Note 16.

Stock-Based Compensation

On March 5, 2014, our Board of Directors approved and adopted the 2014 Omnibus Equity and Incentive Compensation Plan (“Omnibus Plan”). The Omnibus Plan was approved by our shareholders on May 21, 2014. The Omnibus Plan authorizes the compensation committee of the Board of Directors to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, dividend equivalents and other awards for the purpose of providing our officers, key employees, and non-employee directors’ incentives and rewards for performance. The Omnibus Plan replaced the Flowers Foods’ 2001 Equity and Performance Incentive Plan, as amended and restated as of April 1, 2009 (“EPIP”), the Stock Appreciation Rights Plan, and the Annual Executive Bonus Plan. All outstanding equity awards that were made under the EPIP will continue to be governed by the EPIP; however, all equity awards granted after May 21, 2014 are governed by the Omnibus Plan. No additional awards will be issued under the EPIP. Awards granted under the Omnibus Plan are limited to the authorized amount of 8,000,000 shares.

The EPIP authorized the compensation committee of the Board of Directors to make awards of options to purchase our common stock, restricted stock, performance stock and units and deferred stock. The company’s officers, key employees and non-employee directors (whose grants are generally approved by the full Board of Directors) were eligible to receive awards under the EPIP. Over the life of the EPIP, the company issued options, restricted stock and deferred stock.

The following is a summary of stock options, restricted stock, and deferred stock outstanding under the plans described above. Information relating to the company’s stock appreciation rights, which were issued under a separate stock appreciation right plan, is also described below.

Stock Options

The company issued non-qualified stock options (“NQSOs”) during fiscal years 2011 and prior that have no additional service period remaining. All outstanding NQSOs have vested and are exercisable on December 31, 2016.

The stock option activity for fiscal years 2016, 2015, and 2014 pursuant to the EPIP is set forth below (amounts in thousands, except price data):

	Fiscal 2016					Fiscal 2015					Fiscal 2014
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of year		4,353		$	10.97		6,191		$	10.88		8,112		$	10.89
Exercised		(2,507	)	$	11.02		(1,838	)	$	10.67		(1,921	)	$	10.94
Outstanding at end of year		1,846		$	10.89		4,353		$	10.97		6,191		$	10.88
Exercisable at end of year		1,846					4,353					6,191

As of December 31, 2016, options outstanding under the EPIP had an average exercise price of $10.89, a weighted average remaining contractual life of 0.90 years, and an aggregate intrinsic value of $16.8 million.

The cash received, the windfall tax benefits, and intrinsic value from stock option exercises for fiscal years 2016, 2015, and 2014 are set forth below (amounts in thousands):

	Fiscal 2016		Fiscal 2015		Fiscal 2014
Cash received from option exercises	$	27,631	$	19,617	$	21,014
Cash tax windfall benefit, net	$	3,746	$	7,660	$	4,572
Intrinsic value of stock options exercised	$	15,778	$	24,590	$	16,725

Performance-Contingent Restricted Stock Awards

Performance-Contingent Total Shareholder Return Shares (“TSR Shares”)

Since 2012, certain key employees have been granted performance-contingent restricted stock under the EPIP and the Omnibus Plan in the form of TSR Shares. The awards generally vest approximately two years from the date of grant (after the filing of the company’s Annual Report on Form 10-K), and the shares become non-forfeitable if, and to the extent that, on that date the vesting conditions are satisfied. As a result of the delay (July as opposed to January) in the grant of the 2012 awards, the 2012 awards vested during the first quarter of 2014, 18 months from the grant date. Awards granted subsequent to the 2012 award (granted during the first quarters of their respective years) vest two years from the date of grant. The total shareholder return (“TSR”) is the percent change in the company’s stock price over the measurement period plus the dividends paid to shareholders. The performance payout is calculated at the end of each of the last four quarters (averaged) in the measurement period. Once the TSR is determined for the company (“Company TSR”), it is compared to the TSR of our food company peers (“Peer Group TSR”). The Company TSR compared to the Peer Group TSR will determine the payout as set forth below (the “TSR Modifier”):

