Note 10 Stock-Based Compensation

Stock Based Compensation

In February 2016, our stockholders approved amendments to the Microsemi Corporation 2008 Performance Incentive Plan (the "2008 Plan"). The amendments a) increased the share limit by an additional approximately 4.8 million shares so that the amended aggregate share limit for the 2008 Plan is approximately 41.8 million shares; b) extended the term of the 2008 Plan to December 2, 2025; c) limited the grant date value of awards that may be granted to non-employee directors under the 2008 Plan during any one calendar year to $0.4 million (or $0.6 million as to any newly elected or appointed non-employee director or a non-employee director serving as chairman of the Board or lead independent director); and d) extended the Company's authority to grant awards under the 2008 Plan intended to qualify as "performance-based awards" within the meaning of Section 162(m) of the U.S. Internal Revenue Code through the first annual meeting of stockholders that occurs in 2021. For every one share issued in connection with a full value award (such as a restricted stock award, and as defined in the 2008 Plan), 2.41 shares will be counted against the share limit.

Except as described in this paragraph, shares that are subject to or underlie awards which expire or for any reason, are canceled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under the 2008 Plan will again be available for subsequent awards under the 2008 Plan. Shares exchanged by a participant or withheld by the Company as full or partial payment in connection with any award granted under the 2008 Plan that is a full-value award, as well as any shares exchanged by a participant or withheld by the Company or one of its subsidiaries to satisfy the tax withholding obligations related to any full-value award granted under the 2008 Plan will be available for subsequent awards under the 2008 Plan. Shares exchanged by a participant or withheld by the Company to pay the exercise price of a stock option or stock appreciation right granted under the 2008 Plan, as well as any shares exchanged or withheld to satisfy the tax withholding obligations related to any such award, will not be available for subsequent awards under the 2008 Plan. Tax withholding obligations are established at the statutory minimum requirements for any shares exchanged or withheld.

Awards authorized by the 2008 Plan include options, stock appreciation rights, restricted stock, stock bonuses, stock units, performance share awards, and other cash or share-based awards. The shares issued under the 2008 Plan may be newly issued or shares held by Microsemi as treasury stock. The maximum term of a stock option grant or a stock appreciation right granted under the 2008 Plan is 6 years.

Stock-based compensation expense was $101.1 million in 2016, of which,$23.1 million was recorded in restructuring expense. Stock-based compensation expense was $49.8 million and $43.9 million in 2015 and 2014, respectively. At October 2, 2016, unamortized compensation expense related to unvested stock awards was $102.3 million. The weighted average period over which compensation expense related to these grants will be recognized is 1.5 years.

Remaining share-units available for grant, assuming the issuance of performance units at target, at October 2, 2016, September 27, 2015 and September 28, 2014 under the 2008 Plan were 12.3 million, 11.7 million and 14.1 million, respectively.

Restricted Shares

Compensation expense for restricted shares was calculated based on the closing price of our common stock on the date of grant and the restricted shares are subject to forfeiture if a participant does not meet length of service requirements. Restricted stock awards granted to employees typically vest over a three year period and awards granted to non-employee directors vest in accordance with our director compensation policy.

Activity and price information related to restricted stock awards are as follows (quantity in millions):



	Quantity		Weighted-Average Grant Price
Outstanding at September 29, 2013	3.1
Granted	1.6		$	24.67
Vested	(1.4	)
Forfeited	(0.2	)
Outstanding at September 28, 2014	3.1
Assumed from acquisition	0.3		$	33.01
Granted	1.3		$	29.37
Vested	(1.5	)
Forfeited	(0.2	)
Outstanding at September 27, 2015	3.0
Assumed from acquisition	1.9		$	29.77
Granted	1.3		$	32.15
Vested	(2.1	)
Forfeited	(0.5	)
Outstanding at October 2, 2016	3.6

In connection with the acquisition of Vitesse in 2015 and PMC in 2016, we assumed restricted shares and converted them to Microsemi awards in accordance with the merger agreements.

Stock Units with Performance and Market Conditions

Compensation expense for performance stock units with performance and market conditions was calculated based upon expected achievement of the performance metrics specified in the grant and the closing price of our common stock on the date of grant, or when a grant contains a market condition, the grant date fair value using a Monte Carlo simulation which incorporates estimates of the potential outcomes of the market condition on the fair value date of each award.

Performance units with performance and market conditions are eligible to vest based on our rate of growth for net sales and earnings per share (subject to certain adjustments) relative to the growth rates for that metric over the relevant performance period for a peer group of companies. The performance period for each grant is over three fiscal years and portion of the performance units may vest based on performance after each fiscal year of the performance period.

For the 2014 grants, 40% of each performance-based award opportunity will be subject to the net sales metric for the performance period and 60% will be subject to the earnings per share metric for the performance period. The maximum percentage for a particular metric is 200% of the "target" number of units subject to the award related to that metric. For the 2015 grant, 70% of each performance-based award opportunity will be subject to the net sales metric for the performance period and 30% will be subject to the earnings per share metric for the performance period. The maximum percentage for a particular metric is 225% of the "target" number of units subject to the award related to that metric. The maximum percentage is further adjusted by our total shareholder return relative to a peer group selected by the Compensation Committee. For the 2014 grant, the maximum adjustment is 125% and for the 2015 and 2016 grant, the maximum adjustment is 120%.

