STOCK-BASED COMPENSATION

2004

Equity Incentive Plan (the

“2004

Plan”)

The Board of Directors adopted the

2004

Plan in

March

2004,

and the stockholders approved it in

November

2004.

The

2004

Plan provided for annual increases in the number of shares available for issuance equal to the least of

of the outstanding shares of common stock on the

first

day of the year,

2.4

million shares, or a number of shares determined by the Board of Directors. The

2004

Plan expired on

November

12,

2014

and equity awards can no longer be granted under the

2004

Plan. As of

November

12,

2014,

2.9

million shares that were available for issuance expired under the

2004

Plan.

2014

Equity Incentive Plan (the

“2014

Plan”)

The Board of Directors adopted the

2014

Plan in

April

2013,

and the stockholders approved it in

June

2013.

October

2014,

the Board of Directors approved certain amendments to the

2014

Plan. The

2014

Plan became effective on

November

13,

2014

and provides for the issuance of up to

5.5

million shares. The

2014

Plan will expire on

November

13,

2024.

As of

December

31,

2016,

3.8

million shares remained available for future issuance under the

2014

Plan.

Stock-Based Compensation Expense

The Company recognized stock-based compensation expense as follows (in thousands):

	Year Ended December 31,
	2016		2015		2014
Cost of revenue	$	1,575	$	1,166	$	903
Research and development		14,041		11,156		9,019
Selling, general and administrative		29,373		29,241		23,532
Total	$	44,989	$	41,563	$	33,454

In the

first

quarter of

2016,

the Company’s then Chief Financial Officer retired. As the service or performance conditions for certain of her RSUs had not been satisfied at the time of her departure, the Company reversed previously accrued stock-based compensation expenses of approximately

$2.9

million associated with the unvested shares and recorded the credit in selling, general and administrative expenses for the

three

months ended

March

31,

2016.

RSUs

The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market and performance conditions (“MPSUs”), and RSUs with market conditions (“MSUs”). Vesting of all awards requires continued service for the Company. In addition, vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals. A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

	Time-Based RSUs			Weighted- Average Grant Date Fair Value Per Share		PSUs and MPSUs				Weighted- Average Grant Date Fair Value Per Share		MSUs			Weighted- Average Grant Date Fair Value Per Share		Total			Weighted- Average Grant Date Fair Value Per Share
Outstanding at January 1, 2014		754		$	19.41		1,028			$	23.02		1,800		$	23.57		3,582		$	22.53
Granted		335		$	36.71		952		(1)	$	34.65		-		$	-		1,287		$	35.19
Released		(468	)	$	20.36		(304	)		$	18.12		-		$	-		(772	)	$	19.48
Forfeited		(32	)	$	19.75		(17	)		$	19.79		-		$	-		(49	)	$	19.77
Outstanding at December 31, 2014		589		$	28.48		1,659			$	28.11		1,800		$	23.57		4,048		$	26.14
Granted		271		$	49.82		927		(1)	$	47.61		-		$	-		1,198		$	48.11
Released		(319	)	$	26.56		(629	)		$	23.40		-		$	-		(948	)	$	24.47
Forfeited		(42	)	$	35.60		(24	)		$	28.68		-		$	-		(66	)	$	33.06
Outstanding at December 31, 2015		499		$	40.75		1,933			$	38.99		1,800		$	23.57		4,232		$	32.64
Granted		133		$	63.00		1,216		(1)	$	41.12		-		$	-		1,349		$	43.28
Released		(239	)	$	36.43		(736	)		$	29.71		-		$	-		(975	)	$	31.36
Forfeited		(27	)	$	45.35		(129	)		$	36.82		(180	)	$	23.57		(336	)	$	30.38
Outstanding at December 31, 2016		366		$	51.35		2,284			$	43.24		1,620		$	23.57		4,270		$	36.47

_________________

(1)	Amount reflects the number of PSUs and MPSUs that may ultimately be earned based on management’s probability assessment of the performance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions.

The intrinsic value related to awards released was

$62.9

million,

$49.2

million and

$28.9

million for the years ended

December

31,

2016,

2015

and

2014,

respectively. As of

December

31,

2016,

the total intrinsic value of all outstanding awards was

$332.9

million, based on the closing stock price of

$81.93.

As of

December

31,

2016,

unamortized compensation expense related to all outstanding awards was approximately

$84.8

million with a weighted-average remaining recognition period of approximately

four

years.

Time-Based RSUs:

For the years ended

December

31,

2016,

2015

and

2014,

the Board of Directors granted

133,000,

271,000

and

335,000

RSUs, respectively, with service conditions primarily to employees and non-employee directors. The RSUs generally vest over

four

years for employees and

one

year for non-employee directors, subject to continued employment with the Company.

