13.

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 fiscal year ended

February

25,

2017,

February

27,

2016

and

February

28,

2015

was approximately

$71.9

million

($46.3

million after tax or

$0.31

per diluted share), approximately

$67.0

million

($42.4

million after tax or

$0.26

per diluted share) and approximately

$66.5

million

($42.4

million after tax or

$0.22

per diluted share), respectively. In addition, the amount of stock-based compensation cost capitalized for the years ended

February

25,

2017

and

February

27,

2016

was approximately

$2.2

million and

$2.1

million, respectively.

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

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

five

equal annual installments beginning

one

year from the date of grant for options issued since

May

10,

2010,

and beginning

one

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

February

25,

2017,

unrecognized compensation expense related to the unvested portion of the Company’s stock options was

$21.0

million, which is expected to be recognized over a weighted average period of

2.9

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.

	FISCAL YEAR ENDED
Black-Scholes Valuation Assumptions (1)	February 25, 2017			February 27, 2016			February 28, 2015

Weighted Average Expected Life (in years) (2)		6.6			6.7			6.6
Weighted Average Expected Volatility (3)		26.96	%		27.59	%		28.31	%
Weighted Average Risk Free Interest Rates (4)		1.46	%		1.93	%		2.11	%
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 fiscal year ended

February

25,

2017

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		(635	)		31.94
Forfeited or expired		-			-
Options outstanding, end of period		3,906		$	56.48
Options exercisable, end of period		2,262		$	55.02

The weighted average fair value for the stock options granted in fiscal

2016,

2015

and

2014

was

$11.87,

$23.12

and

$20.96,

respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding as of

February

25,

2017

was

4.0

years and

$4.6

million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable as of

February

25,

2017

was

2.6

years and

$4.6

million, respectively. The total intrinsic value for stock options exercised during fiscal

2016,

2015

and

2014

was

$9.0

million,

$8.7

million and

$33.5

million, respectively.

Net cash proceeds from the exercise of stock options for fiscal

2016

were

$20.4

million and the net associated income tax benefit was

$0.4

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

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

February

25,

2017,

unrecognized compensation expense related to the unvested portion of the Company’s restricted stock awards was

$132.7

million, which is expected to be recognized over a weighted average period of

4.1

years.

Changes in the Company’s restricted stock for the fiscal year ended

February

25,

2017

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		1,287			44.83
Vested		(834	)		55.13
Forfeited		(191	)		59.29
Unvested restricted stock, end of period		3,492		$	58.12

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

February

25,

2017,

unrecognized compensation expense related to the unvested portion of the Company’s performance stock units was

$23.7

million, which is expected to be recognized over a weighted average period of

1.8

years.

Changes in the Company’s PSUs for the fiscal year ended

February

25,

2017

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