SHARE-BASED COMPENSATION

Share-based compensation expense was:


•	$42 million in 2013,


•	$37 million in 2012 and


•	$25 million in 2011.

This note provides details about:


•	our Long-Term Incentive Compensation Plan (2013 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 plans provide for share-based awards that include:


•	stock options,


•	stock appreciation rights,


•	restricted stock,


•	restricted stock units,


•	performance shares and


•	performance share units.

At our Annual Meeting of Shareholders held on April 11, 2013, our shareholders approved the 2013 Plan. Upon approval by our shareholders of the 2013 Plan, no further awards have been, or will be, granted under the company’s 2004 Long-Term Incentive Plan (2004 Plan) or 1998 Long-Term Incentive Compensation Plan (1998 Plan). Shareholders approved 10 million shares of common stock for issuance under the 2013 Plan. In addition, approximately 9 million shares authorized for issuance under our 2004 Plan and 1998 Plan that have not been issued and are not subject to outstanding awards are available for issuance under the 2013 Plan. Our Board of Directors had previously adopted and approved the 2013 Plan, subject to shareholder approval.

We may issue future grants of up to 19,902,470 shares under the 2013 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 2 million 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 1 million shares annually.


•	No participant may be granted awards that exceed $10 million earned in a 12 month period.

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 40 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, 2013 under the 2013 Plan, 2004 Plan and 1998 Plan; and


•	all remaining options, restricted stock units, and performance share units that could be granted under the 2013 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:


•	$10 million in 2013,


•	$9 million in 2012 and


•	$6 million in 2011.

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:


•	$13 million in 2013,


•	$5 million in 2012 and


•	$2 million in 2011.

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 2013, 2012 and 2011 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 upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant depending on the number of months employed after grant date;


•	options continue to vest for one year in the event of involuntary termination when the retirement criteria has not been met; and


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

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



	2013 GRANTS			2012 GRANTS			2011 GRANTS
Expected volatility	38.00		%	40.41		%	38.56		%
Expected dividends	2.23		%	2.94		%	2.48		%
Expected term (in years)	4.97			5.33			5.73
Risk-free rate	0.92		%	1.01		%	2.65		%
Weighted average grant date fair value	$	8.40		$	5.72		$	7.54

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 2013.



	OPTIONS (IN THOUSANDS)	WEIGHTED AVERAGE EXERCISE PRICE		WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (IN YEARS)	AGGREGATE INTRINSIC VALUE (IN MILLIONS)
Outstanding at December 31, 2012	22,809	$	22.36
Granted	1,987	$	30.48
Exercised	(7,226)	$	22.37
Forfeited or expired	(515)	$	28.29
Outstanding at December 31, 2013⁽¹⁾	17,055	$	23.12	4.96	$	144
Exercisable at December 31, 2013	12,441	$	22.71	3.81	$	110
(1) As of December 31, 2013, there were approximately 955 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 2013, 2012 and 2011 generally:


•	vest ratably over four years;


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


•	continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant depending on the number of months employed after grant date;


•	continue vesting for one year in the event of involuntary termination when the retirement has not been met; and


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

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.

Activity

The following table shows our restricted stock unit activity for 2013.



	STOCK UNITS (IN THOUSANDS)	WEIGHTED AVERAGE GRANT-DATE FAIR VALUE
Nonvested at December 31, 2012	1,649	$	22.25
Granted	729	$	30.54
Vested	(641)	$	22.28
Forfeited	(190)	$	24.78
Nonvested at December 31, 2013⁽¹⁾⁽²⁾	1,547	$	25.83
(1) As of December 31, 2013, there were approximately 165 thousand restricted stock units that had met the requisite service period and will be released as identified in the grant terms. (2) Includes 90 thousand shares related to the Special Dividend associated with our REIT conversion in 2010. These units will be issued as the underlying shares vest. Nonvested units do not include any regular dividends.

