Employee Benefit Plans


(a)	Employee Stock Incentive Plans

Stock Incentive Plan Program Description As of July 27, 2019, we had one stock incentive plan: the 2005 Stock Incentive Plan (the “2005 Plan”). In addition, we have, in connection with our acquisitions of various companies, assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Share-based awards are designed to reward employees for their long-term contributions to us and provide incentives for them to remain with Cisco. The number and frequency of share-based awards are based on competitive practices, operating results of Cisco, government regulations, and other factors. Our primary stock incentive plan is summarized as follows:

2005 Plan The 2005 Plan provides for the granting of stock options, stock grants, stock units and stock appreciation rights (SARs), the vesting of which may be time-based or upon satisfaction of performance goals, or both, and/or other conditions. Employees (including employee directors and executive officers) and consultants of Cisco and its subsidiaries and affiliates and non-employee directors of Cisco are eligible to participate in the 2005 Plan. As of July 27, 2019, the maximum number of shares issuable under the 2005 Plan over its term was 694 million shares. The 2005 Plan may be terminated by the Board of Directors at any time and for any reason, and is currently set to terminate at the 2021 Annual Meeting unless re-adopted or extended by the shareholders prior to or on such date.

Under the 2005 Plan’s share reserve feature, a distinction is made between the number of shares in the reserve attributable to (i) stock options and SARs and (ii) “full value” awards (i.e., stock grants and stock units). Shares issued as stock grants, pursuant to stock units or pursuant to the settlement of dividend equivalents are counted against shares available for issuance under the 2005 Plan on a 1.5-to-1 ratio. If awards issued under the 2005 Plan are forfeited or terminated for any reason before being exercised or settled, then the shares underlying such awards, plus the number of additional shares, if any, that counted against shares available for issuance under the 2005 Plan at the time of grant as a result of the application of the share ratio described above, will become available again for issuance under the 2005 Plan.


(b)	Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan under which 721.4 million shares of our common stock have been reserved for issuance as of July 27, 2019. Eligible employees are offered shares through a 24-month offering period, which consists of four consecutive 6-month purchase periods. Employees may purchase a limited amount of shares of our stock at a discount of up to 15% of the lesser of the fair market value at the beginning of the offering period or the end of each 6-month purchase period. The Employee Stock Purchase Plan is scheduled to terminate on the earlier of (i) January 3, 2030 and (ii) the date on which all shares available for issuance under the Employee Stock Purchase Plan are sold pursuant to exercised purchase rights. We issued 19 million, 22 million, and 23 million shares under the Employee Stock Purchase Plan in fiscal 2019, 2018, and 2017, respectively. As of July 27, 2019, 159 million shares were available for issuance under the Employee Stock Purchase Plan.


(c)	Summary of Share-Based Compensation Expense

Share-based compensation expense consists primarily of expenses for stock options, stock purchase rights, restricted stock, and RSUs granted to employees. The following table summarizes share-based compensation expense (in millions):



Years Ended	July 27, 2019		July 28, 2018		July 29, 2017
Cost of sales—product	$	90	$	94	$	85
Cost of sales—service	130		133		134
Share-based compensation expense in cost of sales	220		227		219
Research and development	540		538		529
Sales and marketing	519		555		542
General and administrative	250		246		236
Restructuring and other charges	62		33		3
Share-based compensation expense in operating expenses	1,371		1,372		1,310
Total share-based compensation expense	$	1,591	$	1,599	$	1,529
Income tax benefit for share-based compensation	$	542	$	558	$	451

As of July 27, 2019, the total compensation cost related to unvested share-based awards not yet recognized was $3.3 billion, which is expected to be recognized over approximately 2.8 years on a weighted-average basis.


(d)	Share-Based Awards Available for Grant

A summary of share-based awards available for grant is as follows (in millions):



Years Ended	July 27, 2019		July 28, 2018		July 29, 2017
Balance at beginning of fiscal year	245		272		242
Restricted stock, stock units, and other share-based awards granted	(67	)	(70	)	(76	)
Share-based awards canceled/forfeited/expired	18		18		78
Shares withheld for taxes and not issued	23		25		28
Other	1		—		—
Balance at end of fiscal year	220		245		272

For each share awarded as restricted stock or a restricted stock unit award under the 2005 Plan, 1.5 shares was deducted from the available share-based award balance. For restricted stock units that were awarded with vesting contingent upon the achievement of future financial performance or market-based metrics, the maximum awards that can be achieved upon full vesting of such awards were reflected in the preceding table.


