Stock-Based Compensation

Prior to the Separation, certain of the Company's employees participated in stock-based compensation plans sponsored by former Parent. Former Parent's stock-based compensation plans included incentive compensation plans ("former Parent's Plan") and an employee stock purchase plan ("former Parent's ESPP"). All awards granted under the plans were based on former Parent's common shares and, as such, the award activity is not reflected in the Company's Consolidated and Combined Financial Statements. For the fiscal years ended October 31, 2015 and 2014, stock-based compensation expense includes expense attributable to the Company based on the awards and terms previously granted under the incentive compensation plan to the Company's employees and an allocation of former Parent's corporate and shared functional employee expenses. Accordingly, the amounts presented for fiscal 2015 and 2014 are not necessarily indicative of future awards and do not necessarily reflect the results that the Company would have experienced as an independent, publicly-traded company. The share and per share data for fiscal 2015 and 2014 presented in this note has not been adjusted to reflect the impact of the Separation.

In conjunction with the Separation, the Company adopted the Hewlett Packard Enterprise Company 2015 Stock Incentive Plan (the "Plan") and the Hewlett Packard Enterprise Company 2015 Employee Stock Purchase Plan (the “ESPP”). The Plan and the ESPP became effective November 1, 2015. The total number of shares of the Company’s common stock authorized under the Plan and the ESPP was 260 million and 80 million, respectively. The Plan provides for the grant of various types of awards including restricted stock awards, stock options, and performance-based awards.

In connection with the Separation and in accordance with the Employee Matters Agreement between HP Inc. and the Company, the Company's employees with outstanding former Parent stock-based awards received replacement stock-based awards under the Plan at Separation. The value of the replacement stock-based awards was designed to generally preserve the intrinsic value of the replaced awards immediately prior to the Separation. The incremental expense incurred by the Company was not material. Also in conjunction with the Separation, the Company granted one-time retention stock awards to certain executives, with a total grant date fair value of approximately $137 million. These awards vest over three years from the grant date.

Stock-Based Compensation Expense and Related Income Tax Benefits

Stock-based compensation expense and the resulting tax benefits recognized by the Company were as follows:



	Fiscal years ended October 31,
	2016			2015			2014
	In millions
Stock-based compensation expense	$	597		$	565		$	427
Income tax benefit	(181		)	(165		)	(141		)
Stock-based compensation expense, net of tax	$	416		$	400		$	286

In May 2016, in connection with the announcement of the spin-off and merger of the Company's Enterprise Services business with CSC, the Company modified its stock-based compensation program such that certain unvested equity awards outstanding on May 24, 2016 will vest upon the earlier of: (i) the termination of an employee’s employment with HPE as a direct result of an announced sale, divestiture or spin-off of a subsidiary, division or other business; (ii) the termination of an employee’s employment by HPE without cause; or (iii) June 1, 2018. This modification also includes changes to the performance and market conditions of certain performance-based awards. As a result, for the year ended October 31, 2016, stock-based compensation expense in the table above includes pre-tax expense of $31 million, which has been recorded within Separation costs in the Consolidated and Combined Statements of Earnings. Additionally, for the year ended October 31, 2016, stock-based compensation expense in the table above includes pre-tax expense of $8 million related to workforce reductions, which has been recorded within Restructuring charges in the Consolidated and Combined Statements of Earnings.

In connection with the Separation, former Parent's Board of Directors approved amendments to certain outstanding long-term incentive awards on July 29, 2015. The amendments provided for the accelerated vesting on September 17, 2015 of certain stock-based awards that were otherwise scheduled to vest between September 18, 2015 and December 31, 2015. The incremental pre-tax stock-based compensation expense due to the acceleration was approximately $61 million in fiscal 2015.

Stock-based compensation expense includes an allocation of former Parent's corporate and shared functional employee expenses of $151 million and $113 million in fiscal 2015 and 2014, respectively.

Cash received from option exercises and purchases under the Company's ESPP was $119 million in fiscal 2016. The benefit realized for the tax deduction from option exercises in fiscal 2016 was $21 million. Cash received from option exercises and purchases by Company employees under former Parent's ESPP was $165 million in fiscal 2015 and $154 million in fiscal 2014. The benefit realized for the tax deduction from option exercises in fiscal 2015 and 2014 was $45 million and $42 million, respectively.

