9) Stock-Based Compensation

The Company measures all employee stock-based compensation awards using a fair value method and records such expense, net of estimated forfeitures, in its consolidated financial statements. Currently, the Company’s stock-based compensation relates to restricted stock awards, stock options and performance stock units. The Company’s restricted stock awards are considered nonvested share awards.

Stock-based compensation expense for the three months ended May 28, 2016 and May 30, 2015 was approximately $20.7 million ($12.9 million after tax or $0.08 per diluted share) and $17.7 million ($11.1 million after tax or $0.06 per diluted share), respectively. In addition, the amount of stock-based compensation cost capitalized for the three months ended May 28, 2016 and May 30, 2015 was approximately $0.5 million.

Incentive Compensation Plans

The Company currently grants awards under the Bed Bath & Beyond 2012 Incentive Compensation Plan (the “2012 Plan”), which amended and restated the Bed Bath & Beyond 2004 Incentive Compensation Plan (the “2004 Plan”). The 2012 Plan includes an aggregate of 43.2 million common shares authorized for issuance and the ability to grant incentive stock options. Outstanding awards that were covered by the 2004 Plan continue to be in effect under the 2012 Plan.

The 2012 Plan is a flexible compensation plan that enables the Company to offer incentive compensation through stock options (whether nonqualified stock options or incentive stock options), restricted stock awards, stock appreciation rights, performance awards and other stock based awards, including cash awards. Under the 2012 Plan, grants are determined by the Compensation Committee for those awards granted to executive officers and by an appropriate committee for all other awards granted. Awards of stock options and restricted stock generally vest in five equal annual installments beginning one to three years from the date of grant. Awards of performance stock units generally vest over a period of four years from the date of grant dependent on the Company’s achievement of performance-based tests and subject, in general, to the executive remaining in the Company’s service on specified vesting dates.

The Company generally issues new shares for stock option exercises, restricted stock awards and vesting of performance stock units.

Stock Options

Stock option grants are issued at fair market value on the date of grant and generally become exercisable in either three or five equal annual installments beginning one year from the date of grant for options issued since May 10, 2010, and beginning one to three years from the date of grant for options issued prior to May 10, 2010, in each case, subject, in general to the recipient remaining in the Company’s service on specified vesting dates. Option grants expire eight years after the date of grant. All option grants are nonqualified. As of May 28, 2016, unrecognized compensation expense related to the unvested portion of the Company’s stock options was $28.8 million, which is expected to be recognized over a weighted average period of 3.6 years.

The fair value of the stock options granted was estimated on the date of the grant using a Black-Scholes option-pricing model that uses the assumptions noted in the following table.

	Three Months Ended
Black-Scholes Valuation Assumptions (1)	May 28, 2016			May 30, 2015

Weighted Average Expected Life (in years) (2)		6.6			6.7
Weighted Average Expected Volatility (3)		26.96	%		27.59	%
Weighted Average Risk Free Interest Rates (4)		1.46	%		1.93	%
Expected Dividend Yield (5)		1.10	%		-

(1) Forfeitures are estimated based on historical experience.

(2) The expected life of stock options is estimated based on historical experience.

(3) Expected volatility is based on the average of historical and implied volatility. The historical volatility is determined by observing actual prices of the Company’s stock over a period commensurate with the expected life of the awards. The implied volatility represents the implied volatility of the Company’s call options, which are actively traded on multiple exchanges, had remaining maturities in excess of twelve months, had market prices close to the exercise prices of the employee stock options and were measured on the stock option grant date.

(4) Based on the U.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the stock options.

(5) Expected dividend yield is estimated based on anticipated dividend payouts.

Changes in the Company’s stock options for the three months ended May 28, 2016 were as follows:

(Shares in thousands)	Number of Stock Options			Weighted Average Exercise Price
Options outstanding, beginning of period		3,838		$	54.43
Granted		703			45.53
Exercised		(598	)		32.16
Forfeited or expired		-			-
Options outstanding, end of period		3,943		$	56.22
Options exercisable, end of period		2,292		$	54.58

The weighted average fair value for the stock options granted during the first three months of fiscal 2016 and 2015 was $11.87 and $23.12, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of May 28, 2016 was 4.8 years and $6.4 million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable as of May 28, 2016 was 3.3 years and $6.4 million, respectively. The total intrinsic value for stock options exercised during the first three months of fiscal 2016 and 2015 was $8.3 million and $8.2 million, respectively.

Net cash proceeds from the exercise of stock options for the first three months of fiscal 2016 were $19.2 million and the net associated income tax benefit was $3.3 million.

Restricted Stock

Restricted stock awards are issued and measured at fair market value on the date of grant and generally become vested in five equal annual installments beginning one to three years from the date of grant, subject, in general, to the recipient remaining in the Company’s service on specified vesting dates. Vesting of restricted stock awarded to certain of the Company’s executives is dependent on the Company’s achievement of a performance-based test for the fiscal year of grant and, assuming achievement of the performance-based test, time vesting, subject, in general, to the executive remaining in the Company’s service on specified vesting dates. The Company recognizes compensation expense related to these awards based on the assumption that the performance-based test will be achieved. Vesting of restricted stock awarded to the Company’s other employees is based solely on time vesting. As of May 28, 2016, unrecognized compensation expense related to the unvested portion of the Company’s restricted stock awards was $151.2 million, which is expected to be recognized over a weighted average period of 4.5 years.

Changes in the Company’s restricted stock for the three months ended May 28, 2016 were as follows:

(Shares in thousands)	Number of Restricted Shares			Weighted Average Grant-Date Fair Value
Unvested restricted stock, beginning of period		3,230		$	62.71
Granted		808			45.61
Vested		(626	)		53.81
Forfeited		(49	)		63.74
Unvested restricted stock, end of period		3,363		$	60.24

Performance Stock Units

Performance stock units (“PSUs”) are issued and measured at fair market value on the date of grant. Vesting of PSUs awarded to certain of the Company’s executives is dependent on the Company’s achievement of a performance-based test during a one-year period from the date of grant and during a three-year period from the date of grant and, assuming achievement of the performance-based test, time vesting over periods of up to four years, subject, in general, to the executive remaining in the Company’s service on specified vesting dates. Performance during the one-year period will be based on Earnings Before Interest and Taxes (“EBIT”) margin relative to a peer group of the Company and performance during the three-year period will be based on Return on Invested Capital (“ROIC”) relative to such peer group. The awards based on EBIT margin and ROIC range from a floor of zero to a cap of 150% of target achievement. PSUs are converted into shares of common stock upon payment following vesting. Upon grant of the PSUs, the Company recognizes compensation expense related to these awards based on the assumption that 100% of the target award will be achieved. The Company evaluates the target assumption on a quarterly basis and adjusts compensation expense related to these awards, as appropriate. As of May 28, 2016, unrecognized compensation expense related to the unvested portion of the Company’s performance stock units was $41.3 million, which is expected to be recognized over a weighted average period of 2.5 years.

Changes in the Company’s PSUs for the three months ended May 28, 2016 were as follows:

(Shares in thousands)	Number of Performance Stock Units			Weighted Average Grant-Date Fair Value
Unvested performance stock units, beginning of period		627		$	67.15
Granted		566			45.53
Vested		(179	)		66.53
Forfeited		-			-
Unvested performance stock units, end of period		1,014		$	55.19