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

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 in 2013, 2012 and 2011. 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 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;


•	continue to vest upon retirement at an age of at least 62, but a portion of the grant is forfeited if retirement occurs before the one year anniversary of the grant depending on the number of months employed after grant date;


•	continue vesting for one year in the event of involuntary termination when the retirement has not been met; 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



	2013 GRANTS			2012 GRANTS			2011 GRANTS
Performance period	1/1/2013 – 12/31/2014			1/1/2012 – 12/31/2013			1/1/2011 – 12/31/2012
Valuation date closing stock price	$	30.48		$	20.56		$	24.32
Expected dividends	2.23		%	2.92		%	0.82		%
Risk-free rate	0.09% - 0.46%			0.08% - 0.32%			0.12% - 0.80%
Volatility	22.09% - 29.57%			34.86% - 34.66%			28.65% - 35.74%

Activity

The following table shows our performance share unit activity for 2013.



	2013 GRANTS (IN THOUSANDS)		2012 GRANTS (IN THOUSANDS)		2011 GRANTS (IN THOUSANDS)		TOTAL GRANTS(IN THOUSANDS)	WEIGHTED AVERAGE GRANT-DATE FAIR VALUE
Nonvested at December 31, 2012	—		420		394		814	$	24.38
Granted at target	389		0		—		389	$	31.37
Vested	0		0		(198	)	(198)	$	27.30
Forfeited	(63	)	(41	)	(18)		(122)	$	27.64
Performance adjustment	155		64		0		219	$	28.57
Nonvested at December 31, 2013⁽¹⁾	481		443		178		1,102	$	26.83
(1) As of December 31, 2013, there were approximately 331 thousand performance share units that had met the requisite service period and will be released as identified in the grant terms.

For 2013 grants, the company exceeded the cash flow target, resulting in an initial number of shares earned equal to 150 percent of target.

For 2012 grants, the company exceeded the cash flow target, resulting in an initial number of shares earned equal to 122 percent of target. Because the company's two-year TSR ranking was between the 50^th and 75^th percentile, the initial number of performance shares granted increased 17 percent.

For 2011 grants, the company exceeded the cash flow target, resulting in an initial number of shares earned equal to 105 percent of target. Because the company's two-year TSR ranking was greater than the 75^th percentile, the initial number of shares granted increased by 20 percent.

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



	2013 GRANTS			2012 GRANTS			2011 GRANTS
Expected volatility	24.02		%	29.07		%	39.92		%
Expected dividends	2.81		%	2.44		%	3.21		%
Expected term (in years)	1.16			1.71			2.82
Risk-free rate	0.19		%	0.27		%	0.44		%
Weighted average fair value	$	8.68		$	7.25		$	3.24

Activity

The following table shows our stock appreciation rights activity for 2013.



	RIGHTS (IN THOUSANDS)		WEIGHTED AVERAGE EXERCISE PRICE		AVERAGE REMAINING CONTRACTUAL TERM (IN YEARS)	AGGREGATE INTRINSIC VALUE (IN MILLIONS)
Outstanding at December 31, 2012	1,151		$	22.67
Granted	—		$	—
Exercised	(440	)	$	22.08
Forfeited or expired	(16	)	$	26.20
Outstanding at December 31, 2013	695		$	22.96	4.04	$	6
Exercisable at December 31, 2013	592		$	23.62	3.51	$	5

UNRECOGNIZED SHARE-BASED COMPENSATION

As of December 31, 2013, our unrecognized share-based compensation cost for all types of share-based awards included:


•	$43 million related to non-vested equity-classified share-based compensation arrangements — expected to be recognized over a weighted average period of approximately 2.3 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 may 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;


•	may choose to defer part of their salary, except for executive officers; and


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

Our directors:


•	receive a portion of their annual retainer fee in the form of restricted stock units, which vest over one year and may be 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 for our employees. Our directors receive shares of common stock as payment for stock-equivalent units. In addition, we credit all stock-equivalent accounts with dividend equivalents.

During 2012, the directors' deferred compensation plan was amended to allow the directors to elect to receive payments of amounts deferred into stock-equivalent units in cash or stock for elections made prior to December 31, 2011. Deferrals made beginning January 1, 2012, into stock-equivalent units will be paid in common shares. Elections to receive these deferred amounts in stock resulted in the issuance of 52,720 in 2013 and 40,899 shares in 2012. The number of common shares to be issued in the future to directors who elected common share payments is 557,519.

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.

Activity

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


•	915,160 as of December 31, 2013;


•	971,650 as of December 31, 2012; and


•	1,021,977 as of December 31, 2011.