9.	STOCK-BASED COMPENSATION

On April 30, 2014, the Company’s stockholders approved the Trex Company, Inc. 2014 Stock Incentive Plan (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.

In 2014, the Company began granting performance-based restricted stock in addition to the time-based restricted stock it previously granted. 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 for 1 year, cumulative 2 years and cumulative 3 years, respectively. The number of shares that vest, with respect to each vesting, will be between 0% and 200% of the target number of shares.

In 2015, the Company began issuing restricted stock units in lieu of restricted stock. Accordingly, time-based restricted stock units replaced time-based restricted stock and performance-based restricted stock units replaced performance-based restricted stock. The vesting terms of the restricted stock units are identical to the vesting provisions of the restricted stock.

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 and performance-based restricted stock units, expense is recognized ratably over the performance and vesting period of each tranche based on management’s judgment of the ultimate award that is probable 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, 2016, 2015 and 2014 (in thousands):


	Year Ended December 31,
	2016		2015		2014
Time-based restricted stock and time-based restricted stock units	$	2,281	$	2,704	$	2,974
Performance-based restricted stock and performance-based restricted stock units		2,210		1,562		727
Stock appreciation rights		184		525		1,035
Employee stock purchase plan		113		70		71

Total stock-based compensation	$	4,788	$	4,861	$	4,807

Stock-based compensation expense is included in “Selling, general and administrative expenses” in the accompanying Consolidated Statements of Comprehensive Income.

Time-Based Restricted Stock and Time-Based Restricted Stock Units

The fair value of time-based restricted stock and time-based restricted stock units is determined based on the closing price of the Company’s shares on the grant date. Time-based restricted stock and time-based restricted stock units vest based on the terms of the awards. Unvested time-based restricted stock and unvested time-based restricted stock units are generally forfeitable upon the resignation of employment or termination of employment with cause. The total fair value of vested time-based restricted shares and vested time-based restricted stock units for the years ended December 31, 2016, 2015 and 2014 was $1.7 million, $9.8 million, and $3.9 million, respectively. At December 31, 2016, there was $1.5 million of total compensation expense related to unvested time-based restricted stock and unvested time-based restricted stock units remaining to be recognized over a weighted-average period of approximately 1.6 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, 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
Granted		57,598		$	43.81
Vested		(230,704	)	$	42.37
Forfeited		(48,549	)	$	20.20

Nonvested at December 31, 2015		107,907		$	29.43
Granted		57,874		$	37.64
Vested		(43,848	)	$	42.34
Forfeited		(133	)	$	43.89

Nonvested at December 31, 2016		121,800		$	31.59

Performance-based Restricted Stock and Performance-Based Restricted Stock Units

The fair value of performance-based restricted stock and performance-based restricted stock units is determined based on the closing price of the Company’s shares on the grant date. Unvested performance-based restricted stock and unvested performance-based restricted stock units are generally forfeitable upon the resignation of employment or termination of employment with cause. The performance-based restricted shares and performance-based restricted stock units have a three-year vesting period, vesting one-third each year based on target earnings before interest, taxes, depreciation and amortization (EBITDA) for 1 year, cumulative 2 years and cumulative 3 years, respectively. The number of shares that will vest, with respect to each vesting, will be between 0% and 200% of the target number of shares. At December 31, 2016 and 2015, there was $1.2 million and $0.6 million, respectively, of total compensation expense related to unvested performance-based restricted stock and unvested performance-based restricted stock units remaining to be recognized over a weighted-average period of approximately 2.0 years.

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


	Performance-based Restricted Stock and Performance-based Restricted Stock Units			Weighted-Average Grant Price Per Share
Nonvested at December 31, 2014		42,676		$	33.72
Granted		34,638		$	43.89
Vested		(35,679	)	$	41.91
Forfeited		(12,538	)	$	38.12

Nonvested at December 31, 2015		29,097		$	39.38
Granted		44,925		$	35.83
Vested		(14,949	)	$	35.71
Forfeited		(657	)	$	33.72

Nonvested at December 31, 2016		58,416		$	36.63

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 the resignation of employment or termination of employment with cause. The Company recognizes compensation cost on a straight-line basis over the vesting period for the award.

As of December 31, 2016, there was no unrecognized compensation cost related to SARs. The fair value of each SAR is estimated on the date of grant using a Black-Scholes option-pricing model. There were no SARs issued in the year ended December 31, 2016. For SARs issued in the years ended December 31, 2015 and 2014, respectively, the assumptions shown in the following table were used:


	December 31,
	2015			2014
Dividend yield		0	%		0	%
Average risk-free interest rate		1.6	%		1.7	%
Expected term (years)		5			5
Expected volatility		42.9	%		52.6	%

Dividend Yield. The Company has never paid cash dividends on its common stock.

Average 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 are expected to remain unexercised. SARs granted during the year ended December 31, 2015 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.

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.

The Company recognizes forfeitures as they occur.

The weighted-average grant date fair value of SARs granted during the years ended December 31, 2015 and 2014 was $16.26, and $17.78, 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, 2016
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
Granted		15,585		$	41.19
Exercised		(263,626	)	$	13.86
Canceled		(5,712	)	$	21.94

Outstanding at December 31, 2015		262,077		$	13.13
Granted		—		$	—
Exercised		(124,352	)	$	11.09
Canceled		—		$	—

Outstanding at December 31, 2016		137,725		$	19.57		5.6	$	6,174,886
Vested at December 31, 2016		127,469		$	17.83		5.4	$	5,936,639
Exercisable at December 31, 2016		127,469		$	17.83		5.4	$	5,936,639

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 balance by the purchase price. The aggregate number of shares of common stock that may be purchased under the plan is 600,000. Through December 31, 2016, employees had purchased approximately 422,687 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. All outstanding options were exercised during fiscal 2015 and there were no stock options outstanding at December 31, 2015 and 2016.

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


	Options			Weighted-Average Exercise Price Per Share
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
Granted		—		$	—
Exercised		(13,158	)	$	50.37
Canceled		—		$	—

Outstanding at December 31, 2015		—		$	—