Stock-based Compensation

Tempur Sealy International has two stock-based compensation plans which provide for grants of non-qualified and incentive stock options, stock appreciation rights, restricted stock and stock unit awards, performance shares, stock grants and performance based awards to employees, non-employee directors, consultants and Company advisors. The plan under which equity awards may be granted in the future is the 2013 Equity Incentive Plan (the "2013 Plan"). It is the policy of the Company to issue stock out of treasury shares upon issuance or exercise of share-based awards. The Company believes that awards and purchases made under these plans better align the interests of the plan participants with those of its stockholders.

The 2013 Plan was adopted on May 22, 2013 by the Company’s Board of Directors, and provides for grants of stock options to purchase shares of common stock to employees and directors of the Company. The 2013 Plan may be administered by the Compensation Committee of the Board of Directors, by the Board of Directors directly, or, in certain cases, by an executive officer or officers of the Company designated by the Compensation Committee. The shares issued or to be issued under the 2013 Plan may be either authorized but unissued shares of the Company’s common stock or shares held by the Company in its treasury. Tempur Sealy International may issue a maximum of 5.1 million shares of common stock under the 2013 Plan, subject to certain adjustment provisions.

The Amended and Restated 2003 Equity Incentive Plan, as amended (the “2003 Plan”), was administered by the Compensation Committee of the Board of Directors, which, together with the Board of Directors, had the exclusive authority to administer the 2003 Plan, including the power to determine eligibility to receive awards, the types and number of shares of stock subject to the awards, the price and timing of awards and the acceleration or waiver of any vesting and performance of forfeiture restrictions, in each case subject to the terms of the 2003 Plan. Any of the Company’s employees, non-employee directors, consultants and Company advisors, as determined by the Compensation Committee, were eligible to be selected to participate in the 2003 Plan. Tempur Sealy International allowed a maximum of 11.5 million shares of its common stock under the 2003 Plan to be issued. In May 2013, the Company's Board of Directors adopted a resolution that prohibited further grants under the 2003 Plan.

In 2010, the Board of Directors approved the terms of a Long-Term Incentive Plan established under the 2003 Plan. In 2013, the Board of Directors approved the terms of another Long-Term Incentive Plan established under the 2013 Plan. Awards under both Long-Term Incentive Plans have typically consisted primarily of a mix of stock options, RSUs and PRSUs. Shares with respect to the PRSUs will be granted and vest following the end of the applicable performance period and achievement of applicable performance metrics as determined by the Compensation Committee of the Board of Directors.

The Company’s stock-based compensation expense for the year ended December 31, 2016 included PRSUs, stock options, RSUs and DSUs. A summary of the Company’s stock-based compensation expense is presented below:



	Year Ended December 31,
(in millions)	2016		2015		2014
PRSU expense	$	3.9	$	13.7	$	3.5
Stock option expense	5.3		6.6		7.0
RSU/DSU expense	7.0		2.2		2.9
Total stock-based compensation expense	$	16.2	$	22.5	$	13.4

The Company granted PRSUs during the years ended December 31, 2016, 2015 and 2014. Actual payout under the PRSUs is dependent upon the achievement of certain financial goals. The Company recorded a benefit in the accompanying Consolidated Statements of Income of $3.8 million for the year ended December 31, 2016 after the change in estimate to reduce accumulated performance based stock compensation amortization to actual cost based on final financial results. The Company did not record any similar benefits in 2015. The Company recorded a benefit in the accompanying Consolidated Statements of Income of $3.0 million for the year ended December 31, 2014 after re-evaluation of the probability of meeting certain required performance goals and determining that the performance goals would not be met.

