Stock-Based Compensation

The company utilizes equity-based compensation incentives as a component of its employee and non-employee director and officer compensation philosophy. Currently, these incentives consist principally of stock options, restricted stock, restricted stock units and performance share units. The company also offers a stock purchase plan for its domestic and certain international employees. The company issues shares in connection with its share-based compensation plans from authorized, but unissued, shares.

Valuation and Expense Information

The company measures the cost of employee services received in exchange for an award of equity instruments based on their grant-date fair market value. This cost is recognized over the requisite service period.

Certain of the company's equity-based compensation awards contain provisions that allow for continued vesting into retirement. Stock-based awards are considered fully vested for expense attribution purposes when the employee's retention of the award is no longer contingent on providing subsequent service.

The company classifies pre-tax stock-based compensation expense primarily within “Operating expenses” in the Consolidated Statements of Comprehensive Income. Related expenses charged to “Cost of sales” are not material. Pre-tax compensation expense and the related income tax benefit for all types of stock-based programs was as follows for the periods indicated:



(In millions)	May 31, 2014		June 1, 2013		June 2, 2012
Employee stock purchase program	$	0.3	$	0.3	$	0.3
Stock option plans	2.3		3.6		2.8
Restricted stock grants	0.2		0.3		0.5
Restricted stock units	5.2		3.2		2.4
Performance share units	3.0		0.7		—
Total	$	11.0	$	8.1	$	6.0

Tax benefit	$	4.0	$	2.9	$	2.1

As of May 31, 2014, total pre-tax stock-based compensation cost not yet recognized related to non-vested awards was approximately $9.1 million. The weighted-average period over which this amount is expected to be recognized is 1.49 years.

The company estimated the fair value of employee stock options on the date of grant using the Black-Scholes model. In determining these values, the following weighted-average assumptions were used for the options granted during the fiscal years indicated.



	2014			2013			2012
Risk-free interest rates ⁽¹⁾	1.62		%	0.77		%	1.75		%
Expected term of options ⁽²⁾	5.5 years			5.5 years			5.5 years
Expected volatility ⁽³⁾	46		%	47		%	42		%
Dividend yield ⁽⁴⁾	1.74		%	1.98		%	0.34		%
Weighted-average grant-date fair value of stock options:
Granted with exercise prices equal to the fair market value of the stock on the date of grant	$	10.68		$	6.52		$	10.15

(1) Represents the U.S. Treasury yield over the same period as the expected option term.

(2) Represents the period of time that options granted are expected to be outstanding. Based on analysis of historical option exercise activity, the company has determined that all employee groups exhibit similar exercise and post-vesting termination behavior.

(3) Amount is determined based on analysis of historical price volatility of the company's common stock over a period equal to the expected term of the options.

(4) Represents the company's estimated cash dividend yield over the expected term of options.

Stock-based compensation expense recognized in the Consolidated Statements of Comprehensive Income, has been reduced for estimated forfeitures, as it is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

Employee Stock Purchase Program

Under the terms of the company's Employee Stock Purchase Plan, 4 million shares of authorized common stock were reserved for purchase by plan participants at 85 percent of the market price.

Stock Option Plans

The company has stock option plans under which options to purchase the company's stock are granted to employees and non-employee directors and officers at a price not less than the market price of the company's common stock on the date of grant. Under the current award program, all options become exercisable between one and three years from date of grant and expire two to ten years from date of grant. Most options are subject to graded vesting with the related compensation expense recognized on a straight-line basis over the requisite service period. At May 31, 2014, there were 2.3 million shares available for option awards.

The following is a summary of the transactions under the company's stock option plans:



	Shares Under Option		Weighted-Average Exercise Prices		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In millions)
Outstanding at May 28, 2011	2,578,590		$	24.62	5.5	$	6.6
Granted at market	365,141		$	25.75
Exercised	(215,524	)	$	19.74
Forfeited or expired	(398,958	)	$	25.76

Outstanding at June 2, 2012	2,329,249		$	25.06	5.7	$	0.9
Granted at market	499,870		$	18.17
Exercised	(297,255	)	$	17.49
Forfeited or expired	(120,490	)	$	24.56

Outstanding at June 1, 2013	2,411,374		$	24.59	5.7	$	11.2
Granted at market	46,829		$	28.74
Exercised	(821,050	)	$	22.97
Forfeited or expired	(40,169	)	$	27.47

Outstanding at May 31, 2014	1,596,984		$	25.47	4.7	$	9.9
Ending vested + expected to vest	1,588,824		$	25.49	4.6	$	9.8
Exercisable at end of period	1,122,446		$	27.35	3.3	$	5.1

The total pre-tax intrinsic value of options exercised during fiscal 2014, 2013 and 2012 was $6.2 million, $2.0 million, and $1.1 million, respectively. The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the company's closing stock price as of the end of the period presented, which would have been received by the option holders had all option holders exercised in-the-money options as of that date.

