STOCK-BASED COMPENSATION

Our stock-based compensation programs are long-term retention programs that are intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We have the following stock-based compensation plans and programs:

Restricted Stock Plans

We grant restricted stock units to all eligible employees under our 2003 Equity Incentive Plan, as amended (“2003 Plan”) and our 2005 Equity Incentive Assumption Plan (“2005 Assumption Plan”). Restricted stock units granted under these plans as part of our annual review process vest annually over three years. Other restricted stock units granted under these plans generally vest over four years, the majority of which vest 25% annually. Certain grants have other vesting periods approved by our Board of Directors or an authorized committee of the Board of Directors.

We grant performance awards to officers and key employees under our 2003 Plan. Performance awards granted under these plans from fiscal 2009 to fiscal 2012 generally vest annually over three years with the exception of the performance awards granted in fiscal 2013 which cliff-vest after three years. Performance awards granted prior to fiscal 2009 vest annually over four years.

As of November 29, 2013, we had reserved 154.4 million and 5.7 million shares of common stock for issuance under our 2003 Plan and 2005 Assumption Plan, respectively, and had 44.0 million and 0.6 million shares available for grant under our 2003 Plan and 2005 Assumption Plan, respectively.

Employee Stock Purchase Plan

Our 1997 Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower. The ESPP will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued.

As of November 29, 2013, we had reserved 93.0 million shares of our common stock for issuance under the ESPP and approximately 15.8 million shares remain available for future issuance.

Stock Option Plans

The 2003 Plan and the 2005 Assumption Plan allows us to grant options to all employees, including executive officers, outside consultants and non-employee directors. These plans will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued and restrictions on issued shares have lapsed. Option vesting periods are generally four years for all of these plans. Options granted under these plans generally expire seven years from the effective date of grant.

The Executive Compensation Committee of Adobe's Board of Directors eliminated the use of stock option grants for all employees in fiscal 2012. Stock option grants to non-employee directors were minimal in fiscal 2013, and in December 2013 the Board of Directors eliminated the use of options for directors going forward.

Performance Share Programs

Effective January 24, 2013, our Executive Compensation Committee modified our Performance Share Program (the "2013 Program") by eliminating the use of qualitative performance objectives, with 100% of shares to be earned based on the achievement of an objective total stockholder return measure over a three-year performance period. Performance awards will be granted under the 2013 Program pursuant to the terms of our 2003 Equity Incentive Plan. The purpose of the 2013 Program is to align key management and senior leadership with stockholders’ interests over the long term and to retain key employees. Performance share awards will be awarded and fully vest upon the Executive Compensation Committee's certification of the level of achievement following the three-year anniversary of the grant date on January 24, 2016. Participants in the 2013 Program generally have the ability to receive up to 200% of the target number of shares originally granted.

Issuance of Shares

Upon exercise of stock options, vesting of restricted stock and performance shares, and purchases of shares under the ESPP, we will issue treasury stock. If treasury stock is not available, common stock will be issued. In order to minimize the impact of on-going dilution from exercises of stock options and vesting of restricted stock and performance shares, we instituted a stock repurchase program. See Note 13 for information regarding our stock repurchase programs.

Valuation of Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award. We use the Black-Scholes option pricing model to determine the fair value of stock options and ESPP shares. The determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.

We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in the option valuation model on zero-coupon yields implied by U.S. Treasury issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

The assumptions used to value our option grants were as follows:



	Fiscal Years
	2013		2012	2011
Expected life (in years)	3.2		3.9 - 4.2	3.8 - 4.2
Volatility	27	%	31 - 34%	30 - 41%
Risk free interest rate	0.36	%	0.54 - .71%	0.64 - 1.92%

The expected term of ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights were as follows:



	Fiscal Years
	2013	2012	2011
Expected life (in years)	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0
Volatility	26 - 30%	30 - 36%	30 - 34%
Risk free interest rate	0.09 - 0.34%	0.06 - 0.30%	0.10 - 0.61%

We recognize the estimated compensation cost of restricted stock awards and restricted stock units, net of estimated forfeitures, over the vesting term. The estimated compensation cost is based on the fair value of our common stock on the date of grant.

We recognize the estimated compensation cost of performance shares, net of estimated forfeitures. The fiscal 2013 awards are earned upon achievement of an objective total stockholder return measure at the end of the three-year performance period, as described above. The fair value of the awards was fixed at grant date and will be amortized over the longer of the remaining performance or service period. In previous years, the awards were earned upon attainment of identified performance goals, some of which contained discretionary metrics. As such, these awards were measured based on our traded stock price at the end of each reporting period until achieved. The fair value of the awards were based on the achievement date and amortized over the longer of the remaining performance or service period.