A summary of the Company’s PRSU activity and related information for the years ended December 31, 2016 and 2015 is presented below:



(shares in millions)	Shares		Weighted Average Grant Date Fair Value
Awards unvested at December 31, 2014	0.3		$	53.45
Granted	1.7		70.43
Vested	—		—
Forfeited	(0.1	)	56.74
Awards unvested at December 31, 2015	1.9		68.17
Granted	0.2		60.78
Vested	(0.1	)	51.87
Forfeited	(0.3	)	70.43
Awards unvested at December 31, 2016	1.7		$	68.02

In addition to the PRSUs noted above, during 2015, the Company granted the CEO and certain other senior executives and key employees a total of 1,390,000 PRSUs that vest if the Company achieves more than $650 million in Adjusted EBITDA for 2017 (the "2017 Aspirational Plan PRSUs"). All of the 2017 Aspirational Plan PRSUs will vest in full if the Company achieves Adjusted EBITDA in 2017 greater than $650 million. In addition, if this target is not met in 2017 but the Company achieves more than $650 million in Adjusted EBITDA for 2018, then one-third of the total 2017 Aspirational Plan PRSUs will vest, and the remaining 2017 Aspirational Plan PRSUs will be forfeited. If the Company does not achieve more than $650 million of Adjusted EBITDA in either 2017 or 2018, then all of the 2017 Aspirational Plan PRSUs will be forfeited. Adjusted EBITDA is defined as the Company’s “Consolidated EBITDA” as such term is defined in the Company’s 2012 Credit Agreement. Based on the price of the Company’s common stock on the respective grant dates during 2015, the total unrecognized compensation expense related to these awards if the performance target is met for 2017 is $101.1 million, which would be expensed over the service period if it becomes probable of achieving the performance condition.

During 2016, the Company granted certain other senior executives and key employees a total of 72,000 2017 Aspirational Plan PRSUs with substantially the same terms as the 2017 Aspirational Plan PRSUs as described above. Based on the price of the Company’s common stock on the respective grant dates during 2016, the total unrecognized compensation expense related to these awards if the performance target is met for 2017 is $4.4 million, which would be expensed over the service period if it becomes probable of achieving the performance condition.

The Company has not recorded any stock-based compensation expense related to the 2017 Aspirational Plan PRSUs during the year ended December 31, 2016, as it is not considered probable as of this date that the Company will achieve the specified performance target as of December 31, 2017 or December 31, 2018. The Company will continue to evaluate the probability of achieving the performance condition going forward and record the appropriate expense when the awards are probable of vesting.

The following table shows the PRSUs granted under the 2013 Plan and related Long-Term Incentive Plan, the maximum number of shares to be awarded under the PRSUs granted during the year ended December 31, 2016 and the performance date and vesting schedule of the PRSUs granted.



(shares in millions)
Number of Shares Granted	Maximum Number of Shares to be Awarded	Performance Date	Vesting Schedule
0.1	0.1	December 31, 2017 ⁽¹⁾	December 31, 2017 ⁽¹⁾
0.1	0.1	December 31, 2016	Five annual installments beginning on each applicable grant date



(1)	These shares will vest in full if the Company achieves the performance metric per the award agreement in 2017. In addition, if this target is not met in 2017 but the Company achieves the performance metric in 2018, then one-third of the PRSUs will vest, and the remaining PRSUs shall be forfeited.

During the year ended December 31, 2016, shares granted in 2014 with an aggregate intrinsic value of $5.6 million were paid out from treasury stock following the satisfaction of certain financial metrics over the two year performance period that ended December 31, 2015. The PRSUs were paid out from treasury stock at 79.0% of the target award, out of a maximum potential payout of 200%. During the year ended December 31, 2015, no shares were issued from treasury stock to satisfy payouts under the PRSUs. During the year ended December 31, 2014, shares of common stock with an aggregate intrinsic value of $1.4 million were issued from treasury stock to satisfy payouts under the PRSUs following the satisfaction of certain financial metrics over the one year performance period that ended December 31, 2013. The shares were issued from treasury stock to satisfy payouts under the PRSUs at 100.0% of the target award, the maximum payout. The aggregate intrinsic value of PRSUs outstanding as of December 31, 2016 was $121.2 million.

