SHARE-BASED COMPENSATION

Share-based compensation expense was:


•	$25 million in 2011,


•	$24 million in 2010 and


•	$26 million in 2009.

This note provides details about:


•	our Long-Term Incentive Compensation Plan,


•	how we account for share-based awards,


•	tax benefits of share-based awards,


•	types of share-based compensation and


•	unrecognized share-based compensation.

OUR LONG-TERM INCENTIVE COMPENSATION PLAN

Our Long-Term Incentive Compensation Plan (the Plan) provides for share-based awards that include:


•	stock options,


•	stock appreciation rights,


•	restricted stock,


•	restricted stock units,


•	performance shares and


•	performance share units.

We may issue future grants of up to 11,714,621 shares under the Plan. We also have the right to reissue forfeited and expired grants.

For stock options and stock appreciation rights:


•	An individual participant may receive a grant of up to 1,327,093 shares in any one calendar year.


•	The exercise price is required to be the market price on the date of the grant.

For restricted stock, restricted stock units, performance shares, performance share units or other equity grants:


•	An individual participant may receive a grant of up to 540,584 shares annually.


•	The maximum aggregate number of shares that may be issued as grants is 9.2 million shares.

The compensation committee of our board of directors (the Committee) annually establishes an overall pool of stock awards available for grants based on performance.

For stock-settled awards, we:


•	issue new stock into the marketplace and


•	generally do not repurchase shares in connection with issuing new awards.

Our common shares would increase by approximately 45 million shares if all share-based awards were exercised or vested. These include:


•	all options, restricted stock units, and performance share units outstanding at December 31, 2011 under the Plan;


•	all options outstanding at December 31, 2011 under earlier plans; and


•	all remaining options, restricted stock units, and performance share units that could be granted under the Plan.

HOW WE ACCOUNT FOR SHARE-BASED AWARDS

We:


•	use a fair-value-based measurement for share-based awards, and


•	recognize the cost of share-based awards in our consolidated financial statements.

We recognize the cost of share-based awards in our Consolidated Statement of Operations over the required service period — generally the period from the date of the grant to the date when it is vested. Special situations include:


•	Awards that vest upon retirement — the required service period ends on the date an employee is eligible for retirement, including early retirement.


•	Awards that continue to vest following job elimination or the sale of a business — the required service period ends on the date the employment from the company is terminated.

In these special situations, compensation expense from share-based awards is recognized over a period that is shorter than the stated vesting period.

TAX BENEFITS OF SHARE-BASED AWARDS

Our total income tax benefit from share-based awards — as recognized in our Consolidated Statement of Operations — for the last three years was:


•	$6 million in 2011,


•	$4 million in 2010 and


•	$9 million in 2009.

Tax benefits for share-based awards are accrued as stock compensation expense is recognized in the Consolidated Statement of Operations. Tax benefits on share-based awards are realized when:


•	restricted shares and restricted share units vest,


•	performance shares and performance share units vest,


•	stock options are exercised and


•	stock appreciation rights are exercised.

When actual tax benefits realized exceed the tax benefits accrued for share-based awards, we realize an excess tax benefit. We report the excess tax benefit as financing cash inflows rather than operating cash inflows. We had excess tax benefits of $2 million in 2011 and none in 2010 or 2009.

TYPES OF SHARE-BASED COMPENSATION

Our share-based compensation is in the form of:


•	stock options,


•	restricted stock units,


•	performance share units,


•	stock appreciation rights and


•	deferred compensation stock equivalent units.

STOCK OPTIONS

Stock options entitle award recipients to purchase shares of our common stock at a fixed exercise price. We grant stock options with an exercise price equal to the market price of our stock on the date of the grant.

The Details

Our stock options generally:


•	vest over four years of continuous service and


•	must be exercised within 10 years of the grant date.

