Note 14: Stock-Based Compensation

The La-Z-Boy Incorporated 2010 Omnibus Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, dividend equivalent rights, and short-term cash incentive awards. Under this plan, as amended, the aggregate number of common shares that may be issued through awards of any form is 8.7 million shares. No grants may be issued under our previous plans.

The table below summarizes the total stock-based compensation expense recognized for all outstanding grants in our consolidated statement of income (for the fiscal years ended):

(Amounts in thousands)	4/29/2017		4/30/2016		4/25/2015
Equity-based awards expense	$	8,864	$	8,292	$	6,780
Liability-based awards expense		1,687		1,355		4,597

Total stock-based compensation expense	$	10,551	$	9,647	$	11,377

Stock Options. The La-Z-Boy Incorporated 2010 Omnibus Incentive Plan authorizes grants to certain employees and directors to purchase common shares at a specified price, which may not be less than 100% of the current market price of the stock at the date of grant. We granted 497,198 stock options to employees during the first quarter of fiscal 2017, and we also have stock options outstanding from previous grants. We recognize compensation expense for stock options over the vesting period equal to the fair value on the date our compensation committee approved the awards. The vesting period for our stock options ranges from one to four years, with accelerated vesting upon retirement. We expense options granted to retirement-eligible employees immediately. Granted options outstanding under the former long-term equity award plan remain in effect and have a term of ten years.

Stock option expense recognized in selling, general and administrative expense for fiscal 2017, fiscal 2016, and fiscal 2015 was $3.4 million, $3.2 million, and $3.0 million, respectively. We received $3.6 million, $0.4 million, and $1.4 million in cash during fiscal 2017, fiscal 2016, and fiscal 2015, respectively, for exercises of stock options.

Plan activity for stock options under the above plans was as follows:

	Number of Shares (In Thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (In Thousands)
Outstanding at April 30, 2016		1,411		$	19.39		7.4	$	9,489
Granted		497			25.99
Canceled		(97	)		25.28
Exercised		(302	)		11.82			$	4,871

Outstanding at April 29, 2017		1,509		$	22.70		7.6	$	7,638


Exercisable at April 29, 2017		591		$	18.27		6.2	$	5,688

The aggregate intrinsic value of options exercised was $0.6 million and $2.0 million in fiscal 2016 and fiscal 2015, respectively. As of April 29, 2017, our total unrecognized compensation cost related to non-vested stock option awards was $2.3 million, which we expect to recognize over a weighted-average remaining vesting term of all unvested awards of 1.4 years. During the year ended April 29, 2017, 0.3 million shares vested.

We estimate the fair value of the employee stock options at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. We estimate expected volatility based on the historical volatility of our common shares. We base the average expected life on the contractual term of the stock option and expected employee exercise trends. We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the date of the grant. The fair value of stock options granted during fiscal 2017, fiscal 2016, and fiscal 2015 were calculated using the following assumptions:

	Fiscal 2017 Grant			Fiscal 2016 Grant			Fiscal 2015 Grant
Risk-free interest rate		1.30	%		1.54	%		1.59	%
Dividend rate		1.54	%		1.20	%		1.00	%
Expected life in years		5.0			5.0			5.0
Stock price volatility		38.87	%		44.37	%		54.40	%
Fair value per share	$	7.99		$	9.69		$	10.45

Stock Appreciation Rights. Under the La-Z-Boy Incorporated 2010 Omnibus Incentive Plan, the Compensation Committee of the board of directors is authorized to award stock appreciation rights to certain employees. We did not grant any SARs to employees during fiscal 2017, but we have SARs outstanding from previous grants. SARs will be paid in cash upon exercise and, accordingly, we account for SARs as liability-based awards that we re-measure to reflect the fair value at the end of each reporting period. These awards vest at 25% per year, beginning one year from the grant date for a term of four years, with accelerated vesting upon retirement. We expense SARs granted to retirement-eligible employees immediately. We estimate the fair value of SARs at the end of each reporting period using the Black-Scholes option-pricing model, which requires management to make certain assumptions. We base the average expected life on the contractual term of the SARs and expected employee exercise trends (which is consistent with the expected life of our option awards). We base the risk-free rate on U.S. Treasury issues with a term equal to the expected life assumed at the end of the reporting period. We recognized compensation expense of $0.7 million, $0.1 million, and $0.7 million related to SARs in selling, general and administrative expense for the years ended April 29, 2017, April 30, 2016, and April 25, 2015, respectively. We have no remaining unrecognized compensation cost at April 29, 2017 relating to SAR awards, as they are all fully vested, but we will continue to re-measure these awards to reflect the fair value at the end of each reporting period until all awards are exercised or forfeited.

