SHARE-BASED COMPENSATION

Sysco provides compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock long-term incentive plans, a non-employee director plan and the Employees’ Stock Purchase Plan (ESPP).

Stock Incentive Plans

In November 2013, Sysco’s Long-term Incentive Plan (2013 Plan) was adopted and reserved up to 55,600,000 shares of Sysco common stock for share-based awards to employees, non-employee directors and key advisors. Of the 55,600,000 authorized shares, the full 55,600,000 shares may be issued as options or stock appreciation rights and up to 17,500,000 shares may be issued as restricted stock, restricted stock units or other types of stock-based awards. To date, Sysco has issued options and restricted stock units under the 2013 Plan. Vesting requirements for awards under the 2013 Plan vary by individual grant and may include either time-based vesting or time-based vesting subject to acceleration based on performance criteria for fiscal periods of at least one year. The contractual life of all options granted under the 2013 Plan are and will be no greater than ten years. As of July 2, 2016, there were 38,535,843 remaining shares authorized and available for grant in total under the 2013 Plan, of which the full 38,535,843 shares may be issued as options or stock appreciation rights, or as a combination of up to 13,964,784 shares that may be issued as restricted stock, restricted stock units or other types of stock-based awards, with the remainder available for issuance as options or stock appreciation rights.

Sysco has also granted employee options under several previous employee stock option plans for which previously granted options remain outstanding as of July 2, 2016. No new options will be issued under any of the prior plans, as future grants to employees will be made through the 2013 Plan or subsequently adopted plans. Awards under these plans are subject to time-based vesting with vesting periods that vary by individual grant. The contractual life of all options granted under these plans is seven years.

In November 2009, Sysco’s 2009 Non-Employee Directors Stock Plan (2009 NED Plan) was adopted and provides for the issuance of up to 750,000 shares of Sysco common stock as share-based awards to non-employee directors. The authorized shares may be granted as restricted stock, restricted stock units, elected shares or additional shares. Vesting requirements for awards under the 2009 NED Plan varies by individual grant and include either time-based vesting or vesting based on performance criteria. As of July 2, 2016, there were a total of 270,074 remaining shares authorized and available for grant under the 2009 NED Plan.

Stock Options

Sysco’s option awards are subject to graded vesting over a requisite service period with compensation cost recognized on a straight-line basis over the requisite service period over the duration of the award.

In addition, certain of Sysco’s options provide that the options continue to vest as if the optionee continued as an employee or director if the optionee meets certain age and years of service thresholds upon retirement. In these cases, Sysco will recognize compensation cost for such awards over the period from the grant date to the date the employee or director first becomes eligible to retire with the options continuing to vest after retirement.

The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. Expected dividend yield is estimated based on the historical pattern of dividends and the average stock price for the year preceding the option grant. Expected volatility is based on historical volatility of Sysco’s stock, implied volatilities from traded options on Sysco’s stock and other factors. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Sysco utilizes historical data to estimate option exercise and employee termination behavior within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately in determining the expected life of awards for valuation purposes.

The weighted average assumptions discussed above are noted in the table below for relevant periods as follows:



	2016		2015		2014
Dividend yield	3.1	%	3.2	%	3.5	%
Expected volatility	20.4	%	20.7	%	20.4	%
Risk-free interest rate	2.0	%	2.0	%	2.1	%
Expected life	7.2 years		7.3 years		7.2 years

The following summary presents information regarding outstanding options as of July 2, 2016 and changes during the fiscal year then ended with regard to options under all stock incentive plans:



	Shares Under Option		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of June 27, 2015	25,792,378		$	31.28
Granted	4,367,764		40.63
Exercised	(8,154,705	)	28.62
Forfeited	(756,775	)	34.20
Expired	(20,334	)	25.79
Outstanding as of July 2, 2016	21,228,328		$	34.13	6.03	$	352,493
Vested or expected to vest as of July 2, 2016	13,735,565		$	35.94	7.19	$	203,100
Exercisable as of July 2, 2016	7,305,776		$	30.60	3.78	$	147,080

The total number of employee options granted was 4,367,764, 4,497,954 and 5,575,645 in fiscal years 2016, 2015 and 2014, respectively.

During fiscal 2016, 1,495,351 and 2,872,413 options were granted to 8 executive officers and approximately 169 other key employees, respectively. During fiscal 2015, 1,286,533 and 3,211,421 options were granted to 6 executive officers and approximately 173 other key employees, respectively. During fiscal 2014, 2,159,698 and 3,415,947 options were granted to 11 executive officers and 167 other key employees, respectively.

The weighted average grant date fair value of options granted in fiscal 2016, 2015 and 2014 was $5.99, $5.78 and $4.64, respectively. The total intrinsic value of options exercised during fiscal 2016, 2015 and 2014 was $36.1 million, $21.6 million and $19.1 million, respectively.