(e)	Restricted Stock and Stock Unit Awards

A summary of the restricted stock and stock unit activity, which includes time-based and performance-based or market-based RSUs, is as follows (in millions, except per-share amounts):



	Restricted Stock/ Stock Units		Weighted-Average Grant Date Fair Value per Share		Aggregate Fair Value
UNVESTED BALANCE AT JULY 30, 2016	145		$	24.26
Granted	50		27.89
Assumed from acquisitions	15		32.21
Vested	(54	)	23.14		$	1,701
Canceled/forfeited/other	(15	)	23.56
UNVESTED BALANCE AT JULY 29, 2017	141		26.94
Granted	46		35.62
Assumed from acquisitions	1		28.26
Vested	(53	)	26.02		$	1,909
Canceled/forfeited/other	(16	)	28.37
UNVESTED BALANCE AT JULY 28, 2018	119		30.56
Granted	45		47.71
Vested	(50	)	29.25		$	2,446
Canceled/forfeited/other	(14	)	32.01
UNVESTED BALANCE AT JULY 27, 2019	100		$	38.66


(f)	Stock Option Awards

A summary of the stock option activity is as follows (in millions, except per-share amounts):



	STOCK OPTIONS OUTSTANDING
	Number Outstanding		Weighted-Average Exercise Price per Share
BALANCE AT JULY 30, 2016	73		$	26.78
Assumed from acquisitions	8		4.47
Exercised	(14	)	12.11
Canceled/forfeited/expired	(55	)	31.83
BALANCE AT JULY 29, 2017	12		6.15
Assumed from acquisitions	3		8.20
Exercised	(8	)	5.77
Canceled/forfeited/expired	(1	)	8.75
BALANCE AT JULY 28, 2018	6		7.18
Exercised	(4	)	7.12
BALANCE AT JULY 27, 2019	2		$	6.94

The total pretax intrinsic value of stock options exercised during fiscal 2019, 2018, and 2017 was $149 million, $257 million, and $283 million, respectively.

The total number of in-the-money stock options exercisable as of July 27, 2019 and July 28, 2018 were 2 million and 4 million, respectively. As of July 27, 2019 and July 28, 2018, 2 million and 4 million outstanding stock options were exercisable and the weighted-average exercise price was $6.75 and $6.84, respectively.


(g)	Valuation of Employee Share-Based Awards

Time-based restricted stock units and PRSUs that are based on our financial performance metrics or non-financial operating goals are valued using the market value of our common stock on the date of grant, discounted for the present value of expected dividends. On the date of grant, we estimated the fair value of the total shareholder return (TSR) component of the PRSUs using a Monte Carlo simulation model. The assumptions for the valuation of time-based RSUs and PRSUs are summarized as follows:



	RESTRICTED STOCK UNITS
Years Ended	July 27, 2019			July 28, 2018			July 29, 2017
Number of shares granted (in millions)	43			43			43
Grant date fair value per share	$	47.75		$	35.81		$	28.38
Weighted-average assumptions/inputs:
Expected dividend yield	2.7		%	3.2		%	3.5		%
Range of risk-free interest rates	0.0% – 2.9%			0.0% – 2.7%			0.0% – 1.5%



	PERFORMANCE BASED RESTRICTED STOCK UNITS
Years Ended	July 27, 2019			July 28, 2018			July 29, 2017
Number of shares granted (in millions)	2			3			7
Grant date fair value per share	$	47.00		$	32.69		$	28.94
Weighted-average assumptions/inputs:
Expected dividend yield	2.8		%	3.5		%	3.4		%
Range of risk-free interest rates	2.1% – 3.0%			1.0% – 2.7%			0.1% – 1.5%
Range of expected volatilities for index	13.0% - 65.2%			12.5% - 82.8%			16.7% – 46.8%

The PRSUs granted during the fiscal years presented are contingent on the achievement of our financial performance metrics, our comparative market-based returns, or the achievement of financial and non-financial operating goals. For the awards based on financial performance metrics or comparative market-based returns, generally 50% of the PRSUs are earned based on the average of annual operating cash flow and earnings per share goals established at the beginning of each fiscal year over a three-year performance period. Generally, the remaining 50% of the PRSUs are earned based on our TSR measured against the benchmark TSR of a peer group over the same period. Each PRSU recipient could vest in 0% to 150% of the target shares granted contingent on the achievement of our financial performance metrics or our comparative market-based returns, and 0% to 100% of the target shares granted contingent on the achievement of non-financial operating goals.