In fiscal 2014 and fiscal 2013, we granted SARs as described in our Annual Reports on Form 10-K for the fiscal years ended April 26, 2014, and April 27, 2013, respectively. At April 29, 2017, we measured the fair value of the SARs granted during these fiscal years using the following assumptions:

	Fiscal 2014 Grant			Fiscal 2013 Grant
Risk-free interest rate		1.04	%		0.81	%
Dividend rate		1.58	%		1.58	%
Expected life in years		1.13			0.21
Stock price volatility		31.29	%		21.91	%
Fair value per share	$	9.06		$	15.86

Restricted Stock. Under the La-Z-Boy Incorporated 2010 Omnibus Incentive Plan, the Compensation Committee of the board of directors is authorized to award restricted common shares to certain employees. We awarded 97,924 shares of restricted stock to employees during fiscal 2017. We issue restricted stock at no cost to the employees, and the shares are held in an escrow account until the vesting period ends. If a recipient's employment ends during the escrow period (other than through death or disability), the shares are returned at no cost to the company. We account for restricted stock awards as equity-based awards because upon vesting, they will be settled in common shares. The fair value of the restricted stock that was awarded in the first quarter of fiscal 2017 was $25.99 per share, the market value of our common shares on the date of grant. We recognize compensation expense for restricted stock over the vesting period equal to the fair value on the date our compensation committee approved the awards. Restricted stock awards vest at 25% per year, beginning one year from the grant date for a term of four years. We recorded expense related to the restricted stock in selling, general and administrative expense of $1.7 million, $1.1 million, and $0.8 million during fiscal 2017, fiscal 2016, and fiscal 2015, respectively. Our unrecognized compensation cost at April 29, 2017, related to restricted shares was $4.0 million and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 2.6 years.

The following table summarizes information about non-vested share awards as of and for the year ended April 29, 2017:

	Shares (In Thousands)			Weighted Average Grant Date Fair Value
Non-vested shares at April 30, 2016		169		$	25.22
Granted		102			26.20
Vested		(51	)		25.06
Canceled		(11	)		25.56

Non-vested shares at April 29, 2017		209		$	25.72

Restricted Stock Units. Under the La-Z-Boy Incorporated 2010 Omnibus Incentive Plan, the Compensation Committee of the board of directors is authorized to award restricted stock units to certain employees and our non-employee directors.

We did not grant any restricted stock units to employees during fiscal 2017, but we have restricted stock units outstanding from previous grants. We account for these units as liability-based awards because upon vesting, these awards will be paid in cash. We measure and recognize initial compensation expense based on the market value (intrinsic value) of our common stock on the grant date and amortize the expense over the vesting period. We re-measure and adjust the liability based on the market value (intrinsic value) of our common shares on the last day of the reporting period until paid with a corresponding adjustment to reflect the cumulative amount of compensation expense. The fair value of each outstanding restricted stock unit at April 29, 2017, was $27.90, the market value of our common shares on the last day of the reporting period. Each restricted stock unit is the equivalent of one common share. Restricted stock units vest at 25% per year, beginning one year from the grant date for a term of four years. We recognized compensation expense related to restricted stock units granted to employees of $0.8 million, $1.4 million, and $1.5 million in selling, general and administrative expense for the years ended April 29, 2017, April 30, 2016, and April 25, 2015, respectively. Our unrecognized compensation cost at April 29, 2017, related to employee restricted stock units was $0.1 million based on the market value (intrinsic value) on that date, and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of less than one year.

The following table summarizes information about non-vested stock units as of and for the year ended April 29, 2017:

	Units (In Thousands)			Weighted Average Grant Date Fair Value
Non-vested units at April 30, 2016		77		$	16.61
Vested		(51	)		15.47
Canceled		(3	)		16.62

Non-vested units at April 29, 2017		23		$	19.80

Restricted stock units granted to directors is offered at no cost to the directors and vest when a director leaves the board. During fiscal 2017, fiscal 2016, and fiscal 2015 we granted less than 0.1 million of restricted stock each year to our non-employee directors. We account for these restricted stock awards as equity-based awards as they will be settled in shares of our common stock upon vesting. We measure and recognize compensation expense for these awards based on the market price of our common shares on the date of grant, which was $27.10, $27.74, and $21.81 for the awards granted in fiscal 2017, fiscal 2016, and fiscal 2015, respectively. Our expense relating to the non-employee directors restricted stock which we recorded in selling, general and administrative expense was $0.6 million in both fiscal 2017 and fiscal 2016, and $0.7 million in fiscal 2015.