Summary of Restricted Stock Units

Restricted stock unit activity for fiscal 2013, 2012 and 2011 was as follows (in thousands):



	2013		2012		2011
Beginning outstanding balance	18,415		16,871		13,890
Awarded	7,236		9,431		8,180
Released	(6,224	)	(5,854	)	(3,819	)
Forfeited	(1,479	)	(2,147	)	(1,587	)
Increase due to acquisition	—		114		207
Ending outstanding balance	17,948		18,415		16,871

The weighted average grant date fair values of restricted stock units granted during fiscal 2013, 2012 and 2011 were $39.87, $31.36 and $33.10, respectively. The total fair value of restricted stock units vested during fiscal 2013, 2012 and 2011 was $249.5 million, $180.1 million and $123.3 million, respectively.

Information regarding restricted stock units outstanding at November 29, 2013, November 30, 2012 and December 2, 2011 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Restricted stock units outstanding	17,948	1.09	$	1,019.1
Restricted stock units vested and expected to vest	16,265	1.02	$	920.5
2012
Restricted stock units outstanding	18,415	1.37	$	637.3
Restricted stock units vested and expected to vest	16,289	1.26	$	562.8
2011
Restricted stock units outstanding	16,871	1.35	$	457.4
Restricted stock units vested and expected to vest	14,931	1.25	$	404.3

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^(*)	The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of November 29, 2013, November 30, 2012 and December 2, 2011 were $56.78, $34.61 and $27.11, respectively.

Summary of Performance Shares

The following table sets forth the summary of performance share activity under our 2013 Program for the fiscal year ended November 29, 2013 (in thousands):



	Shares Granted		Maximum Shares Eligible to Receive
Beginning outstanding balance	—		—
Awarded	946		1,891
Forfeited	(92	)	(184	)
Ending outstanding balance	854		1,707

In the first quarter of fiscal 2013, the Executive Compensation Committee certified the actual performance achievement of participants in the 2012 Performance Share Program (the “2012 Program”). Based upon the achievement of specific and/or market-based performance goals outlined in the 2012 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 116% of target or approximately 1.3 million shares for the 2012 Program. One third of the shares under the 2012 Program vested in the first quarter of fiscal 2013 and the remaining two thirds vest evenly on the following two anniversaries of the grant, contingent upon the recipient's continued service to Adobe.

In the first quarter of fiscal 2012, the Executive Compensation Committee certified the actual performance achievement of participants in the 2011 Performance Share Program (the “2011 Program”). Based upon the achievement of goals outlined in the 2011 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 130% of target or approximately 0.5 million shares for the 2011 Program. One third of the shares under the 2011 Program vested in the first quarter of fiscal 2012 and the remaining two thirds vest evenly on the following two annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe.

In the first quarter of fiscal 2011, the Executive Compensation Committee certified the actual performance achievement of participants in the 2010 Performance Share Program (the “2010 Program”). Based upon the achievement of goals outlined in the 2010 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 135% of target or approximately 0.3 million shares for the 2010 Program. One third of the shares under the 2011 Program vested in the first quarter of fiscal 2012 and the remaining two thirds vest evenly on the following two annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe.

The following table sets forth the summary of performance share activity under our 2010, 2011 and 2012 programs, based upon share awards actually achieved, for the fiscal years ended November 29, 2013, November 30, 2012 and December 2, 2011 (in thousands):



	2013		2012		2011
Beginning outstanding balance	388		405		557
Achieved	1,279		492		337
Released	(665	)	(464	)	(436	)
Forfeited	(141	)	(45	)	(53	)
Ending outstanding balance	861		388		405

The total fair value of performance awards vested during fiscal 2013, 2012 and 2011 was $25.4 million, $14.4 million and $14.8 million, respectively.

Information regarding performance shares outstanding at November 29, 2013, November 30, 2012 and December 2, 2011 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Performance shares outstanding	861	0.58	$	48.9
Performance shares vested and expected to vest	817	0.56	$	46.3
2012
Performance shares units outstanding	388	0.54	$	13.4
Performance shares vested and expected to vest	369	0.51	$	12.7
2011
Performance shares units outstanding	405	0.41	$	11.0
Performance shares vested and expected to vest	390	0.39	$	10.4

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^(*)	The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of November 29, 2013, November 30, 2012 and December 2, 2011 were $56.78, $34.61 and $27.11, respectively.