2016

PSUs:

February

2016,

the Board of Directors granted

285,000

PSUs to the executive officers, which represent a target number of shares to be awarded based on the Company’s average

two

-year

(2016

and

2017)

revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association

(“2016

Executive PSUs”). The maximum number of shares that an executive officer can earn is

300%

of the target number of the

2016

Executive PSUs.

50%

of the

2016

Executive PSUs will vest in the

first

quarter of

2018

if the pre-determined performance goals are met during the performance period and approved by the Board of Directors. The remaining

2016

Executive PSUs will vest over the following

two

years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In

March

2016,

the Company cancelled

32,000

2016

Executive PSUs as a result of the departure of its then Chief Financial Officer. In

July

2016,

the Board of Directors granted

12,000

2016

Executive PSUs to the Company’s new Chief Financial Officer. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the

2016

Executive PSUs is approximately

$31.8

million.

February

2016,

the Board of Directors granted

64,000

PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s

2017

revenue goals for certain regions or product line divisions, or the Company’s average

two

-year

(2016

and

2017)

revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association

(“2016

Non-Executive PSUs”). The maximum number of shares that an employee can earn is either

200%

300%

of the target number of the

2016

Non-Executive PSUs, depending on the job classification of the employee.

50%

of the

2016

Non-Executive PSUs will vest in the

first

quarter of

2018

if the pre-determined performance goals are met during the performance period and approved by the Board of Directors. The remaining

2016

Non-Executive PSUs will vest over the following

two

years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the

2016

Non-Executive PSUs is approximately

$6.0

million.

The

2016

Executive PSUs and the

2016

Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company

$20

per share upon vesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the

2016

Executive PSUs and the

2016

Non-Executive PSUs granted in

February

2016

using the Black-Scholes model with the following assumptions: stock price of

$58.98,

expected term of

2.6

years, expected volatility of

31.1%

and risk-free interest rate of

0.9%.

For the

2016

Executive PSUs granted in

July

2016,

the Company used the following assumptions: stock price of

$70.98,

expected term of

2.3

years, expected volatility of

29.6%

and risk-free interest rate of

0.7%.

2015

MPSUs:

December

31,

2015,

the Board of Directors granted

127,000

MPSUs to the executive officers and certain key employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions

(“2015

MPSUs”). The maximum number of shares that an employee can earn is

500%

of the target number of the

2015

MPSUs. The

2015

MPSUs consist of

four

separate tranches with various performance periods ending on

December

31,

2019.

The

first

tranche contains market conditions only, which require the achievement of

five

MPS stock price targets ranging from

$71.36

$95.57

over a

four

-year period. The

second,

third

and

fourth

tranches contain both market conditions and performance conditions. Each tranche requires the achievement of

five

MPS stock price targets to be measured against a base price equal to the greater of:

(1)

the average closing stock price during the

consecutive trading days immediately before the start of the measurement period for that tranche, or

(2)

the closing stock price immediately before the start of the measurement period for that tranche. In addition, each of the

second,

third

and

fourth

tranches requires the achievement of

one

of following

six

operating metrics:

	1.	Successful implementation of full digital solutions vs. current analog topology for certain products.
	2.	Successful implementation, and adoption by a key player, of integrated, software-based field-oriented-control with sensors to motor drivers.
	3.	Successful implementation of certain advanced power analog processes.
	4.	Successful design wins and achievement of a specific level of revenue with a global networking customer.
	5.	Achievement of a specific level of revenue with a global electronics manufacturer.
	6.	Achievement of a specific level of market share with certain core power products.

Subject to the employees’ continued employment with the Company, the

2015

MPSUs will fully vest on

January

2020

if the pre-determined individual market and performance goals in each tranche are met during the performance periods and approved by the Board of Directors. In addition, the

2015

MPSUs contain post-vesting sales restrictions on the vested shares by employees for up to

two

years.

The Company determined the grant date fair value of the

2015

MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of

$61.35,

expected volatility of

33.2%,

risk-free interest rate of

1.3%,

and an illiquidity discount of

7.8%

to account for the post-vesting sales restrictions. In

March

2016,

the Company cancelled

13,000

2015

MPSUs as a result of the departure of its then Chief Financial Officer. Assuming the achievement of all of the required performance goals, the total stock-based compensation cost for the

2015

MPSUs is approximately

$24.6

million to be recognized as follows:

$8.3

million for the

first

tranche,

$4.5

million for the

second

tranche,

$5.2

million for the

third

tranche, and

$6.6

million for the

fourth

tranche.