The assumptions for the valuation of employee stock purchase rights are summarized as follows:



	EMPLOYEE STOCK PURCHASE RIGHTS
Years Ended	July 27, 2019			July 28, 2018			July 29, 2017
Weighted-average assumptions:
Expected volatility	20.4		%	22.1		%	24.6		%
Risk-free interest rate	1.9		%	1.3		%	0.7		%
Expected dividend	3.0		%	3.1		%	3.2		%
Expected life (in years)	1.3			1.3			1.3
Weighted-average estimated grant date fair value per share	$	9.06		$	7.48		$	6.52

The valuation of employee stock purchase rights and the related assumptions are for the employee stock purchases made during the respective fiscal years.

We used third-party analyses to assist in developing the assumptions used in our Black-Scholes model. We are responsible for determining the assumptions used in estimating the fair value of our share-based payment awards.

We used the implied volatility for traded options (with contract terms corresponding to the expected life of the employee stock purchase rights) on our stock as the expected volatility assumption required in the Black-Scholes model. The implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock purchase rights. The dividend yield assumption is based on the history and expectation of dividend payouts at the grant date.


(h)	Employee 401(k) Plans

We sponsor the Cisco Systems, Inc. 401(k) Plan (the “Plan”) to provide retirement benefits for our employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary contributions and after-tax contributions for eligible employees. The Plan allows employees to contribute up to 75% of their annual eligible earnings to the Plan on a pretax and after-tax basis, including Roth contributions. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. We match pretax and Roth employee contributions up to 100% of the first 4.5% of eligible earnings that are contributed by employees. Therefore, the maximum matching contribution that we may allocate to each participant’s account will not exceed $12,600 for the 2019 calendar year due to the $280,000 annual limit on eligible earnings imposed by the Internal Revenue Code. All matching contributions vest immediately. Our matching contributions to the Plan totaled $283 million, $269 million, and $265 million in fiscal 2019, 2018, and 2017, respectively.

The Plan allows employees who meet the age requirements and reach the Plan contribution limits to make catch-up contributions (pretax or Roth) not to exceed the lesser of 75% of their annual eligible earnings or the limit set forth in the Internal Revenue Code. Catch-up contributions are not eligible for matching contributions. In addition, the Plan provides for discretionary profit-sharing contributions as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants. There were no discretionary profit-sharing contributions made in fiscal 2019, 2018, and 2017.

We also sponsor other 401(k) plans as a result of acquisitions of other companies. Our contributions to these plans were not material to Cisco on either an individual or aggregate basis for any of the fiscal years presented.


(i)	Deferred Compensation Plans

The Cisco Systems, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), a nonqualified deferred compensation plan, became effective in 2007. As required by applicable law, participation in the Deferred Compensation Plan is limited to a select group of our management employees. Under the Deferred Compensation Plan, which is an unfunded and unsecured deferred compensation arrangement, a participant may elect to defer base salary, bonus, and/or commissions, pursuant to such rules as may be established by Cisco, up to the maximum percentages for each deferral election as described in the plan. We may also, at our discretion, make a matching contribution to the employee under the Deferred Compensation Plan. A matching contribution equal to 4.5% of eligible compensation in excess of the Internal Revenue Code limit for qualified plans for calendar year 2019 that is deferred by participants under the Deferred Compensation Plan (with a $1.5 million cap on eligible compensation) will be made to eligible participants’ accounts at the end of calendar year 2019. The total deferred compensation liability under the Deferred Compensation Plan, together with deferred compensation plans assumed from acquired companies, was approximately $678 million and $651 million as of July 27, 2019 and July 28, 2018, respectively, and was recorded primarily in other long-term liabilities.