Stock Units with Market Conditions

In July 2016, the Compensation Committee (the “Committee”) of the Board of Directors of the Company approved a long-term incentive equity award for our chief executive officer consisting of 1,000,000 restricted stock units awarded under the Company’s 2008 Plan. Under the award agreement, the vesting of the RSUs is contingent on the Company’s stock price achieving specified levels during the five-year period after the date of grant of the award (the “performance period”) as follows:



Stock Price Level		Percentage of Total Award That Vests
$50.00		25%
$60.00		50%
$70.00		25%

For a stock price level to be considered achieved, the closing price of the Company’s common stock (together with any dividends paid on a share of the Company’s stock after the grant date of the award) must equal or exceed that level for a period of at least 20 consecutive trading days. A stock price level will also be considered achieved if, during the performance period, a change in control of the Company occurs after which the Company does not survive as a public company (a “Sale of the Company”) and the per-share price of the Company’s common stock in the Sale of the Company (together with any dividends paid on a share of the Company’s stock after the grant date of the award) equals or exceeds that level. In each case, the vesting of the award is subject to Mr. Peterson’s continued employment with the Company through the date the applicable stock price level is met.

The award is also eligible to vest in connection with certain “acceleration events” as described below. If, during the first year of the performance period, an acceleration event occurs and the award has not yet vested as to at least 160,000 RSUs, the award will accelerate on the event to the extent necessary so that 160,000 RSUs are vested on the event. If an acceleration event occurs during the performance period but after the first year of the performance period and the award has not yet vested as to at least 320,000 RSUs, the award will generally accelerate on the occurrence of the event to the extent necessary so that 320,000 RSUs are vested upon such event. If, however, an acceleration event occurs during the performance period but after the first year of the performance period, and the award has not yet vested as to at least 500,000 RSUs and the average closing price of the Company’s common stock for the period of 20 consecutive trading days ending with the date of the acceleration event (or, in the case of an acceleration event that is a Sale of the Company, the per-share sale price of the Company’s stock, and in each case together with any dividends paid on a share of the Company’s stock after the grant date) equals or exceeds $50.00, the award will accelerate on occurrence of the event to the extent necessary so that 500,000 RSUs are vested upon such event. For these purposes, an “acceleration event” is either a change in control of the Company (whether or not the transaction constitutes a Sale of the Company) or a termination of our chief executive officer's employment by the Company without cause, by our chief executive officer for good reason or as a result of our chief executive officer's death or disability (as such terms are defined in the award agreement). In no event will the award vest as to more than 100% of the RSUs subject to the award (with the RSUs under the award being subject in each case to customary adjustments for stock splits and similar events).

Activity and price information related to performance units are as follows (quantity reported at target and in millions):



	Quantity
Outstanding at September 29, 2013	0.6
Granted	0.4
Vested	(0.3	)
Outstanding at September 28, 2014	0.7
Granted	0.3
Vested	(0.3	)
Outstanding at September 27, 2015	0.7
Granted	1.5
Vested	(0.5	)
Outstanding at October 2, 2016	1.7

Stock Options and Stock Appreciation Rights

Compensation expense for stock options and stock appreciation rights was calculated based on the grant or assumption date using the Black-Scholes pricing model. All stock appreciation rights we have granted or assumed are stock-settled. Stock options and stock appreciation rights are granted at exercise prices equal to the closing price of our common stock on the date of grant. Assumed stock options and stock appreciation rights are granted at exercise prices determined in accordance with the applicable merger agreement. Expected life and forfeiture rates were estimated based primarily on historical data that were stratified between members of the Board of Directors, executive employees and all other recipients. Expected volatility was estimated based on historical volatility using equally weighted daily price observations over a period approximately equal to the expected life of each option. The risk free interest rate is based on the implied yield currently available on U.S. Treasury securities with an equivalent remaining term. No dividends are expected to be paid.

Activity and price information related to stock options and stock appreciation rights are as follows (quantity and intrinsic value in millions):



	Quantity		Weighted-Average Exercise Price		Intrinsic Value		Weighted Average Remaining Life (Years)
Outstanding at September 29, 2013	4.7		$	22.49	$	14.7	1.7
Assumed from acquisition	0.6		$	20.08
Exercised	(1.2	)	$	16.39	$	17.0
Forfeited	(1.4	)	$	26.55
Outstanding at September 28, 2014	2.7		$	22.70	$	7.4	2.0
Assumed from acquisition	0.2		$	24.18
Exercised	(2.1	)	$	23.83	$	15.8
Forfeited	(0.1	)	$	23.90
Outstanding at September 27, 2015	0.7		$	19.60	$	9.1	4.0
Exercised	(0.2	)	$	21.16
Forfeited	—		$	21.44
Outstanding at October 2, 2016	0.5		$	18.75	$	10.7	3.5
Exercisable at October 2, 2016	0.4		$	18.24	$	9.8	3.3
Exercisable and expected to vest after October 2, 2016	0.5		$	18.75	$	10.7	3.5

In connection with the acquisitions Symmetricom, Inc. in 2014 and Vitesse in 2015, we assumed stock options and converted them to Microsemi awards in accordance with their respective merger agreements.

Quantity and weighted-average exercise prices related to stock options and stock appreciation rights outstanding as of October 2, 2016 and stratified by exercise price are as follows (quantity in millions):



	Exercisable			Outstanding
Exercise Price	Quantity	Weighted-Average Exercise Price		Quantity	Weighted-Average Exercise Price
Less than or equal to $20.00	0.3	$	14.08	0.3	$	14.17
Greater than $20.00	0.1	$	25.87	0.2	$	25.60
	0.4	$	18.24	0.5	$	18.75