Percentile	Payout as % of Target
90th		200	%
70th		150	%
50th		100	%
30th		50	%
Below 30th		0	%

For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The table below presents the payout percentage for each of the TSR awards:

Award	Fiscal year vested	Payout (%)
2012 award	Fiscal 2014	195
2013 award	Fiscal 2015	88
2014 award	Fiscal 2016	27

The TSR shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and measured at the actual performance for the entire performance period. In addition, if the company undergoes a change in control, the TSR shares will immediately vest at the target level, provided that if 12 months of the performance period have been completed, vesting will be determined based on Company TSR as of the date of the change in control without application of four-quarter averaging. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the shares that ultimately vest. The fair value estimate was determined using a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability of the company achieving the market condition discussed above. Inputs into the model included the following for the company and comparator companies: (i) TSR from the beginning of the performance cycle through the measurement date; (ii) volatility; (iii) risk-free interest rates; and (iv) the correlation of the comparator companies’ TSR. The inputs are based on historical capital market data.

The following performance-contingent TSR Shares have been granted under the EPIP (2014) and the Omnibus Plan (2015) and have service period remaining (amounts in thousands, except price data):

Grant date	January 3, 2016		January 4, 2015
Shares granted		401		414
Assumed vesting date	2/21/2018		2/23/2017
Fair value per share	$	24.17	$	21.21

As of December 31, 2016, there was $5.7 million of total unrecognized compensation cost related to nonvested TSR Shares granted under the EPIP and Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 1.03 years.

Performance-Contingent Return on Invested Capital Shares (“ROIC Shares”)

Since 2012, certain key employees have been granted performance-contingent restricted stock under the EPIP and the Omnibus Plan in the form of ROIC Shares. The awards generally vest approximately two years from the date of grant (after the filing of the company’s Annual Report on Form 10-K), and the shares become non-forfeitable if, and to the extent that, on that date, the vesting conditions are satisfied. As a result of the delay (July as opposed to January) in the grant of the 2012 awards, the 2012 awards vested during the first quarter of 2014, 18 months from the grant date. Awards granted subsequent to the 2012 award (granted during the first quarters of their respective years) vest two years from the date of grant. Return on Invested Capital is calculated by dividing our profit, as defined, by the invested capital (“ROIC”). Generally, the performance condition requires the company’s average ROIC to exceed its average weighted cost of capital (“WACC”) by between 1.75 to 4.75 percentage points (the “ROI Target”) over the two fiscal year performance period. If the lowest ROI Target is not met, the awards are forfeited. The shares can be earned based on a range from 0% to 125% of target as defined below (the “ROIC Modifier”):

•

0% payout if ROIC exceeds WACC by less than 1.75 percentage points;

•

ROIC above WACC by 1.75 percentage points pays 50% of ROI Target; or

•

ROIC above WACC by 3.75 percentage points pays 100% of ROI Target; or

•

ROIC above WACC by 4.75 percentage points pays 125% of ROI Target.

For performance between the levels described above, the degree of vesting is interpolated on a linear basis. The table below presents the payout percentage for each of the ROIC awards:

Award	Fiscal year vested	Payout (%)
2012 award	Fiscal 2014	125
2013 award	Fiscal 2015	125
2014 award	Fiscal 2016	96

The ROIC Shares vest immediately if the grantee dies or becomes disabled. However, if the grantee retires at age 65 (or age 55 with at least 10 years of service with the company) or later, on the normal vesting date the grantee will receive a pro-rated number of shares based upon the retirement date and actual performance for the entire performance period. In addition, if the company undergoes a change in control, the ROIC Shares will immediately vest at the target level. During the vesting period, the grantee has none of the rights of a shareholder. Dividends declared during the vesting period will accrue and will be paid at vesting on the shares that ultimately vest. The fair value of this type of award is equal to the stock price on the grant date. Since these awards have a performance condition feature the expense associated with these awards may change depending on the expected ROI Target attained at each reporting period. The expected ROI Target for expense calculations at December 31, 2016 was 100% for the 2015 award and 100% for the 2016 award. The following performance-contingent ROIC Shares have been granted under the EPIP (2014) and the Omnibus Plan (2015) and have service period remaining (amounts in thousands, except price data):

Grant date	January 3, 2016		January 4, 2015
Shares granted		401		414
Assumed vesting date	2/21/2018		2/23/2017
Fair value per share	$	21.49	$	19.14

As of December 31, 2016, there was $5.1 million of total unrecognized compensation cost related to nonvested ROIC Shares granted under the EPIP. This cost is expected to be recognized over a weighted-average period of 1.03 years.

