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## 13. EMPLOYEE STOCK AWARD AND BENEFIT PLANS (continued) 

## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

## COHERENT, INC. AND SUBSIDIARIES 

• The service-based restricted stock unit awards are generally subject to annual vesting over three years from the date of grant, though from time-to-time, depending upon exceptional circumstances, the Company has granted restricted stock unit awards with one or two year vesting. 

• The performance restricted stock unit award grants are generally either subject to annual vesting over three years from the date of grant or subject to a single vest measurement three years from the date of grant, depending upon achievement of performance measurements based on the performance of the Company's total shareholder returns (as defined in the plan) over the performance period compared with the performance of the applicable Russell Index (or as otherwise determined by the Compensation and HR Committee). 

## Fair Value of Stock Compensation 

We recognize compensation expense for all share-based payment awards based on the fair value of such awards. The expense is recognized on a straight-line basis per tranche over the respective requisite service period of the awards. 

## Determining Fair Value 

## Employee Stock Purchase Plan 

Valuation and amortization method —We estimate the fair value of employee stock purchase shares using the Black-Scholes-Merton option- pricing formula. This fair value is then amortized on a straight-line basis over the purchase period. 

Expected Term —The expected term represents the period of our employee stock purchase plan. 

Expected Volatility —Our process for computing expected volatility considers both historical volatility and market-based implied volatility; however our estimate of expected forfeitures is based on historical employee data and could differ from actual forfeitures. 

Risk-Free Interest Rate —The risk-free interest rate used in the Black-Scholes-Merton valuation method is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. 

The fair values of shares purchased under the employee stock purchase plan for fiscal 2019, 2018 and 2017 were estimated using the following weighted-average assumptions: 

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## Time-Based Restricted Stock Units 

Time-based restricted stock units are fair valued at the closing market price on the date of grant. 

## Performance Restricted Stock Units 

We grant performance restricted stock units to officers and certain employees. The performance restricted stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of our common stock to be issued after the applicable award vesting period. The final number of units awarded, if any, for these performance grants will be determined as of the vesting dates, based upon our total shareholder return over the performance period compared to the applicable Russell Index and could range from no units to a maximum of twice the initial award units. The weighted average fair value for these performance units was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions: 

