SHARE-BASED COMPENSATION

This note provides details about:


•	our Long-Term Incentive Compensation Plan (2013 Plan),


•	share-based compensation resulting from our merger with Plum Creek,


•	how we account for share-based awards,


•	tax benefits of share-based awards,


•	types of share-based compensation,


•	unrecognized share-based compensation and


•	deferred compensation stock equivalent units.

Share-based compensation expense was:


•	$42 million in 2018,


•	$40 million in 2017 and


•	$60 million in 2016.

The 2016 amount above contains a $6 million award to employees of the divested Cellulose Fibers businesses which is included in our results of discontinued operations.

OUR LONG-TERM INCENTIVE COMPENSATION PLAN

Our long-term incentive plans provide for share-based awards that include:


•	restricted stock,


•	restricted stock units (RSUs),


•	performance shares,


•	performance share units (PSUs),


•	stock options and


•	stock appreciation rights (SARs).

We may issue future grants of up to 21 million shares under the 2013 Plan. We also have the right to reissue forfeited and expired grants.

For restricted stock, RSUs, performance shares, PSUs 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.

For stock options and SARs:


•	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.

We have not granted any additional SARs since 2016. Additionally, the remaining liability related to SARs is immaterial at December 31, 2018.

The Compensation Committee of our board of directors 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 30 million shares if all share-based awards were exercised or vested. These include:


•	all options, RSUs and PSUs outstanding at December 31, 2018, under the 2013 Plan and 2004 Plan; and


•	all remaining options, RSUs and PSUs that could be granted under the 2013 Plan.

SHARE-BASED COMPENSATION RESULTING FROM OUR MERGER WITH PLUM CREEK

Replacement awards were granted as a result of the merger with Plum Creek. Eligible outstanding Plum Creek stock options, RSUs and deferred stock unit awards were converted into equivalent equity awards with respect to Weyerhaeuser Common Shares, after giving effect to the appropriate adjustments to reflect the consummation of the merger.

In total, we issued replacement awards consisting of 1,953 thousand stock options and 1,248 thousand RSUs. The replacement stock option awards were fully vested and had a total value of $5 million, which was included in the equity consideration issued with the merger. Qualifying terminations during 2016 resulted in accelerated vesting of 705 thousand of the replacement RSUs and recognition of $15 million of expense. The accelerated expense is included in the merger-related integration costs as described in Note 18: Charges for Integration and Restructuring, Closures and Asset Impairments.

We also assumed 289,910 value management awards (VMAs) through the merger with Plum Creek. Qualifying terminations during 2016 resulted in $6 million of expense recognized for VMAs. This accelerated expense is included in merger-related integration costs as described in Note 18: Charges for Integration and Restructuring, Closures and Asset Impairments.

HOW WE ACCOUNT FOR SHARE-BASED AWARDS

When accounting 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:


•	$5 million in 2018,


•	$6 million in 2017 and


•	$12 million in 2016.

The 2016 amount above contains a $2 million income tax benefit from share-based awards to employees that were part of the Cellulose Fibers divestitures which is included in our results of discontinued operations.

Tax benefits from share-based awards are accrued as stock compensation expense and realized when:


•	restricted shares and RSUs vest,


•	performance shares and PSUs vest,


•	stock options are exercised and


•	SARs are exercised.

TYPES OF SHARE-BASED COMPENSATION

Our share-based compensation is in the form of:


•	restricted stock units,


•	performance share units,


•	stock options and


•	stock appreciation rights.

RESTRICTED STOCK UNITS

Through the 2013 Plan, we award RSUs — grants that entitle the holder to shares of our stock as the award vests.

The Details

Our RSUs granted in 2018, 2017 and 2016 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;


•	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 RSUs is the market price of our stock on the grant-date of the awards.

We generally record share-based compensation expense for RSUs over the four-year vesting period. Generally, for RSUs 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 RSU activity for 2018.



	RESTRICTED STOCK UNITS (IN THOUSANDS)		WEIGHTED AVERAGE GRANT-DATE FAIR VALUE
Nonvested at December 31, 2017	1,515		$	29.12
Granted	710		34.19
Vested	(560	)	28.81
Forfeited	(72	)	$	30.19
Nonvested at December 31, 2018⁽¹⁾	1,593		$	31.41
(1) As of December 31, 2018, there were approximately 336 thousand RSUs that had met the requisite service period and will be released as identified in the grant terms.

The weighted average grant-date fair value for RSUs was:


•	$34.19 in 2018,


•	$32.83 in 2017 and


•	$30.25 in 2016.