Performance-Contingent Restricted Stock Summary

The table below presents the TSR Modifier share adjustment, ROIC Modifier share adjustment, accumulated dividends on vested shares, and the tax windfall/shortfall at vesting of the performance-contingent restricted stock awards (amounts in thousands except for share data):

Award granted	Fiscal year vested	TSR Modifier increase/(decrease) shares			ROIC Modifier increase/(decrease) shares			Dividends at vesting (thousands)		Tax windfall/(shortfall)			Fair value at vesting
2014	2016		(248,872	)		(13,637	)	$	441	$	(3,090	)	$	7,173
2013	2015		(48,069	)		100,090		$	859	$	1,430		$	18,378
2012	2014		193,756			50,939		$	429	$	2,668		$	13,748

A summary of the status of all of the company’s nonvested shares for performance-contingent restricted stock (including the TSR Shares and the ROIC Shares) for fiscal 2016, 2015 and 2014 is set forth below (amounts in thousands, except price data):

	Fiscal 2016					Fiscal 2015					Fiscal 2014
	Number of Shares			Weighted Average Fair Value		Number of Shares			Weighted Average Fair Value		Number of Shares			Weighted Average Fair Value
Balance at beginning of year		1,349		$	21.26		1,404		$	19.09		1,229		$	15.88
Initial grant		801		$	22.83		829		$	20.18		732		$	22.72
Supplemental grant for exceeding ROIC modifier		—		$	—		100		$	14.37		51		$	14.37
Supplemental grant for exceeding the TSR modifier		—		$	—		—		$	—		194		$	15.45
Vested		(312	)	$	22.02		(853	)	$	16.22		(759	)	$	16.11
Grant reduction for not achieving the ROIC modifier		(249	)	$	23.97		—		$	—		—		$	—
Grant reduction for not achieving the TSR modifier		(14	)	$	21.47		(48	)	$	17.22		—		$	—
Forfeitures		(32	)	$	23.60		(83	)	$	20.99		(43	)	$	19.73
Balance at end of year		1,543		$	21.53		1,349		$	21.26		1,404		$	19.09

As of December 31, 2016, there was $10.7 million of total unrecognized compensation cost related to nonvested restricted stock granted under the EPIP. This cost is expected to be recognized over a weighted-average period of 1.03 years.

Deferred and Restricted Stock

Pursuant to the EPIP, previously the company allowed non-employee directors to convert their annual board retainers into deferred stock equal in value to 130% of the cash payments these directors would have otherwise received. The deferred stock had a minimum two-year vesting period and will be distributed to the individual (along with accumulated dividends) at a time designated by the individual at the date of conversion. Following the May 2014 Board of Directors meeting and the adoption of the Omnibus Plan, annual board retainers converted into deferred stock and issued under the Omnibus Plan are equal in value to 100% of the cash payments directors would otherwise receive and the vesting period is a one-year period to match the period of time that cash would have been received if no conversion existed. Going forward, under the Omnibus Plan, non-employee directors may elect to convert their annual board retainers into deferred stock equal in value to 100% of the cash payments they otherwise would have received. The deferred stock so converted will have a one-year pro-rated vesting period. Accumulated dividends are paid upon delivery of the shares. A total of 2,380 common shares were issued after the deferral period during fiscal 2016.