Restricted Stock Awards

Restricted stock awards are unvested stock awards that may include grants of restricted stock or restricted stock units. Restricted stock awards and cash-settled awards are generally subject to forfeiture if employment terminates prior to the lapse of the restrictions. Such awards generally vest one to three years from the date of grant. During the vesting period, ownership of the restricted stock cannot be transferred. Restricted stock has the same dividend and voting rights as common stock and is considered to be issued and outstanding upon grant. The dividends paid on restricted stock are non-forfeitable. Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on common stock. Restricted stock units do not have the voting rights of common stock, and the shares underlying restricted stock units are not considered issued and outstanding upon grant. The fair value of the restricted stock awards is the close price of the Company's common stock on the grant date of the award. The Company expenses the fair value of restricted stock awards ratably over the period during which the restrictions lapse.

For fiscal 2016, the activity summarized in the table below is related to restricted stock held by Company employees under the Plan. For fiscal 2015 and 2014, the activity summarized in the table below is related to restricted stock held by Company employees under former Parent's Plans.



	Fiscal years ended October 31,
	2016				2015				2014
	Shares		Weighted- Average Grant Date Fair Value Per Share		Shares		Weighted- Average Grant Date Fair Value Per Share		Shares		Weighted- Average Grant Date Fair Value Per Share
	In thousands				In thousands				In thousands
Outstanding at beginning of year	—		$	—	24,496		$	24	18,170		$	20
Converted from former Parent's plan	42,012		$	15	—		$	—	—		$	—
Granted and assumed through acquisition⁽¹⁾	32,752		$	15	19,601		$	35	15,820		$	28
Vested	(12,747	)	$	15	(21,860	)	$	26	(7,893	)	$	24
Forfeited	(4,696	)	$	15	(1,819	)	$	30	(1,601	)	$	22
Employee transition⁽²⁾	—		$	—	3,982		$	33	—		$	—
Outstanding at end of year	57,321		$	15	24,400		$	32	24,496		$	24

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(1)	Includes a one-time restricted stock unit retention grant of approximately 5 million shares in fiscal 2016.


(2)	The Employee transition amounts consist of restricted stock award activity for employees transitioning between the Company and former Parent.

In fiscal 2015, approximately 8 million shares of restricted stock units were assumed through acquisition with a weighted-average grant date fair value of $33 per share.

The total grant date fair value of restricted stock awards vested for Company employees in fiscal 2016, 2015 and 2014 was $130 million, $451 million and $128 million, respectively, net of taxes. As of October 31, 2016, there was $463 million of unrecognized pre-tax stock-based compensation expense related to unvested restricted stock awards, which the Company expects to recognize over the remaining weighted-average vesting period of 1.2 years.

Stock Options

Stock options granted under the Company's principal equity plans are generally non-qualified stock options, but the principal equity plans permitted some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vest over three to four years from the date of grant. The exercise price of a stock option is equal to the closing price of the Company's common stock on the option grant date. The majority of the stock options issued by the Company contain only service vesting conditions. The Company also issued, to a lesser extent, performance-contingent stock options that vest only on the satisfaction of both service and market conditions.

The Company and former Parent utilize the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. The Company and former Parent estimate the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:



	Fiscal years ended October 31,
	2016			2015			2014
Weighted-average fair value⁽¹⁾	$	4		$	8		$	7
Expected volatility⁽²⁾	31.1		%	26.8		%	33.1		%
Risk-free interest rate⁽³⁾	1.7		%	1.7		%	1.8		%
Expected dividend yield⁽⁴⁾	1.5		%	1.8		%	2.1		%
Expected term in years⁽⁵⁾	5.4			5.9			5.7

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(1)	For fiscal 2016, the weighted-average fair value was based on stock options granted under the Plan during the period. For fiscal 2015 and 2014, the weighted-average fair value was based on stock options granted under former Parent's Plan during the respective periods.

(2)

For options granted in fiscal 2016, expected volatility was estimated using the average historical volatility of selected peer companies. For options granted in fiscal 2015, expected volatility was estimated using the implied volatility derived from options traded on former Parent's common stock. For options granted in fiscal 2014, expected volatility for options subject to service-based vesting was estimated using the implied volatility derived from options traded on former Parent's common stock, whereas for performance-contingent options, expected volatility was estimated using the historical volatility of former Parent's common stock.


