STOCK-BASED COMPENSATION

The DSW Inc. 2014 Long-Term Incentive Plan (the "Plan") provides for the issuance of stock-based compensation awards for eligible recipients. The Plan replaced the DSW Inc. 2005 Equity Incentive Plan but did not affect awards granted under that plan, some of which remain outstanding. The Plan covers stock options, RSUs, PSUs, DSUs and Stock Appreciation Rights. Eligible recipients include key employees of DSW Inc. and affiliates, as well as directors. The maximum number of shares of Class A Common Shares underlying awards which may be issued over the term of the Plan cannot exceed 8.5 million shares. As of January 28, 2017, 6.9 million shares of Class A Common Shares remain available for future grants under the Plan.

Stock-based compensation expense consisted of the following:



	Fiscal
	2016		2015		2014
	(in thousands)
Stock options	$	5,788	$	5,532	$	5,827
Restricted stock units	3,342		2,953		2,097
Performance-based restricted stock units	2,317		3,979		1,324
Director stock units	1,240		1,037		1,247
	$	12,687	$	13,501	$	10,495

Stock Options- Stock options are granted with an exercise price per share equal to the fair market value of our common stock on the grant date. Stock options generally vest 20% per year on a cumulative basis and remain exercisable for a period of 10 years from the date of grant.

The fair value for stock option awards was estimated at the grant date using the Black-Scholes pricing model with the following weighted average assumptions for options granted:



	Fiscal
	2016	2015	2014
Assumptions:
Risk-free interest rate	1.5%	1.4%	1.8%
Expected volatility	36.0%	37.9%	44.5%
Expected option term	5.4 years	5.1 years	5.4 years
Dividend yield	3.0%	2.1%	2.3%
Other Data:
Weighted average grant date fair value	$6.58	$8.87	$11.82

The risk-free interest rate is based on the yield for U.S. Treasury securities for the expected term of the options at the grant date. Expected volatility is based on the historical volatility of the Company's Class A Common Shares. The expected term of options granted is derived from historical data of stock option exercises. The dividend yield assumption is based on the expectation of future dividend payouts.

Stock-based compensation expense is recognized only for those awards that are expected to vest, with forfeitures estimated at

the date of grant based on our historical experience and future expectations. The forfeiture rate will be revised, if necessary,

in subsequent periods if actual forfeitures materially differ from the amount estimated. As of January 28, 2017, the total compensation cost related to unvested options not yet recognized was approximately $12.0 million, with a weighted average expense recognition period remaining of 2.0 years.

The following table summarizes the activity for outstanding stock options for fiscal 2016:



	Shares Subject to Options		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in thousands)
Outstanding - beginning of year	3,849		$	25.56
Granted	850		$	26.89
Exercised	(410	)	$	15.30
Forfeited	(490	)	$	29.80
Outstanding - end of year	3,799		$	26.42	6.6 years	$	6,317
Vested and expected to vest - end of year	3,590		$	26.21	6.5 years	$	6,317
Exercisable - end of year	1,986		$	23.31	4.9 years	$	6,317

The aggregate intrinsic value is calculated as the amount by which the fair value of the underlying common shares exceeds the option exercise price. The total intrinsic value of options exercised during fiscal 2016, 2015 and 2014 was $3.6 million, $8.9 million and $11.9 million, respectively. The total fair value of options that vested during fiscal 2016, 2015 and 2014 was $2.7 million, $3.7 million and $2.5 million, respectively.

Restricted Stock Units- Beginning in fiscal 2013, RSUs granted generally cliff vest over three years, and prior to fiscal 2013, RSUs granted cliff vest over four years. RSUs receive dividend equivalents in the form of additional RSUs, which are subject to the same restrictions and forfeiture provisions as the original award. The grant date fair value of RSUs is based on the closing market price of the Class A Common Shares on the date of the grant.

The following table summarizes the activity for unvested RSUs for fiscal 2016:



	Number of Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding - beginning of year	372		$	31.83
Granted	195		$	26.52
Vested	(129	)	$	31.33
Forfeited	(87	)	$	29.97
Outstanding - end of year	351		$	29.60

The total fair value of RSUs that vested during fiscal 2016, 2015 and 2014 was $3.7 million, $2.0 million and $1.4 million, respectively. As of January 28, 2017, the total compensation cost related to unvested RSUs not yet recognized was $5.8 million, with a weighted average expense recognition period remaining of 1.7 years.

Performance-Based Restricted Stock Units- PSUs generally cliff vest over three years based upon the achievement of pre-established goals as of the end of the first year of the term. PSUs receive dividend equivalents in the form of additional PSUs, which are subject to the same restrictions and forfeiture provisions as the original award. Consistent with RSUs, the grant date fair value of PSUs is based on the closing market price of the Class A Common Shares on the date of grant.

The following table summarizes the activity for unvested PSUs for fiscal 2016:



	Number of Shares		Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding - beginning of year	293		$	28.70
Granted	116		$	26.62
Vested	(133	)	$	25.76
Forfeited	(26	)	$	30.18
Outstanding - end of year	250		$	29.46

The total fair value of PSUs that vested during fiscal 2016 and 2015 was $1.4 million and $1.7 million, respectively (no PSUs vested during fiscal 2014). As of January 28, 2017, the total compensation cost related to unvested PSUs not yet recognized was approximately $4.0 million, with a weighted average expense recognition period remaining of 1.7 years.

Director Stock Units- We issue stock units to directors who are not employees. Stock units are automatically granted to each director on the date of each annual meeting of shareholders based on the closing market price of the Class A Common Shares. In addition, each director eligible to receive compensation for board service may elect to have the cash portion of such compensation paid in the form of stock units. Stock units granted to directors vest immediately and directors are given the option to settle their units 30 days after the grant date, at a specified date more than 30 days following the grant date, or upon completion of service. Stock units granted to directors, which are not subject to forfeiture, are considered to be outstanding for the purposes of computing basic earnings per share.

The following table summarizes the activity for unvested DSUs for fiscal 2016:



	Number of Shares
	(in thousands)
Outstanding - beginning of year	305
Granted	69
Exercised	(63	)
Outstanding - end of year	311