A summary of the Company’s unvested shares relating to stock options as of December 31, 2016 and 2015, and changes during the years ended December 31, 2016 and 2015, are presented below:



(shares in millions)	Shares		Weighted Average Grant Date Fair Value
Options unvested at December 31, 2014	0.5		$	46.23
Granted	0.8		63.55
Vested	(0.4	)	44.25
Forfeited	(0.1	)	57.12
Options unvested at December 31, 2015	0.8		$	62.34
Granted	—		—
Vested	(0.3	)	61.28
Forfeited	0.0		58.37
Options unvested at December 31, 2016	0.5		$	63.09

The Company uses the Black-Scholes option-pricing model to calculate the fair value of stock options granted. During the year ended December 31, 2016, no stock options were granted. The assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2015 and 2014 are set forth in the following table. Expected volatility is based on the unbiased standard deviation of Tempur Sealy International’s common stock over the option term. The expected life of the options represents the period of time that the Company expects the options granted to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option for the expected term of the instrument. The dividend yield reflects an estimate of dividend payouts over the term of the award. The Company uses historical data to determine these assumptions.



	Year Ended December 31,
	2016	2015	2014
Expected volatility range of stock	N/A	34.0% - 36.2%	56.7% - 66.5%
Expected life of option, range in years	N/A	3 - 5	2 - 4
Risk-free interest range rate	N/A	0.9% - 1.5%	0.4% - 1.4%
Expected dividend yield on stock	N/A	0.0% - 0.0%	0.6% - 0.7%

A summary of the Company’s stock option activity under the 2003 Plan and 2013 Plan for the years ended December 31, 2016 and 2015 is presented below:



(in millions, except per share amounts)	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Options outstanding at December 31, 2014	2.8		$	24.18
Granted	0.8		63.55
Released	(1.4	)	14.70
Forfeited	(0.1	)	57.12
Options outstanding at December 31, 2015	2.1		$	42.75
Granted	—		—
Released	(0.6	)	24.72
Forfeited	0.0		58.37
Options outstanding at December 31, 2016	1.5		$	50.46	6.71	$	19.1

Options exercisable at December 31, 2016	1.0		$	44.45	5.98	$	23.6

The aggregate intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $23.9 million, $71.8 million and $6.7 million, respectively.

A summary of the Company's RSU and DSU activity and related information for the years ended December 31, 2016 and 2015 is presented below:



(in millions, except per share amounts)	Shares		Weighted Average Release Price		Aggregate Intrinsic Value
Awards outstanding at December 31, 2014	0.1		$	50.41
Granted	0.1		70.44
Vested	(0.1	)	58.73
Terminated	0.0		49.63
Awards outstanding at December 31, 2015	0.1		$	66.41
Granted	0.3		53.77
Vested	0.0		60.17
Terminated	0.0		53.45
Awards outstanding at December 31, 2016	0.4		$	59.37	$	27.1

At December 31, 2016, the Company had 0.4 million of unvested DSUs/RSUs. The aggregate intrinsic value of RSUs and DSUs vested during the year ended December 31, 2016 was $0.7 million.

Excluding the estimated compensation expense related to the 2017 Aspirational Plan PRSUs discussed above, a summary of total unrecognized stock-based compensation expense based on current performance estimates related to stock options, DSUs, RSUs and PRSUs for the year ended December 31, 2016 is presented below:



(in millions, except years)	December 31, 2016		Weighted Average Remaining Vesting Period (Years)
Unrecognized stock option expense	5.3		1.51
Unrecognized DSU/RSU expense	11.9		2.97
Unrecognized PRSU expense	14.2		2.56
Total unrecognized stock-based compensation expense	$	31.4	2.54

Cash received from options exercised under all stock-based compensation plans, including cash received from options issued from treasury shares, for the years ended December 31, 2016, 2015 and 2014, was $15.7 million, $20.4 million, and $4.3 million, respectively.