15. Stock-Based Employee Benefit Plans

Equity Incentive Plans

Polycom’s equity incentive plans provide for, among other award types, stock options, restricted stock units, and performance shares to be granted to employees and non-employee directors. On May 26, 2011, stockholders approved the 2011 Equity Incentive Plan (“2011 Plan”) and reserved for issuance under the 2011 Plan of 19,800,000 shares, terminating any remaining shares available for grant under the 2004 Equity Incentive Plan (“2004 Plan”) as of such date. On June 5, 2013, shareholders approved the addition of 10,500,000 shares to the available shares for issuance under the 2011 Plan. Shareholders also approved an additional 5,600,000 shares to the available shares for issuance under the 2011 Plan on May 27, 2015. Finally, to the extent any shares, not to exceed 13,636,548 shares, would have been returned to our 2004 Plan after May 26, 2011, on account of the expiration, cancellation or forfeiture of awards granted under our 1996 Stock Incentive Plan or the 2004 Plan, those shares instead have been added to the reserve of shares available under the 2011 Plan.

Activity under the above plans for the year ended December 31, 2015 was as follows:

	Shares Available for Grant ⁽¹⁾
Balances, December 31, 2014		13,439,432
Additional shares available for grant ⁽²⁾		5,600,000
Performance shares granted⁽³⁾		(1,709,336	)
Performance shares forfeited		352,930
Restricted stock units granted		(5,050,548	)
Restricted stock units forfeited		1,291,177
Options granted		—
Options forfeited		10,193
Options expired		8,480
Balances, December 31, 2015		13,942,328

(1)	For purpose of above table, shares are counted on a fungible basis (i.e., at a higher multiplier than one-for-one) for full value award activity.

(2)	Approved by stockholders on May 27, 2015.

(3)	Includes 131,212 additional shares (202,066 shares applying the applicable fungible ratio) resulting from above target performance.

Stock Options

Under the terms of the 2004 Plan and the 2011 Plan, options may not be granted at prices lower than fair market value at the date of grant. Options granted expire seven years from the date of grant and are only exercisable upon vesting. The Company settles employee stock option exercises with newly issued common shares. There were no stock options granted in 2015, 2014 and 2013.

Activity under the stock option plans for the year ended December 31, 2015 was as follows:

	Outstanding Options
	Number of Shares			Weighted Avg Exercise Price		Weighted Avg Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Balances, December 31, 2014		240,493		$	11.62
Options granted		—			—
Options exercised		(53,219	)	$	11.65
Options forfeited		(10,193	)	$	11.61
Options expired		(8,480	)	$	11.74
Balances, December 31, 2015		168,601		$	11.61		3.41	$	165,685

All stock options granted were fully vested and exercisable as of December 31, 2015. The total pre-tax intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013 was $0.1 million, $0.2 million and $0.3 million, respectively.

The options outstanding and currently exercisable by exercise price at December 31, 2015 are as follows:

		Stock Options Outstanding and Exercisable
Range of Exercise Price		Number Outstanding		Weighted Average Remaining Contractual Life (Yrs)		Weighted Average Exercise Price
$	0.75		42		4.06	$	0.75
$	11.61		168,559		3.41	$	11.61
			168,601		3.41	$	11.61

As of December 31, 2015, all 168,601 outstanding options were exercisable at a weighted average exercise price of $11.61. As of December 31, 2015 all compensation cost related to stock options has been recognized.

Performance Shares and Restricted Stock Units

The Compensation Committee of the Board of Directors may also grant performance shares and restricted stock units (“RSUs”) under the 2011 Plan to officers, non-employee directors, and certain other employees as a component of the Company’s broad-based equity compensation program. Performance shares represent a commitment by the Company to deliver shares of Polycom common stock at a future point in time, subject to the fulfillment by the Company of pre-defined performance criteria. Such awards will be earned only if performance targets over the performance periods established by or under the direction of the Compensation Committee are met. The number of performance shares subject to vesting is determined at the end of a given performance period. Generally, if the performance criteria is achieved, performance shares will vest over a period of one to three years from the anniversary of the grant date. RSUs are time-based awards that generally vest over a period of one to three years from the date of grant.

The Company granted performance shares to certain employees and executives, which contain a market condition based on Total Shareholder Return (“TSR”) and which measure the Company’s relative performance against the NASDAQ Composite Index. Such performance shares will be delivered in common stock at the end of the vesting period based on the Company’s actual performance compared to the target performance criteria and may equal from zero percent (0%) to one hundred fifty percent (150%) of the target award. The fair value of a performance share with a market condition is estimated on the date of award, using a Monte Carlo simulation model to estimate the total return ranking of the Company’s stock among the NASDAQ Composite Index companies over each performance period.

The Company also granted RSUs. The fair value of RSUs is based on the closing market price of the Company’s common stock on the date of award. The awards will be delivered in common stock at the end of each vesting period. Stock-based compensation expense for the RSUs is recognized using the graded vesting method.