(3)	The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.


(4)	The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the option.

(5)

For options granted in fiscal 2016 subject to service-based vesting, the expected term was estimated using the simplified method detailed in SEC Staff Accounting Bulletin No. 110. For options granted in fiscal 2015 and 2014 subject to service-based vesting, the expected term was estimated using historical exercise and post-vesting termination patterns. For performance-contingent options, the expected term represents an output from the lattice model.

For fiscal 2016, the activity summarized in the table below is related to stock options held by Company employees under the Plan. For fiscal 2015 and 2014, the activity summarized in the table below is related to stock options held by Company employees under former Parent's Plan.



	Fiscal years ended October 31,
	2016							2015							2014
	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value		Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value		Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	In thousands				In years	In millions		In thousands				In years	In millions		In thousands				In years	In millions
Outstanding at beginning of year	—		$	—				24,472		$	27				37,433		$	26
Converted from former Parent's plan	42,579		$	15				—		$	—				—		$	—
Granted and assumed through acquisitions⁽¹⁾	25,390		$	15				3,147		$	37				4,255		$	28
Exercised	(7,845	)	$	11				(5,716	)	$	18				(5,533	)	$	18
Forfeited/cancelled/expired	(2,626	)	$	20				(7,116	)	$	40				(11,683	)	$	37
Employee transition⁽²⁾	—		$	—				11,391		$	26				—		$	—
Outstanding at end of year	57,498		$	15	5.4	$	437	26,178		$	26	5.2	$	115	24,472		$	27	4.2	$	272
Vested and expected to vest at end of year	55,716		$	15	5.3	$	425	25,309		$	26	5.2	$	115	23,152		$	27	4.0	$	252
Exercisable at end of year	26,204		$	13	3.8	$	241	18,767		$	23	4.7	$	109	14,174		$	31	2.5	$	119

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(1)	Includes one-time stock option retention grant of approximately 16 million shares in fiscal 2016.


(2)	Employee transition amounts consist of option activity for employees transitioning between the Company and former Parent.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that Company employee option holders would have realized had all option holders exercised their options on the last trading day of fiscal 2016, 2015 and 2014. For fiscal 2016, the aggregate intrinsic value is the difference between the Company's closing common stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options. For fiscal 2015 and 2014, the aggregate intrinsic value is the difference between former Parent's closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised in fiscal 2016, 2015 and 2014 was $62 million, $94 million and $78 million, respectively. The total grant date fair value of options granted which vested in fiscal 2016, 2015 and 2014 was $18 million, $38 million and $46 million, respectively, net of taxes.

The following table summarizes significant ranges of outstanding and exercisable stock options:



	As of October 31, 2016
	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares Outstanding	Weighted- Average Remaining Contractual Term	Weighted- Average Exercise Price		Shares Exercisable	Weighted- Average Exercise Price
	In thousands	In years			In thousands
$0-$9.99	7,321	3.7	$	8	8,905	$	8
$10-$19.99	39,881	5.7	$	15	13,289	$	14
$20-$29.99	10,296	5.2	$	21	4,010	$	22
	57,498	5.4	$	15	26,204	$	13

As of October 31, 2016, there was $58 million of unrecognized pre-tax stock-based compensation expense related to stock options, which the Company expects to recognize over the remaining weighted-average vesting period of 1.8 years.

Employee Stock Purchase Plan

The ESPP allows eligible employees to contribute up to 10% of their eligible compensation to purchase Hewlett Packard Enterprise's common stock. The ESPP provides for a discount not to exceed 15% and an offering period up to 24 months. The Company currently offers 6 month offering periods during which employees have the ability to purchase shares at 95% of the closing market price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases, as the criteria of a non-compensatory plan were met.

Prior to the Separation, former Parent sponsored the ESPP, pursuant to which eligible employees could contribute up to 10% of their eligible compensation, subject to certain income limits, to purchase shares of former Parent's common stock. Pursuant to the terms of the ESPP, employees purchased stock under the ESPP at a price equal to 95% of former Parent's closing stock price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases because the criteria of a non-compensatory plan were met.