NOTE 14

Equity-Based Compensation Plans

The Clearwater Paper Corporation 2008 Stock Incentive Plan, or Stock Plan, which has been approved by our stockholders, provides for equity-based awards in the form of restricted shares, restricted stock units, or RSUs, performance shares, stock options, or stock appreciation rights to selected employees, outside directors, and consultants of the company. The Stock Plan became effective on December 16, 2008. Under the Stock Plan, we are authorized to issue up to approximately 4.1 million shares, which includes approximately 0.7 million additional shares authorized in connection with our acquisition of Cellu Tissue that are available for issuance as equity-based awards only to any employees, outside directors, or consultants who were not employed on December 26, 2010 by Clearwater Paper Corporation or any of its subsidiaries. At December 31, 2011, approximately 1.9 million shares were available for future issuance under the Stock Plan.

We recognize equity-based compensation expense for all equity-based payment awards made to employees and directors, including RSUs and performance shares, based on estimated fair values and net of estimates of future forfeitures. Expense is classified in selling, general and administrative expense in our Consolidated Statements of Operations and is recognized on a straight-line basis over the requisite service periods of each award. Based on the terms of the Plan, retirement-eligible employees become fully vested in outstanding awards on the later of that date they reach retirement eligibility or at the end of the first calendar year of each respective grant. We account for this feature when determining the service period over which to recognize expense for each grant of RSUs and performance shares.

Employee equity-based compensation expense was recognized as follows:


	Year Ended
(In thousands)	2011		2010		2009
Restricted stock units	$	1,212	$	1,544	$	2,218
Performance shares		5,446		3,275		794

Total employee equity-based compensation	$	6,658	$	4,819	$	3,012

Related tax benefit	$	2,290	$	1,582	$	1,018

RESTRICTED STOCK UNITS

RSUs granted under our Stock Plan are generally subject to a vesting period of one to three years. RSU awards will accrue dividend equivalents based on dividends paid, if any, during the RSU vesting period. The dividend equivalents will be converted into additional RSUs that will vest in the same manner as the underlying RSUs to which they relate.

A summary of the status of outstanding unvested RSU awards as of December 31, 2011, 2010 and 2009, and changes during those years, is presented below:


	2011					2010					2009
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Unvested shares outstanding at
January 1		437,272		$	6.96		849,512		$	7.04		564,938		$	8.63
Granted		23,138			38.42		32,428			24.23		428,722			4.95
Vested		(286,486	)		6.88		(425,556	)		8.42		(36,694	)		7.52
Forfeited		(4,580	)		8.64		(19,112	)		7.14		(107,454	)		6.93

Unvested shares outstanding at December 31		169,344			11.33		437,272			6.96		849,512			7.04

Aggregate intrinsic value (in thousands)				$	6,030				$	17,119				$	23,349

All common share amounts have been adjusted for the two-for-one stock split effected in the form of a stock dividend distributed on August 26, 2011.

For RSU awards granted during 2011, the fair value of each share was estimated on the date of grant using the grant date market price of our common stock. The total fair value of share awards that vested during 2011 was $2.0 million.

As of December 31, 2011, there was $0.6 million of total unrecognized compensation cost related to outstanding RSU awards. The cost is expected to be recognized over a weighted average period of 1.4 years.

PERFORMANCE SHARES

Performance share awards granted under our Stock Plan have a three-year performance period, with generally the same service period, and shares are issued after the end of the period if the employee provides the requisite service and the performance measure is met. The performance measure is a comparison of the percentile ranking of our total stockholder return compared to the total stockholder return performance of a selected peer group. The performance measure is considered to represent a “market condition” under authoritative accounting guidance, and thus, the market condition is considered when determining the estimate of the fair value of the performance share awards. The number of shares actually issued, as a percentage of the amount subject to the performance share award, could range from 0%-200%. Performance share awards granted under our Stock Plan do not represent common stock, and therefore the holders do not have voting rights unless and until shares are issued upon settlement. During the performance period, dividend equivalents accrue based on dividends paid, if any, and are converted into additional performance shares, which vest or are forfeited in the same manner as the underlying performance shares to which they relate. Generally, if an employee terminates prior to completing the requisite service period, all or a portion of their awards are forfeited and the previously recognized compensation cost is reversed. If an employee provides the requisite service through the end of the performance period, but the performance measure is not met, following authoritative guidance for awards with a market condition, previously recognized compensation cost is not reversed.

The fair value of performance share awards is estimated using a Monte Carlo simulation model. For performance shares granted in 2011, the following assumptions were used in our Monte Carlo model:



Closing price of stock on date of grant	$	38.46
Risk free rate		1.16%
Measurement period		3 years
Volatility		81%

In addition to the above assumptions, the dividend yields for all companies were assumed to be zero since dividends are included in the definition of total shareholder return.

A summary of the status of outstanding performance share awards as of December 31, 2011, 2010 and 2009, and changes during those years, is presented below:


	2011				2010					2009
	Shares		Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Outstanding at
January 1		638,870	$	13.00		524,588		$	5.64		—		$	—
Granted		110,668		57.18		141,522			39.36		562,182			5.59
Forfeited		—		—		(27,240	)		8.14		(37,594	)		4.94

Outstanding at
December 31		749,538		19.52		638,870			13.00		524,588			5.64

Aggregate intrinsic value (in thousands)			$	26,691				$	25,012				$	14,418

All common share amounts have been adjusted for the two-for-one stock split effected in the form of a stock dividend distributed on August 26, 2011.

On December 31, 2011, the performance period for performance shares granted in 2009 ended, and those performance shares will be settled and distributed in the first quarter of 2012.

As of December 31, 2011, there was $5.2 million of unrecognized compensation cost related to outstanding performance share awards. The cost is expected to be recognized over a weighted average period of 1.4 years.

DIRECTOR AWARDS

In connection with joining our Board of Directors, in January 2009 our outside directors were granted an award of phantom common stock units, which were credited to an account established on behalf of each director and vest ratably over a three-year period. In May 2010 and 2011, our outside directors were granted equity awards in the form of phantom common stock units as part of their annual compensation, which were credited to their accounts. Certain of the awards granted vest ratably over a one-year period. These accounts will be credited with additional phantom common stock units equal in value to dividends paid, if any, on the same amount of common stock. Upon separation from service as a director, the vested portion of the phantom common stock units held by the director in a stock unit account are converted to cash based upon the then market price of the common stock and paid to the director. Due to the cash-settlement feature of the awards, we recognize equity-based compensation expense or income at the end of each reporting period based on the portion of the award that is vested and the increase or decrease in the value of our common stock. We recorded director equity-based compensation expense totaling $1.5 million, $3.7 million and $2.6 million for the years ended December 31, 2011, 2010 and 2009, respectively.