The vesting and post-termination vesting terms for stock options granted in 2011 and 2010 were as follows:


•	vest ratably over 4 years;


•	vest or continue to vest in the event of death, disability or retirement at an age of at least 62;


•	continue to vest for one year in the event of involuntary termination when the retirement criteria for full or continued vesting have not been met; and


•	stop vesting for all other situations including early retirement prior to age 62.

The vesting and post-termination vesting terms for stock options granted in 2009 were as follows:


•	vest upon retirement for employees aged 65 or older, or employees aged 62 – 64 with at least 10 years of service;


•	continue to vest following retirement for employees ages 55 – 61 with at least 10 years of service; and


•	continue to vest following involuntary termination due to job elimination or the sale of a business.

During first quarter 2009, we awarded selected executives with special stock options that:


•	vest at the end of four years of continuous service and


•	must be exercised within ten years of the grant date.

Our Accounting

We use a Black-Scholes option valuation model to estimate the fair value of every stock option award on its grant date.

In our estimates, we use:


•	historical data — for option exercise time and employee terminations;


•	a Monte-Carlo simulation — for how long we expect granted options to be outstanding; and


•	the U.S. Treasury yield curve — for the risk-free rate. We use a yield curve over a period matching the expected term of the grant.

The expected volatility in our valuation model is based on:


•	implied volatilities from traded options on our stock,


•	historical volatility of our stock and


•	other factors.

Weighted Average Assumptions Used in Estimating Value of Stock Options Granted



	2011 GRANTS			2010 GRANTS			2009 GRANTS
	10-YEAR STANDARD OPTIONS			10-YEAR STANDARD OPTIONS			10-YEAR STANDARD OPTIONS			10-YEAR EXECUTIVE OPTIONS
Expected volatility	38.56		%	37.62		%	36.61		%	36.51		%
Expected dividends	2.48		%	0.51		%	3.95		%	3.95		%
Expected term (in years)	5.73			5.16			6.16			7.08
Risk-free rate	2.65		%	2.52		%	2.54		%	2.75		%
Weighted average grant date fair value	$	7.54		$	5.28		$	6.45		$	6.69

Share-based compensation expense for stock options is generally recognized over the vesting period. There are exceptions for stock options awarded to employees who:


•	are eligible for retirement;


•	will become eligible for retirement during the vesting period; or


•	whose employment is terminated during the vesting period due to job elimination or the sale of a business.

In these cases, we record the share-based compensation expense over a required service period that is less than the stated vesting period.

Activity

The following table shows our option unit activity for 2011.



	OPTIONS (IN THOUSANDS)	WEIGHTED AVERAGE EXERCISE PRICE		WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (IN YEARS)	AGGREGATE INTRINSIC VALUE (IN MILLIONS)
Outstanding at December 31, 2010	33,379	$	22.16
Granted	1,942	$	24.16
Exercised	(2,191)	$	17.43
Forfeited or expired	(3,961)	$	24.40
Outstanding at December 31, 2011⁽¹⁾	29,169	$	22.34	4.91	$	—
Exercisable at December 31, 2011	22,277	$	24.10	4.00	$	—
(1) As of December 31, 2011, there were approximately 1,560 thousand stock options that had met the requisite service period and will be released as identified in the grant terms.

RESTRICTED STOCK UNITS

Through the Plan, we award restricted stock units — grants that entitle the holder to shares of our stock as the award vests.

The Details

Our restricted stock units granted in 2011 and 2010 generally:


•	vest ratably over four years;


•	immediately vest in the event of death while employed or disability;


•	partially vest upon retirement at an age of at least 62 or job elimination depending on the employment period after grant date; and


•	will be forfeited upon termination of employment in all other situations including early retirement prior to age 62.

Our restricted stock units granted in 2009 generally:


•	vest over four years of continuous service; and


•	are forfeited upon termination of employment for any reason, including retirement.

Our Accounting

The fair value of our restricted stock units is the market price of our stock on the grant date of the awards.