Restricted Stock Units

During fiscal 2016, 2015 and 2014, restricted stock units of 1,257,889, 1,198,588 and 1,322,709 were granted to employees, respectively, the majority of which will vest ratably over a three-year period. Some of these restricted stock units were granted with dividend equivalents. The fair value of each restricted stock unit award granted with a dividend equivalent is based on the company’s stock price as of the date of grant. For restricted stock unit awards granted without dividend equivalents, the fair value was reduced by the present value of expected dividends as of the date of grant date during the vesting period. The weighted average grant date fair value per share of restricted stock units granted during fiscal 2016, 2015 and 2014 was $42.78, $37.59 and $33.39, respectively. The total fair value of restricted stock units vested during fiscal 2016, 2015 and 2014 was $43.4 million, $52.5 million and $39.4 million, respectively.

Non-Employee Director Awards

During fiscal 2016, 2015 and 2014, restricted awards of 43,362, 37,035 and 43,119 were granted to non-employee directors (NED's), respectively, that will vest over a one-year period. NED's may elect to receive these awards in restricted stock shares that will vest at the end of the award stated vesting period or as deferred units that convert into shares of Sysco common stock on a date subsequent to the award stated vesting date selected by the NED. The fair value of the restricted awards is based on the company’s stock price as of the date of grant. The weighted average grant date fair value of the shares granted during fiscal 2016, 2015 and 2014 was $40.59, $38.89 and $33.40, respectively. The total fair value of restricted stock shares vested and deferred units distributed during fiscal 2016, 2015 and 2014 was $1.6 million, $1.6 million and $1.4 million, respectively. Restricted stock shares are valued on their vesting date. Vested deferred units are valued on their subsequent conversion and distribution date.

NED's may elect to receive up to 100% of their annual directors’ fees in Sysco common stock on either an annual or deferred basis. Sysco provides a matching grant of 50% of the number of shares received for the stock election subject to certain limitations. As a result of such elections, a total of 25,185, 23,949 and 24,565 shares with a weighted-average grant date fair value of $39.31, $38.26 and $34.59 per share were issued in fiscal 2016, 2015 and 2014, respectively, in the form of fully vested common stock or deferred units. The total fair value of common stock issued as a result of election shares and deferred units distributed during fiscal 2016, 2015 and 2014 was $1.0 million, $0.9 million and $0.8 million, respectively. Common stock shares are valued on their vesting date. Vested deferred units are valued on their subsequent conversion and distribution date.

As of July 2, 2016, there were 103,137 fully vested deferred units outstanding that will convert into shares of Sysco common stock upon dates selected by the respective NED.

Summary of Non-vested Awards

The following summary presents information regarding outstanding non-vested awards as of July 2, 2016 and changes during the fiscal year then ended with regard to these awards under the stock incentive plans. Award types represented include restricted stock units granted to employees and restricted awards granted to non-employee directors.



	Shares		Weighted Average Grant Date Fair Value Per Share
Non-vested as of June 27, 2015	2,697,654		$	34.37
Granted	1,301,278		42.71
Vested	(1,335,552	)	33.69
Forfeited	(130,659	)	35.98
Non-vested as of July 2, 2016	2,532,721		$	38.93

Employees’ Stock Purchase Plan

Sysco has an ESPP that permits employees to invest in Sysco common stock by means of periodic payroll deductions at a discount of 15% from the closing price on the last business day of each calendar quarter. The total number of shares which may be sold pursuant to the ESPP may not exceed 79,000,000 shares, of which 9,935,892 remained available as of July 2, 2016.

During fiscal 2016, 1,275,765 shares of Sysco common stock were purchased by the participants, as compared to 1,243,275 shares purchased in fiscal 2015 and 1,315,535 shares purchased in fiscal 2014. The weighted average fair value of employee stock purchase rights issued pursuant to the ESPP was $6.04, $5.73 and $5.17 per share during fiscal 2016, 2015 and 2014, respectively. The fair value of the stock purchase rights was calculated as the difference between the stock price at date of issuance and the employee purchase price.

All Share-Based Payment Arrangements

The total share-based compensation cost included in operating expenses in the consolidated results of operations was $79.5 million, $73.8 million and $74.3 million for fiscal 2016, 2015 and 2014, respectively. The total income tax benefit for share-based compensation arrangements was $30.7 million, $27.4 million and $28.1 million for fiscal 2016, 2015 and 2014, respectively.

As of July 2, 2016, there was $69.6 million of total unrecognized share-based compensation cost, which is expected to be recognized over a weighted-average period of 2.42 years.

Cash received from option exercises and purchases of shares under the ESPP was $282.4 million, $240.2 million and $255.6 million during fiscal 2016, 2015 and 2014, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $42.5 million, $20.7 million and $16.6 million during fiscal 2016, 2015 and 2014, respectively.