For the

first

tranche, stock-based compensation expense is recognized over the requisite service period even if the market conditions are not satisfied. For the

second,

third

and

fourth

tranches, stock-based compensation expense for each tranche is recognized depending upon the number of the operating metrics management deems probable of being achieved in each reporting period. As of

December

31,

2016,

based on management’s assessment,

three

of the

six

operating metrics were considered probable of being achieved during the performance period. Accordingly, stock-based compensation expense is being recognized for the

second,

third

and

fourth

tranches over the requisite service period.

2015

PSUs:

February

2015,

the Board of Directors granted

172,000

PSUs to the executive officers, which represented a target number of shares that would be awarded based on the Company’s average

two

-year

(2015

and

2016)

revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association

(“2015

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2015

Executive PSUs.

50%

of the

2015

Executive PSUs would vest in the

first

quarter of

2017

if the pre-determined performance goals were met during the performance period and approved by the Board of Directors. The remaining

2015

Executive PSUs would vest over the following

two

years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In

March

2016,

the Company cancelled

19,000

2015

Executive PSUs as a result of the departure of its then Chief Financial Officer.

February

2017,

the Board of Directors approved the revenue achievement for the

2015

Executive PSUs and a total of

432,000

shares were earned by the executive officers. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2015

Executive PSUs is approximately

$21.0

million.

February

2015,

the Board of Directors granted

58,000

PSUs to certain non-executive employees, which represented a target number of shares that would be awarded based on the Company’s

2016

revenue goals for certain regions or product line divisions, or the Company’s average

two

-year

(2015

and

2016)

revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association

(“2015

Non-Executive PSUs”). The maximum number of shares that an employee could earn was either

200%

300%

of the target number of the

2015

Non-Executive PSUs, depending on the job classification of the employee.

50%

of the

2015

Non-Executive PSUs would vest in the

first

quarter of

2017

if the pre-determined performance goals were met during the performance period and approved by the Board of Directors. The remaining

2015

Non-Executive PSUs would vest over the following

two

years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company.

February

2017,

the Board of Directors approved the revenue achievement for the

2015

Non-Executive PSUs and a total of

118,000

shares were earned by the employees. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2015

Non-Executive PSUs is approximately

$5.7

million.

2014

PSUs:

February

2014,

the Board of Directors granted

252,000

PSUs to the executive officers, which represented a target number of shares that would be awarded based on the Company’s average

two

-year

(2014

and

2015)

revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association

(“2014

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2014

Executive PSUs. In

February

2016,

the Board of Directors approved the revenue achievement for the

2014

Executive PSUs and a total of

694,000

shares were earned by the executive officers.

50%

of the

2014

Executive PSUs vested in the

first

quarter of

2016.

The remaining

2014

Executive PSUs vest over the following

two

years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In

March

2016,

the Company cancelled

37,000

2014

Executive PSUs as a result of the departure of its then Chief Financial Officer. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2014

Executive PSUs is approximately

$20.7

million.

April

2014,

the Board of Directors granted

61,000

PSUs to certain non-executive employees, which represented a target number of shares that would be awarded based on the Company’s

2015

revenue goals for certain regions or product line divisions, or the Company’s average

two

-year

(2014

and

2015)

revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association

(“2014

Non-Executive PSUs”). The maximum number of shares that an employee could earn was either

200%

300%

of the target number of the

2014

Non-Executive PSUs, depending on the job classification of the employee. In

February

2016,

the Board of Directors approved the revenue achievement for the

2014

Non-Executive PSUs and a total of

103,000

shares were earned by the non-executive employees.

50%

of the

2014

Non-Executive PSUs vested in the

second

quarter of

2016.

The remaining

2014

Non-Executive PSUs vest over the following

two

years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2014

Non-Executive PSUs is approximately

$3.7

million.

In connection with the acquisition of Sensima in

July

2014,

the Board of Directors granted PSUs to key Sensima employees who became employees of the Company. See Note

for further discussion.

2013

PSUs:

February

2013,

the Board of Directors granted

220,000

PSUs to the executive officers, which represented a target number of RSUs that would be awarded upon achievement of certain pre-determined revenue targets in

2014

(“2013

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2013

Executive PSUs. In

February

2015,

the Board of Directors approved the revenue achievement for the

2013

Executive PSUs and a total of

622,000

shares were earned by the executive officers.

50%

of the

2013

Executive PSUs vested in the

first

quarter of

2015

and the remaining shares vest over the following

two

years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In

March

2016,

the Company cancelled

18,000

2013

Executive PSUs as a result of the departure of its then Chief Financial Officer. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2013

Executive PSUs is approximately

$15.0

million.