Performance Awards. Under the La-Z-Boy Incorporated 2010 Omnibus Incentive Plan, the Compensation Committee of the board of directors is authorized to award common shares and stock units to certain employees based on the attainment of certain financial goals over a given performance period. The awards are offered at no cost to the employees. In the event of an employee's termination during the vesting period, the potential right to earn shares/units under this program is generally forfeited.

Payout of these grants depends on our financial performance (80%) and a market-based condition based on the total return our shareholders receive on their investment in our stock relative to returns earned through investments in other public companies (20%). The performance award opportunity ranges from 50% of the employee's target award if minimum performance requirements are met to a maximum of 200% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years.

The number of awards that will vest, as well as unearned and canceled awards, depend on the achievement of certain financial and shareholder-return goals over the three-year performance periods, and will be settled in shares if service conditions are met, requiring employees to remain employed with the company through the end of the three-year-performance periods. The following table summarizes the performance-based shares outstanding at the maximum award amounts based upon the respective performance share agreements:

	Shares (In Thousands)			Weighted Average Grant Date Fair Value
Outstanding shares at April 30, 2016		612		$	23.10
Granted		361			24.79
Vested		(159	)		18.58
Unearned and canceled		(255	)		24.34

Outstanding shares at April 29, 2017		559		$	24.87

We account for performance-based shares as equity-based awards because upon vesting, they will be settled in common shares. For shares that vest based on our results relative to the performance goals, we expense as compensation cost the fair value of the shares as of the day we granted the awards recognized over the performance period, taking into account the probability that we will satisfy the performance goals. The fair value of each share of the awards we granted in fiscal 2017, fiscal 2016, and fiscal 2015 that vest based on attaining performance goals was $24.79, $25.73, and $22.91, respectively, the market value of our common shares on the date we granted the awards less the dividends we expect to pay before the shares vest. For shares that vest based on market conditions, we use a Monte Carlo valuation model to estimate each share's fair value as of the date of grant, and, similar to the way in which we expense awards of stock options, we expense compensation cost over the vesting period regardless of the value that award recipients ultimately receive. Based on the Monte Carlo model, the fair value as of the grant date of the fiscal 2017, fiscal 2016, and fiscal 2015 grants of shares that vest based on market conditions was $33.32, $34.40, and $29.64, respectively. Our unrecognized compensation cost at April 29, 2017, related to performance-based shares was $4.1 million based on the current estimates of the number of awards that will vest, and is expected to be recognized over a weighted-average remaining contractual term of all unvested awards of 1.3 years.

Equity-based compensation expenses related to performance-based shares recognized in our consolidated statement of income were as follows (for the fiscal years ended):

(Amounts in thousands)	4/29/2017		4/30/2016		4/25/2015
Fiscal 2013 grant	$	—	$	—	$	568
Fiscal 2014 grant		—		926		769
Fiscal 2015 grant		675		840		908
Fiscal 2016 grant		1,284		1,610		—
Fiscal 2017 grant		1,109		—		—

Total expense	$	3,068	$	3,376	$	2,245

We account for performance-based units as liability-based awards because upon vesting, they will be paid in cash. For units that vest based on our results relative to performance goals, we expense as compensation cost over the performance period the fair value of each unit, taking into account the probability that the performance goals will be attained. We have not granted performance-based units since fiscal 2014. These awards vested at the end of fiscal 2016 and were completely expensed by that time. In fiscal 2015, we recognized $2.0 million of expense related to performance-based units. During fiscal 2016, we recognized no expense related to performance-based units because the cost of the units was offset by declines in their fair value.

Previously Granted Deferred Stock Units. We account for awards under our deferred stock unit plan for non-employee directors as liability-based awards because upon exercise these awards will be paid in cash. We measure and recognize compensation expense based on the market price of our common stock on the grant date. We remeasure and adjust the liability based on the market value (intrinsic value) of our common shares on the last day of the reporting period until paid with a corresponding adjustment to reflect the cumulative amount of compensation expense. For purposes of dividends and for measuring the liability, each deferred stock unit is the equivalent of one common share. As of April 29, 2017, we had 0.1 million deferred stock units outstanding. We recorded (income)/expense relating to deferred stock units in selling, general and administrative of $0.2 million, $(0.2) million, and $0.4 million during fiscal 2017, fiscal 2016, and fiscal 2015, respectively. Our liability related to these awards was $1.9 million and $2.6 million at April 29, 2017, and April 30, 2016, respectively, and is included as a component of other long-term liabilities on our consolidated balance sheet.