8.	STOCK-BASED COMPENSATION

On April 30, 2014, the Company’s stockholders approved the Trex Company, Inc. 2014 Stock Incentive Plan (“the Plan”), which was previously approved by the Board of Directors on February 19, 2014. The Plan amended and restated in its entirety the Trex Company, Inc. 2005 Stock Incentive Plan, as previously disclosed. The Plan is administered by the Compensation Committee of the Company’s Board of Directors. Stock-based compensation is granted to officers, directors and certain key employees in accordance with the provisions of the Plan. The Plan provides for grants of stock options, restricted stock, restricted stock units, stock appreciation rights (“SARs”), and unrestricted stock. The total aggregate number of shares of the Company’s common stock that may be issued under the Plan is 6,420,000, an increase of 60,000 shares from the previous plan and adjusted to reflect the two-for-one stock split distributed on May 7, 2014.

The Company recognizes stock-based compensation expense ratably over the period from grant date to the earlier of: (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For performance-based restricted stock, expense is recognized ratably over the performance and vesting period of each tranche based on management’s judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. For the employee stock purchase plan, compensation expense is recognized related to the discount on purchases. The following table summarizes the Company’s stock-based compensation expense for the years ended December 31, 2014, 2013 and 2012 (in thousands):


	Year Ended December 31,
	2014		2013		2012
Time-based restricted stock	$	2,974	$	2,461	$	2,035
Performance-based restricted stock		727		—		—
Stock appreciation rights		1,035		1,251		1,369
Employee stock purchase plan		71		99		65

Total stock-based compensation	$	4,807	$	3,811	$	3,469

Stock-based compensation expense is included in “Selling, general and administrative expenses” in the accompanying consolidated statements of comprehensive income.

Time-Based Restricted Stock

The fair value of time-based restricted stock is determined based on the closing price of the Company’s shares on the grant date. Shares of time-based restricted stock vest based on the terms of the awards. Unvested time-based restricted stock is generally forfeitable upon termination of a holder’s service as an employee unless the individual’s service is terminated due to retirement, death or permanent disability. The total fair value of time-based restricted shares vested for the years ended December 31, 2014, 2013 and 2012 was $3.9 million, $3.1 million, and $2.5 million, respectively. At December 31, 2014, there was $2.8 million of total compensation expense related to unvested time-based restricted stock remaining to be recognized over a weighted-average period of approximately 1.5 years.

Time-based restricted stock activity under the Plan and all predecessor stock incentive plans is as follows:


	Time-based Restricted Stock			Weighted-Average Grant Price Per Share
Nonvested at December 31, 2011		320,350		$	11.50
Granted		313,854		$	13.59
Vested		(189,410	)	$	13.44
Forfeited		(15,424	)	$	12.74

Nonvested at December 31, 2012		429,370		$	12.08
Granted		94,030		$	22.21
Vested		(139,594	)	$	22.28
Forfeited		(832	)	$	16.16

Nonvested at December 31, 2013		382,974		$	13.78
Granted		66,511		$	32.70
Vested		(116,641	)	$	33.73
Forfeited		(3,282	)	$	16.61

Nonvested at December 31, 2014		329,562		$	18.89

Performance-based Restricted Stock

In 2014, the Company began granting performance-based restricted stock in addition to the time-based restricted stock it previously granted. The fair value of performance-based restricted stock is determined based on the closing price of the Company’s shares on the grant date. Unvested performance-based restricted stock is generally forfeitable upon termination of a holder’s service as an employee unless the individual’s service is terminated due to retirement, death or permanent disability. The performance-based restricted shares have a three-year vesting period, vesting one-third each year based on target earnings before interest, taxes, depreciation and amortization, or “EBITDA”, for 1 year, cumulative 2 years and cumulative 3 years, respectively. With respect to each vesting, the number of shares that will vest will be between 0% and 200% of the target number of shares. As of December 31, 2014, no performance-based restricted shares had vested. At December 31, 2014, there was $0.6 million of total compensation expense related to unvested performance-based restricted stock remaining to be recognized over a weighted-average period of approximately 1.6 years.

Performance-based restricted stock activity under the Plan is as follows:


	Performance-based Restricted Stock		Weighted-Average Grant Price Per Share
Nonvested at December 31, 2013		—	$	—
Granted		42,676	$	33.72
Vested		—	$	—
Forfeited		—	$	—

Nonvested at December 31, 2014		42,676	$	33.72

Stock Appreciation Rights

SARs are granted with a grant price equal to the closing market price of the Company’s common stock on the date of grant. These awards expire ten years after the date of grant and vest based on the terms of the individual awards. The SARs are generally forfeitable upon termination of a holder’s service as an employee or director unless the individual’s service is terminated due to retirement, death or permanent disability. The Company recognizes compensation cost on a straight-line basis over the vesting period for the award. In 2006, the Company began the use of SARs instead of stock options.