We generally record share-based compensation expense for restricted stock units over the four-year vesting period. Generally for restricted stock units that continue to vest following the termination of employment, we record the share-based compensation expense over a required service period that is less than the stated vesting period. For restricted stock units granted in 2009, we reverse the expense related to the unvested portion of the award following termination of employment.

Activity

The following table shows our restricted stock unit activity for 2011.



	STOCK UNITS (IN THOUSANDS)	WEIGHTED AVERAGE GRANT-DATE FAIR VALUE
Nonvested at December 31, 2010	1,963	$	26.44
Granted	720	$	23.94
Vested	(783)	$	28.50
Forfeited	(161)	$	23.74
Nonvested at December 31, 2011⁽¹⁾	1,739	$	24.72
(1) As of December 31, 2011, there were approximately 95 thousand restricted stock units that had met the requisite service period and will be released as identified in the grant terms.

Nonvested restricted stock units accrue dividends that are paid out when restricted stock units vest. Any restricted stock units forfeited will not receive dividends.

As restricted stock units vest, a portion of the shares awarded is withheld to cover employee taxes. As a result, the number of stock units vested and the number of common shares issued will differ.

PERFORMANCE SHARE UNITS

In 2011, as part of a new long-term incentive compensation strategy intended to tie executive compensation more closely to company performance, we granted a target number of performance share units to executives. Performance share units will be paid in the form of shares of Weyerhaeuser stock – to the extent earned through company performance against financial goals – over a four-year vesting period.

The Details

The final number of shares awarded will range from 0 percent to 150 percent of each grant’s target, depending upon actual company performance.

The ultimate number of Performance Share Units earned is based on two measures:


•	Weyerhaeuser’s cash flow during the first year determined the initial number of units earned and


•	Weyerhaeuser’s relative total shareholder return (TSR) ranking in the S&P 500 during the first two years is used to adjust the initial number of units earned up or down by 20 percent.

At the end of the two-year performance period and over a further two-year vesting period, performance share units would be paid in shares of our stock. Performance share units granted in 2011 and that are earned vest as follows:


•	units vest 50 percent, 25 percent and 25 percent on the second, third and fourth anniversaries of the grant date, respectively, as long as the individual remains employed by the company;


•	units fully vest in the event the participant dies or becomes disabled while employed;


•	a percentage of the units continue to vest upon retirement at age 62 or older or upon job elimination, with the percentage based on the length of time between the grant date and termination of employment; and


•	unvested units will be forfeited upon termination of employment for all other reasons including early retirement prior to age 62.

Our Accounting

Since the award contains a market condition, the effect of the market condition is reflected in the grant date fair value which is estimated using a Monte Carlo simulation model. This model estimates the TSR ranking of the company among the S&P 500 index over the two-year performance period. Compensation expense is based on the estimated probable number of earned awards and recognized over the four-year vesting period on an accelerated basis. Generally, compensation expense would be reversed if the performance condition is not met unless the requisite service period has been achieved.

Weighted Average Assumptions Used in Estimating the Value of Performance Share Units



	2011 GRANTS
Performance period	2/9/2011 – 2/9/2013
Valuation date closing stock price	$	24.32
Expected dividends	2.47		%
Risk-free rate	0.12% - 0.80%
Volatility	28.65% - 35.74%

Activity

The following table shows our performance share unit activity at target levels for 2011.



	STOCK UNITS (IN THOUSANDS)	WEIGHTED AVERAGE GRANT-DATE FAIR VALUE
Granted	326	$	25.52
Forfeited	(12)	$	25.52
Nonvested at December 31, 2011⁽¹⁾	314	$	25.52
(1) As of December 31, 2011, there were approximately 33 thousand performance share units that had met the requisite service period and will be released as identified in the grant terms.

The Company's performance against the cash flow metrics during 2011 determined the initial number of performance shares earned to be slightly above target. The ultimate number of performance shares earned may be adjusted as the TSR component will be used to modify the initial number of shares earned up or down by 20 percent. No performance share units were awarded in 2009 or 2010.