The total grant-date fair value of RSUs vested was:


•	$16 million in 2018,


•	$18 million in 2017 and


•	$36 million in 2016.

Nonvested RSUs accrue dividends that are paid out when RSUs vest. Any RSUs forfeited will not receive dividends.

As RSUs 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

Through the 2013 Plan, we award PSUs — grants that entitle the holder to shares of our stock as the award vests.

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.

For shares granted in 2018 and 2017, the ultimate number of PSUs earned is based on two measures:


•	our relative total shareholder return (TSR) ranking measured against the S&P 500 over a three-year period and


•	our relative TSR ranking measured against an industry peer group of companies over a three-year period.

For shares granted in 2016, the ultimate number of PSUs earned is based on three measures:


•	our relative total shareholder return (TSR) ranking measured against the S&P 500 over a three-year period,


•	our relative TSR ranking measured against an industry peer group of companies over a three-year period and


•	achievement of Plum Creek merger cost synergy targets.

The vesting provisions for PSUs granted in 2018, 2017, and 2016 were as follows:


•	vest 100 percent on the third anniversary of the grant date as long as the individual remains employed by the company;


•	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;


•	continue vesting for one year in the event of involuntary termination when the retirement criteria has not been met and the employee has met the second anniversary of the grant date; and


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

Our Accounting

Since the awards contain 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 over the performance period. Compensation expense is based on the estimated probable number of earned awards and recognized over the 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



	2018 GRANTS		2017 GRANTS		2016 GRANTS
Performance period	1/1/2018-12/31/2020		1/1/2017 – 12/31/2019		1/1/2016 – 12/31/2018
Expected dividends	3.81%		3.74%		3.92% - 5.37%
Risk-free rate	1.75% - 2.34%		0.68% - 1.55%		0.45% - 0.97%
Volatility	17.30% - 21.52%		22.71% - 24.07%		21.87% - 28.09%
Weighted average grant-date fair value	$	35.49	$	37.93	$	22.58

Activity

The following table shows our PSU activity for 2018.



	GRANTS (IN THOUSANDS)		WEIGHTED AVERAGE GRANT-DATE FAIR VALUE
Nonvested at December 31, 2017	965		$	30.87
Granted at target	343		35.49
Vested	(112	)	32.79
Forfeited	(26	)	37.93
Performance adjustment	(128	)	$	34.74
Nonvested at December 31, 2018⁽¹⁾	1,042		$	31.52
(1) As of December 31, 2018, there were approximately 232 thousand PSUs that had met the requisite service period and will be released as identified in the grant terms.

The total grant-date fair value of PSUs vested was:


•	$4 million in 2018,


•	$4 million in 2017 and


•	$8 million in 2016.

As PSUs 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 OPTIONS

Stock options entitle award recipients to purchase shares of our common stock at a fixed exercise price. During 2018 and 2017, we did not grant any stock option awards. When granted in prior years, however, we granted 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,


•	must be exercised within 10 years of the grant-date and


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

Activity

The following table shows our option unit activity for 2018.



	OPTIONS (IN THOUSANDS)		WEIGHTED AVERAGE EXERCISE PRICE		WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (IN YEARS)	AGGREGATE INTRINSIC VALUE (IN MILLIONS)
Outstanding at December 31, 2017	8,487		$	26.47
Exercised	(2,025	)	$	25.68
Forfeited or expired	(96	)	$	25.02
Outstanding at December 31, 2018⁽¹⁾	6,366		$	26.75	5.33	$	4
Exercisable at December 31, 2018	4,732		$	27.14	4.78	$	4
(1) As of December 31, 2018, there were approximately 573 thousand stock options that had met the requisite service period and will be released as identified in the grant terms.

The total intrinsic value of stock options exercised was:


•	$22 million in 2018,


•	$68 million in 2017 and


•	$18 million in 2016.

UNRECOGNIZED SHARE-BASED COMPENSATION

As of December 31, 2018, our unrecognized share-based compensation cost for all types of share-based awards included $33 million related to non-vested equity-classified share-based compensation arrangements — expected to be recognized over a weighted average period of approximately 1.1 years.

DEFERRED COMPENSATION STOCK EQUIVALENT UNITS

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

The Details

The 2013 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 RSUs, 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. The number of common shares to be issued in the future to directors is 639 thousand.

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 were:


•	788 thousand as of December 31, 2018,


•	804 thousand as of December 31, 2017 and


•	1,004 thousand as of December 31, 2016.