Summary of Employee Stock Purchase Plan Shares

The weighted average subscription date fair value of shares under the ESPP during fiscal 2013, 2012 and 2011 were $11.40, $9.09 and $9.01, respectively. Employees purchased 3.4 million shares at an average price of $25.71, 3.2 million shares at an average price of $23.81, and 3.7 million shares at an average price of $23.48, respectively, for fiscal 2013, 2012 and 2011. The intrinsic value of shares purchased during fiscal 2013, 2012 and 2011 was $58.5 million, $22.8 million and $28.9 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

Summary of Stock Options

Option activity under our stock option program for fiscal 2013, 2012 and 2011 was as follows (shares in thousands):



	Outstanding Options
	Number of Shares		Weighted Average Exercise Price
December 3, 2010	37,075		$	30.33
Granted	4,507		$	33.60
Exercised	(4,987	)	$	21.02
Cancelled	(2,268	)	$	33.85
Increase due to acquisition	475		$	2.25
December 2, 2011	34,802		$	31.47
Granted	57		$	32.19
Exercised	(6,754	)	$	23.61
Cancelled	(4,692	)	$	33.07
Increase due to acquisition	1,104		$	3.23
November 30, 2012	24,517		$	32.09
Granted	25		$	45.03
Exercised	(15,872	)	$	32.15
Cancelled	(1,584	)	$	37.37
Increase due to acquisition	273		$	6.82
November 29, 2013	7,359		$	29.93

The weighted average fair values of options granted during fiscal 2013, 2012 and 2011 were $8.64, $8.50 and $8.82, respectively.

The total intrinsic value of options exercised during fiscal 2013, 2012 and 2011 was $181.8 million, $62.6 million and $59.4 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.

Information regarding stock options outstanding at November 29, 2013, November 30, 2012 and December 2, 2011 is summarized below:



	Number of Shares (thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Options outstanding	7,359	$	29.93	3.22	$	197.6
Options vested and expected to vest	7,242	$	30.05	3.18	$	193.6
Options exercisable	5,752	$	31.28	2.65	$	146.7
2012
Options outstanding	24,517	$	32.09	2.74	$	103.3
Options vested and expected to vest	24,158	$	32.15	2.70	$	100.9
Options exercisable	20,668	$	33.06	2.27	$	73.6
2011
Options outstanding	34,802	$	31.47	3.24	$	68.0
Options vested and expected to vest	33,856	$	31.52	3.17	$	65.6
Options exercisable	26,622	$	32.31	2.56	$	42.1

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^(*)	The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of November 29, 2013, November 30, 2012 and December 2, 2011 were $56.78, $34.61 and $27.11, respectively.

All stock options granted to current executive officers are made after a review by and with the approval of the Executive Compensation Committee of the Board of Directors.

Grants to Non-Employee Directors

The Directors Plan (and starting in fiscal 2008, the 2003 Plan) provides for the granting of nonqualified stock options to non-employee directors. Initial equity grant to a new non-employee director is a restricted stock unit award having an aggregate value of $0.5 million based on the average stock price over the 30 calendar days ending on the day before the date of grant. The initial equity award vests over 2 years, 50% on the day preceding each of our next 2 annual meetings. For all periods presented, a non-employee director could elect to receive the annual equity grant as either 100% options, 100% restricted stock units or 50% of each and shall have an aggregate value of $0.2 million as based on the average stock price over the 30 calendar days ending on the day before the date of grant. The target grant value converted to stock options is based on a 1:3 conversion of restricted stock units to stock options. Annual equity awards vest 100% on the day preceding the next annual meeting. Options granted have a seven-year term. The exercise price of the options that are issued is equal to the fair market value of our common stock on the date of grant.

Options granted to directors for fiscal 2013, 2012 and 2011 were as follows (shares in thousands):



	2013		2012		2011
Options granted to existing directors	25		43		85
Exercise price	$	45.03	$	33.18	$	33.23

Restricted stock units granted to directors for fiscal 2013, 2012 and 2011 were as follows (in thousands):



	2013	2012	2011
Restricted stock units granted to existing directors	36	42	28
Restricted stock units granted to new directors	14	41	—

Compensation Costs

With the exception of performance shares, stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the entire award, which is generally the vesting period. For performance shares, expense is recognized on a straight-line basis over the requisite service period for each vesting tranche of the award.

As of November 29, 2013, there was $428.9 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 1.9 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Total stock-based compensation costs that have been included in our Consolidated Statements of Income for fiscal 2013, 2012 and 2011 were as follows (in thousands):



	Income Statement Classifications
	Cost of Revenue– Subscription		Cost of Revenue– Services and Support		Research and Development		Sales and Marketing		General and Administrative		Total⁽¹⁾
Option Grants and Stock Purchase Rights
2013	$	2,059	$	3,413	$	18,188	$	21,283	$	8,410	$	53,353
2012	$	2,840	$	4,130	$	24,823	$	31,379	$	15,455	$	78,627
2011	$	936	$	4,716	$	28,132	$	31,754	$	20,605	$	86,143
Restricted Stock and Performance Share Awards
2013	$	5,052	$	6,961	$	102,464	$	101,423	$	59,734	$	275,634
2012	$	3,100	$	9,461	$	83,349	$	76,359	$	47,606	$	219,875
2011	$	1,521	$	8,607	$	79,427	$	68,485	$	41,920	$	199,960

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⁽¹⁾	During fiscal 2013, 2012 and 2011, we recorded tax benefits of $70.7 million, $61.5 million and $58.3 million, respectively.