In addition, the Company granted RSUs to non-employee directors. The awards vest quarterly over approximately one year from the date of grant. The fair value of these awards is based on the closing market price of the Company’s common stock on the date of grant. Stock-based compensation expense for these awards is amortized over six months from the date of grant due to voluntary termination provisions contained in the underlying agreements.

The following table summarizes the changes in unvested performance shares, RSUs and non-employee director RSUs for 2015:

	Number of Shares ⁽¹⁾			Weighted Average Grant Date Fair Value
Unvested shares at December 31, 2014		6,825,691		$	12.26
Performance shares granted⁽²⁾		1,109,959		$	14.07
Restricted stock units granted ⁽³⁾		3,279,577		$	13.49
Performance shares vested and issued		(782,210	)	$	13.81
Restricted stock units vested and issued		(2,670,181	)	$	12.47
Performance shares forfeited		(217,108	)	$	12.54
Restricted stock units forfeited		(803,545	)	$	12.34
Unvested shares at December 31, 2015		6,742,183		$	12.88

(1)	For the purposes of this table, shares are counted on a one-for-one basis, not on a fungible share counting basis.

(2)	Includes 131,212 additional shares resulting from above target performance.

(3)	Includes 135,000 restricted stock units granted to non-employee directors.

As of December 31, 2015, there was approximately $33.4 million, of total unrecognized compensation cost related to unvested awards, which is expected to be recognized over a weighted-average period of one year. The total fair value of shares vested in 2015, 2014 and 2013 was $44.1 million, $46.1 million, and $44.2 million, respectively.

Employee Stock Purchase Plan

Under the current Employee Stock Purchase Plan (“ESPP”), the Company can grant stock purchase rights to all eligible employees during a two-year offering period with purchase dates at the end of each six-month purchase period (each January and July). Participants lock in a purchase price per share at the beginning of the offering period upon plan enrollment. If the stock price on any subsequent offering period enrollment date is less than the lock-in price, the ESPP has a reset feature that automatically withdraws and re-enrolls participants into a new two-year offering period. Further, the ESPP permits participants to increase or decrease contribution elections at the end of a purchase period for future purchase periods within the same offering period. Shares are purchased through employees’ payroll deductions, currently up to a maximum of 15% of employees’ compensation, at purchase prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the date of the employee’s entrance to the offering period or the purchase date. No participant may purchase more than $25,000 worth of common stock in any one calendar year period, or 10,000 shares of common stock on any one purchase date. As of December 31, 2015, there were 9,164,481 shares available to be issued under the ESPP. A total of 2,150,586 shares, 2,944,069 shares, and 2,904,287 shares were purchased in 2015, 2014, and 2013, respectively, at an average per share price of $9.89, $7.55, and $7.41, respectively.

During the three months ended September 30, 2015, the Company modified the terms of certain existing awards under its ESPP as a result of the reset feature of the ESPP plan, and incurred a cumulative $7.1 million of incremental expense to be recognized over the vesting term. Approximately $2.3 million of the incremental expense was recognized in 2015.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense recorded and its allocation within the Consolidated Statements of Operations (in thousands):

	Year Ended December 31,
	2015		2014		2013
Cost of product revenues	$	2,917	$	2,463	$	2,892
Cost of service revenues		4,711		4,293		5,852
Stock-based compensation expense included in cost of revenues		7,628		6,756		8,744

Sales and marketing		13,187		14,893		26,570
Research and development		9,307		10,299		15,634
General and administrative		15,017		16,012		13,517
Stock-based compensation expense included in operating expenses		37,511		41,204		55,721
Stock-based compensation expense related to employee equity awards and employee stock purchases		45,139		47,960		64,465
Tax benefit		8,171		9,492		11,174
Stock-based compensation expense related to employee equity awards and employee stock purchases, net of tax	$	36,968	$	38,468	$	53,291

Stock-based compensation expense is not allocated to segments because it is centrally managed at the corporate level.

The estimated fair value per share of employee stock purchase rights granted pursuant to ESPP in 2015, 2014, and 2013 ranged from $2.56 to $4.27, from $2.80 to $4.48, and from $2.60 to $4.57, respectively, and was estimated on the date of grant using the Black-Scholes option valuation model based on the following assumptions:

	2015	2014	2013
Expected volatility	28.08-30.73%	26.47-32.18%	42.40-48.89%
Risk-free interest rate	0.07-0.68%	0.05-0.47%	0.08-0.35%
Expected dividends	0.0%	0.0%		0.0%
Expected life (years)	0.49-2.0	0.5-2.0	0.5-2.0

The fair value of employee stock purchase rights is recognized as expense using the graded vesting method.

The Company computed its expected volatility assumption based on blended volatility (50% historical volatility and 50% implied volatility). The selection of the blended volatility assumption was based upon the Company’s assessment that blended volatility is more representative of the Company’s future stock price trends as it weighs in the longer term historical volatility with the near term future implied volatility.

The risk-free interest rate assumption is based upon published interest rates appropriate for the expected life of the Company’s employee stock purchase rights.

The dividend yield assumption is based on the Company’s history of not paying dividends and no future expectations of dividend payouts.

The expected life of employee stock purchase rights represents the contractual terms of the underlying program.