As of December 31, 2014, there was $0.5 million of unrecognized compensation cost related to SARs expected to be recognized over a weighted-average period of approximately 6.5 years. The fair value of each SAR is estimated on the date of grant using a Black-Scholes option-pricing model. For SARs issued in the years ended December 31, 2014, 2013 and 2012, respectively, the assumptions shown in the following table were used:


	Year Ended December 31,
	2014			2013			2012
Dividend yield		0	%		0	%		0	%
Average risk-free interest rate		1.7	%		0.7	%		0.8	%
Expected term (years)		5			5			5
Expected volatility		52.6	%		63.7	%		65.9	%

Expected Volatility. Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company has used the historical volatility over the average expected term of the options granted as the expected volatility.

Risk-Free Interest Rate. The Company uses the U.S. Treasury rate having a term that most closely resembles the expected term of the option.

Expected Term. The expected term is the period of time that the SARs granted is expected to remain unexercised. SARs granted during the year ended December 31, 2014 had a maximum term of ten years. The Company used historical exercise behavior with further consideration given to the class of employees to whom the equity awards were granted to estimate the expected term of the SAR.

The forfeiture rate is the estimated percentage of equity awards granted that are expected to be forfeited or canceled before becoming fully vested. The Company estimates forfeitures based on historical experience with further consideration given to the class of employees to whom the equity awards were granted.

The weighted-average grant date fair value of SARs granted during the years ended December 31, 2014, 2013 and 2012 was $17.78, $11.67, and $7.06, respectively.

SAR activity under the Plan and all predecessor stock incentive plans is as follows:


	SARs			Weighted- Average Grant Price Per Share		Weighted- Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of December 31, 2014
Outstanding at December 31, 2011		2,325,410		$	6.59
Granted		201,828		$	12.88
Exercised		(1,135,906	)	$	6.54
Canceled		(16,952	)	$	12.08

Outstanding at December 31, 2012		1,374,380		$	9.28
Granted		121,176		$	21.95
Exercised		(749,334	)	$	7.70
Canceled		(7,028	)	$	13.10

Outstanding at December 31, 2013		739,194		$	12.93
Granted		3,866		$	37.88
Exercised		(218,826	)	$	10.96
Canceled		(8,404	)	$	4.74

Outstanding at December 31, 2014		515,830		$	13.98		6.5	$	14,754,320
Vested at December 31, 2014		383,488		$	12.55		6.1	$	11,514,749
Exercisable at December 31, 2014		383,488		$	12.55		6.1	$	11,514,749

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (“ESPP”) that permits eligible employees to purchase shares of common stock of the Company at a purchase price which is the lesser of 85% of the market price on either the first day of the calendar quarter or the last day of the calendar quarter. Eligible employees may elect to participate in the plan by authorizing payroll deductions of up to 15% of gross compensation for each payroll period. On the last day of each quarter, each participant’s contribution account is used to purchase the maximum number of whole shares of common stock determined by dividing the contribution account’s balance by the purchase price. The aggregate number of shares of common stock that may be purchased under the plan is 600,000, adjusted to reflect the two-for-one stock split distributed on May 7, 2014. Through December 31, 2014, employees had purchased approximately 407,000 shares under the plan.

Stock Options

Stock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. These awards expire ten years after the date of grant and vest based on the terms of the individual awards. The options are generally forfeitable upon termination of a holder’s service as an employee or director, unless the individual’s service is terminated due to retirement, death or permanent disability. The fair value of each stock option award is estimated on the date of grant using a Black-Scholes option-pricing model. The Company recognizes compensation cost on a straight-line basis over the vesting period for the award. Prior to 2006, the Company granted stock options and all stock options outstanding at December 31, 2014 are fully vested. In 2006, the Company began the use of SARs instead of stock options.

Stock option activity under the Plan and all predecessor stock incentive plans is as follows:


	Options			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of December 31, 2014
Outstanding at December 31, 2011		290,138		$	19.04
Granted		—		$	—
Exercised		(46,378	)	$	15.68
Canceled		(2,484	)	$	10.00

Outstanding at December 31, 2012		241,276		$	20.19
Granted		—		$	—
Exercised		(186,968	)	$	24.92
Canceled		(12,020	)	$	18.16

Outstanding at December 31, 2013		42,288		$	20.05
Granted		—		$	—
Exercised		(27,942	)	$	35.73
Canceled		(1,188	)	$	17.92

Outstanding at December 31, 2014		13,158		$	23.36		0.2	$	252,963
Vested at December 31, 2014		13,158		$	23.36		0.2	$	252,963
Exercisable at December 31, 2014		13,158		$	23.36		0.2	$	252,963