Pursuant to the Omnibus Plan and the EPIP, non-employee directors also receive annual grants of deferred stock. This deferred stock vests over one year from the grant date. During the second quarter of fiscal 2016, non-employee directors were granted an aggregate of 95,314 shares of deferred stock pursuant to the Omnibus Plan. The deferred stock will be distributed to the grantee at a time designated by the grantee at the date of grant. Compensation expense is recorded on this deferred stock over the one year minimum vesting period. During fiscal 2016, a total of 111,868 previously deferred shares were issued after the deferral period.

A total of 105,621 shares of previously vested and deferred awards were also distributed during fiscal 2014 for a director who retired on May 21, 2014 and the cumulative deferred shares (including retainer conversions and annual grants) were issued at that time. An additional 46,364 shares of previously vested and deferred awards were also distributed during fiscal 2014 for a director who retired on December 31, 2014 and the cumulative deferred shares (including retainer conversions and annual grants) were issued at that time.

On May 31, 2013, the company’s Chief Executive Officer (“CEO”) received a time-based restricted stock award of approximately $1.3 million of restricted stock pursuant to the EPIP. This award will vest 100% on the fourth anniversary of the date of grant provided the CEO remains employed by the company during this period and the award value does not exceed 0.5% of our cumulative EBITDA over the vesting period. Vesting will also occur in the event of the CEO’s death or disability, but not his retirement. Dividends will accrue on the award and will be paid to the CEO on the vesting date for all shares that vest. There were 58,500 shares issued for this award at a fair value of $22.25 per share.

The deferred and restricted stock activity for fiscal years 2016, 2015, and 2014 is set forth below (amounts in thousands, except price data):

	Fiscal 2016					Fiscal 2015					Fiscal 2014
	Number of Shares			Weighted Average Fair Value		Number of Shares			Weighted Average Fair Value		Number of Shares			Weighted Average Fair Value
Nonvested shares at beginning of year		126		$	21.89		151		$	21.06		177		$	18.92
Granted		95		$	19.30		70		$	21.59		117		$	20.24
Vested		(72	)	$	21.59		(95	)	$	20.28		(123	)	$	17.81
Forfeited		—		$	—		—		$	—		(20	)	$	18.93
Nonvested shares at end of year		149		$	20.39		126		$	21.89		151		$	21.06
Vested and deferred shares at end of year		331					222					169

As of December 31, 2016, there was $0.7 million of total unrecognized compensation cost related to deferred and restricted stock awards granted under the EPIP. This cost is expected to be recognized over a weighted-average period of 0.40 years. The intrinsic value of deferred stock awards that vested during fiscal 2016 was $1.3 million. There was an immaterial tax windfall on the exercise of deferred share awards during fiscal 2016.

Stock Appreciation Rights

Prior to 2007, the company allowed non-employee directors to convert their retainers and committee chair fees into rights. These rights vested after one year and can be exercised over nine years. The company records compensation expense for these rights at a measurement date based on changes between the grant price and an estimated fair value of the rights using the Black-Scholes option-pricing model. The liability for these rights at January 2, 2016 was $0.2 million and was recorded in other current liabilities. The company paid $0.2 million at the time of exercise of 13,500 shares during fiscal 2016. There are no remaining liabilities for these awards.

The rights activity for fiscal years 2016, 2015, and 2014 is set forth below (amounts in thousands, except price data):

	Fiscal 2016			Fiscal 2015			Fiscal 2014
Balance at beginning of year		14			29			141
Rights exercised		(14	)		(15	)		(112	)
Balance at end of year		—			14			29
Weighted average — grant date fair value	$	—		$	8.67		$	8.47

Shared-Based Payments Compensation Expense Summary

The following table summarizes the company’s stock-based compensation expense, all of which was recognized in selling, distribution, and administration expense, for fiscal years 2016, 2015 and 2014 (amounts in thousands):

	Fiscal 2016			Fiscal 2015		Fiscal 2014
Stock options	$	—		$	—	$	197
Performance-contingent restricted stock awards		16,611			13,369		16,544
Deferred stock awards		2,161			2,205		2,176
Stock appreciation rights (income) expense		(11	)		118		(255	)
Total stock-based compensation expense	$	18,761		$	15,692	$	18,662