Note 9: Stock-Based Compensation

On May 29, 2008, the Company’s stockholders approved the 2008 Equity Incentive Plan and the 2008 Employee Stock Purchase Plan (“ESPP”). The 2008 Equity Incentive Plan and ESPP were previously adopted by the Company’s Board of Directors on April 8, 2008, subject to stockholder approval. Upon stockholder approval of the 2008 Equity Incentive Plan and ESPP each of the following plans were terminated: the 1999 Stock Option Plan, the Restricted Stock Award Plan, the 1998 Stock Option Plan and the Employee Stock Purchase Plan established in 1992.

The 2008 Equity Incentive Plan allows for the award of stock options, stock awards (including stock units, stock grants and stock appreciation rights or other similar equity awards) and cash awards to officers, employees, consultants and non-employee members of the Board of Directors. The total number of shares reserved for issuance under the 2008 Equity Incentive Plan is 2,414,075 shares of common stock, subject to adjustment resulting from a stock split or the payment of a stock dividend or any other increase or decrease in the number of issued shares of the Company’s stock effected without receipt of consideration by the Company. As of January 2, 2015, 717,671 shares were available for grant under the 2008 Equity Incentive Plan.

The ESPP allows for officers and employees to purchase common stock through payroll deductions of up to 15% of a participant’s eligible compensation. Shares of common stock are purchased under the ESPP at 95% of the fair market value of the Company’s common stock on each purchase date. Subject to adjustment resulting from a stock split or the payment of a stock dividend or any other increase or decrease in the number of issued shares of the Company’s stock effected without receipt of consideration by the Company, the total number of shares reserved for issuance under the ESPP was 200,000 shares of common stock. As of January 2, 2015, 46,533 shares were available for grant. Weighted average purchase prices for shares sold under the ESPP plan in fiscal 2014, 2013 and 2012 were $71.35, $60.64 and $50.26, respectively.

Restricted Stock Units

The Company grants restricted stock units to employees and outside directors. These restricted stock unit grants are designed to attract and retain employees, and to better align employee interests with those of the Company’s stockholders. For a select group of employees, up to 40% of their annual bonus is settled with fully vested restricted stock unit awards. Under these fully vested restricted stock unit awards, the holder of each award has the right to receive one share of the Company’s common stock for each fully vested restricted stock unit four years from the date of grant. Each individual who received a fully vested restricted stock unit award is granted a matching number of unvested restricted stock unit awards. These unvested restricted stock unit awards cliff vest four years from the date of grant, at which time the holder of each award will have the right to receive one share of the Company’s common stock for each restricted stock unit award, provided the holder of each award has met certain employment conditions. In the case of retirement at 59 ½ years or older, all unvested restricted stock unit awards will continue to vest provided the holder of each award does all consulting work through the Company and does not become an employee for a past or present client, beneficial party or competitor of the Company.

All restricted stock units granted have dividend equivalent rights (“DER”), which entitle holders of restricted stock units to the same dividend value per share as holders of common stock. DER are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DER are accumulated and paid in additional restricted stock units when the underlying shares vest and are forfeited if the underlying shares are forfeited.

The value of these restricted stock unit awards is determined based on the market price of the Company’s common stock on the date of grant. The value of fully vested restricted stock unit awards issued is recorded as a reduction to accrued bonuses. The portion of bonus expense that the Company expects to settle with fully vested restricted stock unit awards is recorded as stock-based compensation during the period the bonus is earned. For the fiscal years ended January 2, 2015, January 3, 2014 and December 28, 2012, the Company recorded stock-based compensation expense associated with accrued bonus awards of $6,287,000, $6,061,000 and $6,089,000, respectively.

The Company recorded stock-based compensation expense associated with the unvested restricted stock unit awards of $6,103,000, $6,030,000 and $5,650,000 during the fiscal years ended January 2, 2015, January 3, 2014 and December 28, 2012, respectively. The total fair value of restricted stock unit awards vested during the fiscal years ended January 2, 2015, January 3, 2014 and December 28, 2012 was $16.5 million, $15.4 million and $11.3 million, respectively. The weighted-average grant date fair values of restricted stock unit awards granted during the fiscal years ended January 2, 2015, January 3, 2014 and December 28, 2012 were $74.58, $54.17 and $48.04, respectively.

The number of unvested restricted stock unit awards outstanding as of January 2, 2015 is as follows⁽¹⁾:

					Weighted-average
	Number		Weighted-average		remaining		Aggregate
	of awards		grant date		contractual		intrinsic value
	outstanding		fair value		term (years)		(in thousands)⁽²⁾


Balance as of January 3, 2014		478,347	$	42.14
Awards granted		189,174		74.58
Awards vested		(221,599)		48.29
Awards forfeited		(2,532)		59.07

Balance as of January 2, 2015		443,390	$	52.81	1.6	$	35,954

Expected to vest as of January 2, 2015		437,319	$	52.75	1.5	$	35,462

⁽¹⁾ Does not include employee stock purchase plans or stock option plans.

(2)	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 value as of January 2, 2015 was $81.09.

Stock Options

The Company currently grants stock options under the 2008 Equity Incentive Plan. Options are granted for terms of ten years and generally vest ratably over a four-year period from the grant date. The Company grants options at exercise prices equal to the fair value of the Company’s common stock on the date of grant. All stock options have dividend equivalent rights (“DER”), which entitle holders of stock options to the same dividend value per share as holders of common stock. DER are subject to the same vesting terms as the corresponding stock options. DER are accumulated and paid in cash when the underlying stock options vest and are forfeited if the underlying stock options do not vest. During the fiscal years ended January 2, 2015, January 3, 2014 and December 28, 2012, the Company recorded stock-based compensation expense of $689,000, $1,077,000 and $639,000, respectively, associated with stock options.

Option activity is as follows⁽¹⁾:

					Weighted-average
	Number		Weighted-average		remaining		Aggregate
	of awards		grant date		contractual		intrinsic value
	outstanding		fair value		term (years)		(in thousands)⁽²⁾

Balance as of January 3, 2014		217,000	$	32.06
Options granted		22,500		70.80
Options forfeited and expired		-		-
Options exercised		(42,000)		22.86

Balance as of January 2, 2015		197,500	$	38.43		5.85	$	8,426
Vested and expected to vest as of January 2, 2015		195,507	$	38.22		5.83	$	8,382

Exercisable at January 2, 2015		134,375	$	30.35		4.83	$	6,819

⁽¹⁾ Does not include restricted stock or employee stock purchase plans.

The total intrinsic value of options exercised during the fiscal years ended January 2, 2015, January 3, 2014 and December 28, 2012 was $1,975,000, $3,177,000 and $7,484,000, respectively. The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the fiscal year ended January 2, 2015, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on January 2, 2015. This amount changes based on the fair-value of the Company’s stock.

The Company uses the Black-Scholes option-pricing model to determine the fair value of options granted. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends.

The Company used historical exercise and post-vesting forfeiture and expiration data to estimate the expected term of options granted. The historical volatility of the Company’s common stock over a period of time equal to the expected term of the options granted was used to estimate expected volatility. The risk-free interest rate used in the option-pricing model was based on United States Treasury zero coupon issues with remaining terms similar to the expected term on the options. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data was used to estimate pre-vesting option forfeitures and stock-based compensation expense was recorded only for those awards that are expected to vest. All share-based payment awards are recognized on a straight-line basis over the requisite service periods of the awards.