STOCK PLANS

12 Months Ended

May 29, 2016

NOTE 11. STOCK PLANS

We use broad-based stock plans to help ensure that management’s interests are aligned with those of our shareholders. As of May 29, 2016, a total of 24.3 million shares were available for grant in the form of stock options, restricted stock, restricted stock units, and shares of unrestricted stock under the 2011 Stock Compensation Plan (2011 Plan) and the 2011 Compensation Plan for Non-Employee Directors. The 2011 Plan also provides for the issuance of cash-settled share-based units, stock appreciation rights, and performance-based stock awards. Stock-based awards now outstanding include some granted under the 2005, 2006, 2007, and 2009 stock plans, under which no further awards may be granted. The stock plans provide for potential accelerated vesting of awards upon retirement, termination, or death of eligible employees and directors.

Stock Options

The estimated fair values of stock options granted and the assumptions used for the Black-Scholes option-pricing model were as follows:

	Fiscal Year
	2016	2015	2014
Estimated fair values of stock options granted	$7.24	$7.22	$6.03
Assumptions:
Risk-free interest rate	2.4 %	2.6 %	2.6 %
Expected term	8.5 years	8.5 years	9.0 years
Expected volatility	17.6 %	17.5 %	17.4 %
Dividend yield	3.2 %	3.1 %	3.1 %

We estimate the fair value of each option on the grant date using a Black-Scholes option-pricing model, which requires us to make predictive assumptions regarding future stock price volatility, employee exercise behavior, dividend yield, and the forfeiture rate. We estimate our future stock price volatility using the historical volatility over the expected term of the option, excluding time periods of volatility we believe a marketplace participant would exclude in estimating our stock price volatility. We also have considered, but did not use, implied volatility in our estimate, because trading activity in options on our stock, especially those with tenors of greater than 6 months, is insufficient to provide a reliable measure of expected volatility.

Our expected term represents the period of time that options granted are expected to be outstanding based on historical data to estimate option exercises and employee terminations within the valuation model. Separate groups of employees have similar historical exercise behavior and therefore were aggregated into a single pool for valuation purposes. The weighted-average expected term for all employee groups is presented in the table above. The risk-free interest rate for periods during the expected term of the options is based on the U.S. Treasury zero-coupon yield curve in effect at the time of grant.

Any corporate income tax benefit realized upon exercise or vesting of an award in excess of that previously recognized in earnings (referred to as a windfall tax benefit) is presented in our Consolidated Statements of Cash Flows as a financing cash flow.

Realized windfall tax benefits are credited to additional paid-in capital within our Consolidated Balance Sheets. Realized shortfall tax benefits (amounts which are less than that previously recognized in earnings) are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense, potentially resulting in volatility in our consolidated effective income tax rate. We calculated a cumulative memo balance of windfall tax benefits for the purpose of accounting for future shortfall tax benefits.

Options may be priced at 100 percent or more of the fair market value on the date of grant, and generally vest four years after the date of grant. Options generally expire within 10 years and one month after the date of grant.

Information on stock option activity follows:

	Options Exercisable (Thousands)		Weighted-Average Exercise Price Per Share	Options Outstanding (Thousands)		Weighted-Average Exercise Price Per Share
Balance as of May 26, 2013	29,290.3		27.69	47,672.1		30.22
Granted				2,789.8		48.33
Exercised				(6,181.3)		24.78
Forfeited or expired				(111.6)		38.74
Balance as of May 25, 2014	29,452.8		28.37	44,169.0		32.10
Granted				2,253.1		53.70
Exercised				(7,297.2)		26.68
Forfeited or expired				(47.7)		43.73
Balance as of May 31, 2015	26,991.5		30.44	39,077.2		34.35
Granted				1,930.2		55.72
Exercised				(8,471.0)		28.49
Forfeited or expired				(134.8)		48.16
Balance as of May 29, 2016	22,385.1	$	32.38	32,401.6	$	37.09

Stock-based compensation expense related to stock option awards was $14.8 million in fiscal 2016, $18.1 million in fiscal 2015, and $18.2 million in fiscal 2014. Compensation expense related to stock-based payments recognized in our Consolidated Statements of Earnings includes amounts recognized in restructuring, impairment, and other exit costs for fiscal 2016 and 2015.

Net cash proceeds from the exercise of stock options less shares used for minimum withholding taxes and the intrinsic value of options exercised were as follows:

		Fiscal Year
In Millions		2016		2015		2014
Net cash proceeds	$	171.9	$	163.7	$	108.1
Intrinsic value of options exercised	$	268.4	$	201.9	$	166.6

Restricted Stock, Restricted Stock Units, and Performance Share Units

Stock and units settled in stock subject to a restricted period and a purchase price, if any (as determined by the Compensation Committee of the Board of Directors), may be granted to key employees under the 2011 Plan. Restricted stock and restricted stock units generally vest and become unrestricted four years after the date of grant. Performance share units are earned based on our future achievement of three-year goals for average organic net sales growth and cumulative free cash flow. Performance share units are settled in common stock and are generally subject to a three year performance and vesting period. The sale or transfer of these awards is restricted during the vesting period. Participants holding restricted stock, but not restricted stock units or performance share units, are entitled to vote on matters submitted to holders of common stock for a vote. These awards accumulate dividends from the date of grant, but participants only receive payment if the awards vest.

Information on restricted stock unit and performance share units activity follows:

	Equity Classified			Liability Classified
	Share-Settled Units (Thousands)		Weighted-Average Grant-Date Fair Value	Share-Settled Units (Thousands)		Weighted-Average Grant-Date Fair Value
Non-vested as of May 31, 2015	6,235.6	$	46.44	237.0	$	44.84
Granted	1,287.7		56.01	63.8		55.82
Vested	(2,119.9)		46.65	(69.5)		40.55
Forfeited, expired, or reclassified	(303.0)		49.45	(19.9)		51.45
Non-vested as of May 29, 2016	5,100.4	$	48.60	211.4	$	48.37

		Fiscal Year
		2016		2015		2014
Number of units granted (thousands)		1,351.5		1,708.2		2,144.1
Weighted average price per unit	$	56.00	$	53.45	$	48.49

The total grant-date fair value of restricted stock unit awards that vested during fiscal 2016 was $101.8 million and $133.7 million vested during fiscal 2015.

As of May 29, 2016, unrecognized compensation expense related to non-vested stock options, restricted stock units, and performance share units was $93.9 million. This expense will be recognized over 18 months, on average.

Stock-based compensation expense related to restricted stock units and performance share units was $76.8 million for fiscal 2016, $96.6 million for fiscal 2015, and $107.0 million for fiscal 2014. Compensation expense related to stock-based payments recognized in our Consolidated Statements of Earnings includes amounts recognized in restructuring, impairment, and other exit costs for fiscal 2016 and 2015.