The following is a summary of stock options outstanding at May 31, 2014:



	Outstanding Stock Options				Exercisable Stock Options
Range of Exercise Price	Shares	Weighted-Average Remaining Contractual Term (Years)	Weighted-Average Exercise Prices		Shares	Weighted-Average Exercise Prices
$12.33-18.17	553,690	7.1	$	17.18	238,880	$	15.87
$25.06-30.54	627,041	4.3	$	27.90	467,313	$	28.33
$31.84-38.13	416,253	2.0	$	32.85	416,253	$	32.85
	1,596,984	4.7	$	25.47	1,122,446	$	27.35

Restricted Stock Grants

The company periodically grants restricted common stock to certain key employees. Shares are granted in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions on transferability and risk of forfeiture. The grants are subject to either cliff-based or graded vesting over a period not exceeding five years, and are subject to forfeiture if the employee ceases to be employed by the company for certain reasons. After the vesting period, the risk of forfeiture and restrictions on transferability lapse. The company recognizes the related compensation expense on a straight-line basis over the requisite service period. A summary of shares subject to restrictions are as follows:



	2014				2013				2012
	Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
Outstanding, at beginning of year	67,474		$	20.45	83,331		$	19.49	70,595		$	18.44
Granted	—		$	—	—		$	—	24,323		$	21.46
Vested	(3,440	)	$	15.82	(14,357	)	$	15.06	(7,787	)	$	17.56
Forfeited or expired	(2,000	)	$	21.98	(1,500	)	$	18.71	(3,800	)	$	16.44
Outstanding, at end of year	62,034		$	20.66	67,474		$	20.45	83,331		$	19.49

The weighted-average remaining recognition period of the outstanding restricted stock grants at May 31, 2014, was 1.65 years. The fair value of the shares that vested during the twelve months ended May 31, 2014, was $0.1 million.

Restricted Stock Units

The company grants restricted stock units to certain key employees. This program provides that the actual number of restricted stock units awarded is based on the value of a portion of the participant's long-term incentive compensation divided by the fair value of the company's stock on the date of grant. In some years the awards have been partially tied to the company's financial performance for the year in which the grant was based. The awards generally cliff-vest after a three-year service period, with prorated vesting under certain circumstances and full or partial accelerated vesting upon retirement. Each restricted stock unit represents one equivalent share of the company's common stock to be awarded, free of restrictions, after the vesting period. Compensation expense related to these awards is recognized over the requisite service period, which includes any applicable performance period. Dividend equivalent awards are credited quarterly. The units do not entitle participants to the rights of stockholders of common stock, such as voting rights, until shares are issued after vesting.

The following is a summary of restricted stock unit transactions for the fiscal years indicated:



	Share Units		Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value in Millions		Weighted-Average Remaining Contractual Term (Years)
Outstanding at May 28, 2011	285,101		$	21.72	$	6.9	1.5
Granted	125,589		$	25.72
Forfeited	(10,483	)	$	25.13
Released	(78,484	)	$	26.56
Outstanding at June 2, 2012	321,723		$	21.06	$	5.7	1.4
Ending vested + expected to vest	308,645				$	5.4	1.4

Outstanding at June 2, 2012	321,723		$	21.06	$	5.7	1.4
Granted	341,534		$	20.49
Forfeited	(66,368	)	$	19.00
Released	(17,569	)	$	16.14
Outstanding at June 1, 2013	579,320		$	21.35	$	16.0	1.7
Ending vested + expected to vest	547,093				$	15.0	1.6

Outstanding at June 1, 2013	579,320		$	21.35	$	16.0	1.7
Granted	142,004		$	28.55
Forfeited	(10,124	)	$	22.94
Released	(145,094	)	$	20.30
Outstanding at May 31, 2014	566,106		$	23.31	$	17.2	1.5
Ending vested + expected to vest	550,322				$	16.0	1.5

The weighted-average remaining recognition period of the outstanding restricted stock units at May 31, 2014, was 1.35 years. The fair value of the share units that vested during the twelve months ended May 31, 2014, was $4.1 million.

Performance Share Units

The company grants performance share units to certain key employees. The number of units initially awarded was based on the value of a portion of the participant's long-term incentive compensation, divided by the fair value of the company's common stock on the date of grant. Each unit represents one equivalent share of the company's common stock. The number of common shares ultimately issued in connection with these performance share units is determined based on the company's financial performance over the related three-year service period. Compensation expense is determined based on the grant-date fair value and the number of common shares projected to be issued, and is recognized over the requisite service period.