As performance share units vest, a portion of the shares awarded is withheld to cover participant taxes. As a result, the number of stock units vested and the number of common shares issued will differ.

STOCK APPRECIATION RIGHTS

Through the Plan, we grant cash-settled stock appreciation rights as part of certain compensation awards.

The Details

Stock appreciation rights are similar to stock options. Employees benefit when the market price of our stock is higher on the exercise date than it was on the date the stock appreciation rights were granted. The differences are that the employee:


•	receives the benefit as a cash award and


•	does not purchase the underlying stock.

The vesting conditions and exceptions are the same as for 10-year stock options. Details are in the Stock Options section earlier in this note.

Stock appreciation rights are generally issued to employees outside of the U.S.

Our Accounting

We use a Black-Scholes option-valuation model to estimate the fair value of a stock appreciation right on its grant date and every subsequent reporting date that the right is outstanding. Stock appreciation rights are liability-classified awards and the fair value is remeasured at every reporting date.

The process used to develop our valuation assumptions is the same as for the 10-year stock options we grant. Details are in the Stock Options section earlier in this note.

Weighted Average Assumptions Used to Re-measure Value of Stock Appreciation Rights at Year-End



	December 31, 2011
Expected volatility	39.92		%
Expected dividends	3.21		%
Expected term (in years)	2.82
Risk-free rate	0.44		%
Weighted average fair value	$	3.24

Activity

The following table shows our stock appreciation rights activity for 2011.



	RIGHTS (IN THOUSANDS)		WEIGHTED AVERAGE EXERCISE PRICE		AVERAGE REMAINING CONTRACTUAL TERM (IN YEARS)	AGGREGATE INTRINSIC VALUE (IN MILLIONS)
Outstanding at December 31, 2010	1,989		$	22.74
Granted	53		$	24.16
Exercised	(91	)	$	23.92
Forfeited or expired	(373	)	$	25.53
Outstanding at December 31, 2011	1,578		$	22.80	5.09	$	—
Exercisable at December 31, 2011	1,218		$	24.80	4.36	$	—

UNRECOGNIZED SHARE-BASED COMPENSATION

As of December 31, 2011, our unrecognized share-based compensation cost for all types of share-based awards included:


•	$40 million related to non-vested equity-classified share-based compensation arrangements — expected to be recognized over a weighted-average period of approximately 1.8 years; and


•	$1 million related to non-vested liability-classified stock appreciation rights — expected to vest over a weighted-average period of approximately 1.5 years.

DEFERRED COMPENSATION STOCK EQUIVALENT UNITS

Certain employees and our board of directors can defer compensation into stock-equivalent units.

The Details

The plan works differently for employees and directors.

Eligible employees:


•	may choose to defer all or part of their bonus into stock-equivalent units and


•	receive a 15 percent premium if the deferral is for at least five years.

Our directors:


•	have a portion of their annual retainer fee automatically deferred into stock-equivalent units,


•	may choose to defer some or all of the remainder of their annual retainer fee into stock-equivalent units and


•	do not receive a premium for their deferrals.

Employees and directors also choose when the deferrals will be paid out although no deferrals may be paid until after the separation from service of the employee or director.

Our Accounting

We settle all deferred compensation accounts in cash. In addition, we credit all stock-equivalent accounts with dividend equivalents.

Stock-equivalent units are:


•	liability-classified awards and


•	re-measured to fair value at every reporting date.

The fair value of a stock-equivalent unit is equal to the market price of our stock.

Subsequent to year-end, the director's plan was amended to allow directors the ability to elect to receive payments of stock-equivalent units in cash or common shares. The number of common shares to be issued for directors who elected common share payments is 509,362.

Activity

The number of stock-equivalent units outstanding in our deferred compensation accounts was:


•	1,021,977 as of December 31, 2011;


•	1,027,768 as of December 31, 2010; and


•	430,789 as of December 31, 2009.

During 2010, the number of stock-equivalent units outstanding in our deferred compensation accounts increased by 664,957 as a result of the Special Dividend.