February

2013,

the Board of Directors granted

91,000

PSUs to certain non-executive employees, which represented a target number of RSUs that would be awarded upon achievement of certain pre-determined revenue targets for the Company as a whole, certain regions or product-line divisions in

2014

(“2013

Non-Executive PSUs”). The maximum number of shares that an employee could earn was either

200%

300%

of the target number of

2013

Non-Executive PSUs, depending on the job classification of the employee. In

February

2015,

the Board of Directors approved the revenue achievement for the

2013

Non-Executive PSUs and a total of

154,000

shares were earned by the non-executive employees.

50%

of the

2013

Non-Executive PSUs vested in the

first

quarter of

2015

and the remaining shares vest over the following

two

2013

Non-Executive PSUs is approximately

$3.0

million.

2013

MSUs:

December

2013,

the Board of Directors granted

360,000

MSUs to the executive officers and certain key employees, which represented a target number of shares that would be awarded upon achievement of

five

MPS stock price targets ranging from

$40.00

$56.00

during a

five

-year performance period from

January

2014

December

31,

2018

(“2013

MSUs”). The maximum number of shares that an employee could earn was

500%

of the target number of the

2013

MSUs. The

2013

MSUs will vest quarterly from

January

2019

December

31,

2023

if the pre-determined performance goals were met during the performance period and approved by the Board of Directors. Vesting is subject to the employees’ continued employment with the Company. As of

December

31,

2015,

all

five

MPS stock price targets have been achieved and the employees earned a total of

1.8

million shares. In

March

2016,

the Company cancelled

36,000

2013

MSUs as a result of the departure of its then Chief Financial Officer.

The Company determined the grant date fair value of the

2013

MSUs using a Monte Carlo simulation model with the following assumptions: stock price of

$31.73,

expected volatility of

38.7%

and risk-free interest rate of

1.6%.

The total stock-based compensation cost for the

2013

MSUs is approximately

$38.2

million.

Stock Options

No stock options were granted for the years ended

December

31,

2016,

2015

and

2014.

A summary of stock option activity is presented in the table below:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
	(in thousands)					(in years)		(in thousands)
Outstanding at January 1, 2014		1,356		$	15.86		1.9	$	25,506
Exercised		(742	)	$	16.09
Forfeited and expired		(24	)	$	10.07
Outstanding at December 31, 2014		590		$	15.80		1.2	$	20,039
Exercised		(498	)	$	15.55
Forfeited and expired		(2	)	$	6.10
Outstanding at December 31, 2015		90		$	17.50		1.3	$	4,134
Exercised		(76	)	$	17.80
Outstanding at December 31, 2016		14		$	15.88		1.0	$	921
Options exercisable at December 31, 2016 and expected to vest		14		$	15.88		1.0	$	921
Options exercisable at December 31, 2016		14		$	15.88		1.0	$	921

Total intrinsic value of options exercised was

$3.7

million,

$18.6

million and

$17.3

million for the years ended

December

31,

2016,

2015

and

2014,

respectively. Proceeds from stock option exercises were

$1.3

million,

$7.7

million and

$11.9

million for the years ended

December

31,

2016,

2015

and

2014,

respectively. At

December

31,

2016,

there was no unamortized compensation expense.

2004

Employee Stock Purchase Plan (“ESPP”)

Under the ESPP, eligible employees

may

purchase common stock through payroll deductions. Participants

may

not purchase more than

2,000

shares in a

six

-month offering period or stock having a value greater than

$25,000

in any calendar year as measured at the beginning of the offering period in accordance with the Internal Revenue Code and applicable Treasury Regulations. The ESPP provides for an annual increase by an amount equal to the least of

1.0

million shares,

of the outstanding shares of common stock on the

first

day of the year, or a number of shares as determined by the Board of Directors. As of

December

31,

2016,

approximately

4.6

million shares were available for future issuance.

For the years ended

December

31,

2016,

2015

and

2014,

53,000,

56,000

and

78,000

shares, respectively, were issued under the ESPP. The intrinsic value of the shares issued was

$1.0

million,

$0.6

million and

$0.9

million for the years ended

December

31,

2016,

2015

and

2014,

respectively. The unamortized expense as of

December

31,

2016

was

$93,000,

which will be recognized through the

first

quarter of

2017.

The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:

	Year Ended December 31,
	2016			2015			2014
Expected term (years)		0.5			0.5			0.5
Expected volatility		28.6	%		30.3	%		29.4	%
Risk-free interest rate		0.4	%		0.2	%		0.1	%
Dividend yield		1.2	%		1.4	%		0.7	%

Cash proceeds from the shares issued under the ESPP

were

$2.5

million,

$2.2

million and

$2.1

million for the years ended

December

31,

2016,

2015

and

2014,

respectively.