The following is a summary of performance share unit transactions for the fiscal years indicated:



	Share Units		Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value in Millions		Weighted-Average Remaining Contractual Term (Years)
Outstanding at May 28, 2011	90,380		$	25.52	$	—	0.2
Granted	—		$	—
Forfeited	(90,380	)	$	25.52
Outstanding at June 2, 2012	—		$	—	$	—	0.0
Ending vested + expected to vest	—				$	—	0.0

Outstanding at June 2, 2012	—		$	—	$	—	0.0
Granted	72,500		$	17.10
Forfeited	—		$	—
Outstanding at June 1, 2013	72,500		$	17.10	$	2.0	2.1
Ending vested + expected to vest	68,823				$	1.9	2.1

Outstanding at June 1, 2013	72,500		$	17.10	$	2.0	2.1
Granted	139,722		$	31.66
Forfeited	(2,026	)	$	31.74
Outstanding at May 31, 2014	210,196		$	26.64	$	6.6	1.8
Ending vested + expected to vest	203,752				$	6.4	1.8

The weighted-average remaining recognition period of the outstanding performance share units at May 31, 2014, was 1.46 years. The fair value for shares that vested during the twelve months ended May 31, 2014, was zero.

Deferred Compensation Plans

In 2008, the company discontinued use of the existing Non-qualified Deferred Compensation Plan for new contributions and established the Herman Miller, Inc. Executive Equalization Retirement Plan.

The Non-qualified Deferred Compensation Plan allowed selected employees to defer part or all of their executive incentive cash bonus payment each year. The company could make a matching contribution of 30 percent of the executive's contribution up to 50 percent of the deferred cash incentive bonus. The company's matching contribution vested at the rate of 33 1/3 percent annually. In accordance with the terms of the plan, the executive deferral and company matching contribution were placed in a “Rabbi” trust, which invested solely in the company's common stock. Rabbi trust arrangements offer the executive a degree of assurance for ultimate payment of benefits without causing constructive receipt for income tax purposes. Distributions to the executive from the Rabbi trust can only be made in the form of the company's common stock. The assets in the Rabbi trust remain subject to the claims of creditors of the company and are not the property of the executive and are, therefore, included as a separate component of stockholders' equity under the caption "Key Executive Deferred Compensation" in the Consolidated Balance Sheets. Shares associated with the Non-qualified Deferred Compensation Plan are included in the denominator for both basic and diluted EPS.

The Herman Miller, Inc. Executive Equalization Retirement Plan is a supplemental deferred compensation plan and was made available for salary deferrals and company contributions beginning in January 2008. The plan is available to a select group of management or highly compensated employees who are selected for participation by the Executive Compensation Committee of the Board of Directors. The plan allows participants to defer up to 50 percent of their base salary and up to 100 percent of their incentive cash bonus. Company contributions to the plan “mirror” the amounts the company would have contributed to the various qualified retirement plans had the employee's compensation not been above the IRS statutory ceiling ($260,000 in 2014). The company does not guarantee a rate of return for these funds. Instead, participants make investment elections for their deferrals and company contributions. Investment options are the same as those available under the Herman Miller Profit Sharing and 401(k) Plan, except for company stock, which is not an investment option under this plan.

In accordance with the terms of the Executive Equalization Plan, the salary and bonus deferrals and company contributions have been placed in a Rabbi trust. The assets in the Rabbi trust remain subject to the claims of creditors of the company and are not the property of the participant and are, therefore, included as an asset on the company's Consolidated Balance Sheets within the "Other assets" line item. A liability of the same amount is recorded on the Consolidated Balance Sheets within the "Other liabilities" line item. Investment assets are classified as trading, and accordingly, realized and unrealized gains and losses are recognized within the company's Consolidated Statements of Comprehensive Income in the interest and other investment income line item. The associated changes to the liability are recorded as compensation expense within the "Selling, general and administrative" line item within the company's Consolidated Statements of Comprehensive Income. The net effect of any change to the asset and corresponding liability is offset and has no impact on the Consolidated Statements of Comprehensive Income.

Director Fees

Company directors may elect to receive their director fees in one or more of the following forms: cash, deferred compensation in the form of shares or other selected investment funds, unrestricted company stock at the market value at the date of election, or stock options that vest in one year and expire in ten years. The exercise price of the stock options granted may not be less than the market price of the company's common stock on the date of grant. Under the plan, the Board members received the following shares or options in the fiscal years indicated:



	2014	2013	2012
Options	—	—	—
Shares of common stock	12,358	15,746	18,119
Shares through the deferred compensation program	2,317	2,779	3,301