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. At June 2, 2018 there were 5,991,307 shares authorized under the various stock-based compensation plans.

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. 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)	June 2, 2018		June 3, 2017		May 28, 2016
Employee stock purchase program	$	0.3	$	0.3	$	0.3
Stock option plans	2.6		2.0		1.9
Restricted stock units	3.9		3.6		3.2
Performance share units	0.9		2.8		6.5
Total	$	7.7	$	8.7	$	11.9

Tax benefit	$	2.3	$	3.1	$	4.3

As of June 2, 2018, total pre-tax stock-based compensation cost not yet recognized related to non-vested awards was approximately $7.8 million. The weighted-average period over which this amount is expected to be recognized is 0.79 years.

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. Shares of common stock purchased under the employee stock purchase plan were 67,335, 68,547, and 70,768 for the fiscal years ended 2018, 2017 and 2016 respectively.

Stock Option Plans

The company has stock option plans under which options to purchase the company's stock may be granted to employees and non-employee directors 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 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.

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:



	2018			2017			2016
Risk-free interest rates ⁽¹⁾	1.79		%	1.01		%	1.51		%
Expected term of options ⁽²⁾	4.6 years			4.0 years			4.0 years
Expected volatility ⁽³⁾	26		%	26		%	33		%
Dividend yield ⁽⁴⁾	2.23		%	2.13		%	2.03		%
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	$	6.39		$	5.50		$	6.73

(1) Represents term-matched, zero-coupon risk-free rate from the Treasury Constant Maturity yield curve, continuously compounded.

(2) Represents historical settlement data, using midpoint scenario with 1-year grant date filter assumption for outstanding options.

(3) The blended volatility approach was used. 90% term-matched historical volatility from daily stock prices and 10% percent weighted average implied volatility from the 90 days preceding the grant date.

(4) Represents the quarterly dividend divided by the three-month average stock price as of the grant date, annualized and continuously compounded.

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 June 3, 2017	1,329,702		$	28.36	7.26	$	5.8
Granted at market	323,412		$	33.75
Exercised	(538,259	)	$	27.28
Forfeited or expired	(51,606	)	$	32.83
Outstanding at June 2, 2018	1,063,249		$	30.33	7.45	$	2.9
Ending vested + expected to vest	1,063,249		$	30.33	7.45	$	2.9
Exercisable at end of period	265,519		$	23.96	4.78	$	2.4

The weighted-average remaining recognition period of the outstanding stock options at June 2, 2018 was 0.75 years. The total pre-tax intrinsic value of options exercised during fiscal 2018, 2017 and 2016 was $5.0 million, $1.3 million and $2.3 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. Total cash received during fiscal 2018 from the exercise of stock options was $4.4 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 June 3, 2017	384,952		$	28.73	$	12.6	1.14
Granted	242,012		$	35.28
Forfeited	(19,233	)	$	30.86
Released	(126,704	)	$	27.75
Outstanding at June 2, 2018	481,027		$	32.20	$	15.8	1.28
Ending vested + expected to vest	481,027		32.20		$	15.8	1.28

The weighted-average remaining recognition period of the outstanding restricted stock units at June 2, 2018, was 1.15 years. The fair value of the share units that vested during the twelve months ended June 2, 2018, was $4.3 million. The weighted average grant-date fair value of restricted stock units granted during 2018, 2017, and 2016 was $35.28, $31.83 and $29.03 respectively.

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 or the company's financial performance based on certain total shareholder return results as compared to a selected group of peer companies. 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 June 3, 2017	417,947		$	31.18	$	13.7	1.03
Granted	129,131		$	31.28
Forfeited	(42,339	)	$	34.27
Released	(130,179	)	$	31.47
Outstanding at June 2, 2018	374,560		$	30.76	$	12.3	1.01
Ending vested + expected to vest	374,560		$	30.76	$	12.3	1.01

The weighted-average remaining recognition period of the outstanding performance share units at June 2, 2018, was 0.73 years. The fair value for shares that vested during the twelve months ended June 2, 2018, was $4.5 million. The weighted average grant-date fair value of performance share units granted during 2018, 2017, and 2016 was $31.28, $29.40, and $30.81 respectively.

Herman Miller Consumer Holdings Stock (HMCH) Option Plan

Certain employees were granted options to purchase stock of HMCH at a price not less than the market price of HMCH common stock on the date of grant. For the grants of options under the award program, options are potentially exercisable between one year and five years from date of grant and expire at the end of the window period that follows the fifth anniversary of the grant date. Vesting is based on the performance of HMCH over a period of five years. Certain of these options have been classified as liability awards as the holders have the right to put the underlying shares to the company immediately upon exercise. Given this, the awards are measured at fair value at the end of each reporting period and compensation expense is adjusted accordingly to reflect the fair value over the requisite service period. The company estimates the issuance date fair value of HMCH stock options on the date of grant using the Black-Scholes model. The expense for these awards was $0.6 million during fiscal 2018 and the related liability for these awards was $0.9 million as of the end of fiscal 2018. The liability for the HMCH stock options is recorded within the Consolidated Balance Sheets within the "Other liabilities" line item.

The following weighted-average assumptions were used to value the liability associated with HMCH stock options as of June 2, 2018 and June 3, 2017:



	2018			2017
Risk-free interest rates ⁽¹⁾	2.29		%	1.29	%
Expected term of options ⁽²⁾	1.1 years			2.1 years
Expected volatility ⁽³⁾	35		%	35	%
Dividend yield	not applicable			not applicable
Strike price	$	30.64		24.39
Per share value ⁽⁴⁾	$	8.24		3.24

(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.

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

(4) Based on the Black-Scholes formula.



	Shares Under Option		Weighted-Average Exercise Prices		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In millions)
Outstanding at June 3, 2017	526,244		$	24.20	2.20	$	0.1
Granted	28,810		$	21.08
Forfeited	(10,928	)	$	24.39
Outstanding at June 2, 2018	544,126		$	24.04	1.20	$	3.6
Exercisable at end of period	75,568		$	21.83	1.20	$	0.6

There were no HMCH options exercised during fiscal 2018. The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the HMCH market price, less the strike 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.

Deferred Compensation Plan

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 ($275,000 in 2018). 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.

The Nonemployee Officer and Director Deferred Compensation Plan allows the Board of Directors of the company to defer a portion of their annual director fee. Investment options are the same as those available under the Herman Miller Profit Sharing and 401(k) Plan, including company stock.

In accordance with the terms of the Executive Equalization Plan and Nonemployee Officer and Director Deferred Compensation Plan, the salary and bonus deferrals, company contributions and director fee deferrals 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. Investments in securities other than the company's common stock are included within the Other assets line item, while investments in the company's stock are included in the line item Key executive deferred compensation in the company's Consolidated Balance Sheets. 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 Net earnings in 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:



	2018	2017	2016
Shares of common stock	8,828	9,982	21,988
Shares through the deferred compensation program	2,207	2,582	3,118