Equity-Based Compensation Plans

At December 31, 2017, we have two stock incentive plans in place: the Clearwater Paper Corporation Amended and Restated 2008 Stock Incentive Plan which became effective on December 16, 2008, and was amended and restated effective as of February 27, 2015, and the Clearwater Paper Corporation 2017 Stock Incentive Plan, which became effective February 28, 2017, collectively referred to as, the Stock Plans. Our Stock Plans have been approved by our stockholders, and provide for equity-based awards in the form of restricted shares, restricted stock units, or RSUs, performance shares, stock options or stock appreciation rights to selected employees, outside directors, and consultants of the company.

Under our Stock Plans we are authorized to issue up to approximately 6.2 million shares, which includes approximately 0.7 million additional shares authorized in connection with our acquisition of Cellu Tissue that are available for issuance as equity-based awards only to any employees, outside directors, or consultants who were not employed on December 26, 2010 by Clearwater Paper Corporation or any of its subsidiaries. At December 31, 2017, approximately 3.6 million shares were available for future issuance under the Stock Plans.

We recognize equity-based compensation expense for all equity-based payment awards made to employees and directors, including RSUs, performance shares and stock options, based on estimated fair values and net of estimates of future forfeitures. The expense is classified in "Selling, general and administrative expense" in our Consolidated Statements of Operations and is recognized on a straight-line basis over the requisite service periods of each award.

Based on the terms of the Clearwater Paper Corporation Amended and Restated 2008 Stock Incentive Plan, and for grants prior to 2017, employees who were retirement-eligible during the service period became fully vested in outstanding awards on the later of the date they reached retirement eligibility or at the end of the first calendar year of each respective grant. We account for this feature when determining the service period over which to recognize expense for each grant of RSUs, performance shares, and stock options. For the Clearwater Paper Corporation 2017 Stock Incentive Plan and for grants beginning in 2017, employees who are retirement-eligible during the service period become fully vested in outstanding awards on a prorated basis based on the portion of the service period for which they were employed in alignment with the terms of each respective grant type as outlined in the respective stock plan. Employees are not eligible to receive shares until the end of the applicable service period for performance shares, and the applicable vesting period for RSUs and stock options.

Employee equity-based compensation expense was recognized as follows:



(In thousands)	2017		2016		2015
Restricted stock units	$	1,618	$	1,381	$	2,116
Performance shares	2,283		3,311		4,408
Stock options	2,552		2,913		2,106
Total employee equity-based compensation	$	6,453	$	7,605	$	8,630
Related tax benefit	$	2,149	$	2,767	$	3,193

RESTRICTED STOCK UNITS

RSUs granted under our Stock Plans are generally subject to a vesting period of one to three years, with generally the same service period. RSU awards will accrue dividend equivalents based on dividends paid, if any, during the RSU vesting period. The dividend equivalents will be converted into additional RSUs that will vest in the same manner as the underlying RSUs to which they relate. RSUs granted under our Stock Plans do not represent common stock, and therefore the holders do not have voting rights unless and until shares are issued upon settlement.

A summary of the status of outstanding unvested RSU awards as of December 31, 2017, 2016, and 2015, and changes during those years, is presented below:



	2017				2016				2015
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Unvested shares outstanding at
January 1	54,460		$	47.16	46,029		$	60.17	93,254		$	47.95
Granted	66,774		56.45		44,627		39.10		23,148		62.02
Vested	(17,531	)	62.75		(29,338	)	55.16		(65,217	)	43.86
Forfeited	(9,232	)	53.52		(6,858	)	47.80		(5,156	)	58.58
Unvested shares outstanding at December 31	94,471		50.22		54,460		47.16		46,029		60.17
Aggregate intrinsic value (in thousands)			$	4,289			$	3,570			$	2,096

During 2017, 25,940 RSU shares were settled and distributed in common stock. Of these shares, 20,940 were RSU shares that were settled and distributed in the fourth quarter of 2017. Another 1,775 shares were RSU shares that were settled in prior years but distribution had been deferred to preserve tax deductibility for the Company in the respective years because distribution of these shares would have resulted in certain executive compensation being above the Internal Revenue Code section 162(m) threshold for those years. After adjusting for minimum tax withholdings, a net 17,834 shares were issued during 2017. The minimum tax withholdings payment made in 2017 in connection with issued shares was $1.1 million.

During 2016, 45,143 RSU shares were settled and distributed, of which 19,196 shares were settled and distributed in the fourth quarter. After adjusting for minimum tax withholdings and deferred shares, a net 30,093 shares were issued during 2016. The minimum tax withholdings payment made in 2016 in connection with issued shares was $0.9 million.

As of December 31, 2017 a total of 33,663 shares remain deferred under Internal Revenue Code section 162(m).

The fair value of each RSU share award granted during 2017 was estimated on the date of grant using the grant date market price of our common stock. The total fair value of share awards that vested during 2017 was $1.1 million.

As of December 31, 2017, there was $2.8 million of total unrecognized compensation cost related to outstanding RSU awards. The cost is expected to be recognized over a weighted average period of 1.8 years.

PERFORMANCE SHARES

Performance share awards granted under our Stock Plan have a three-year performance period, with generally the same service period, and shares are issued after the end of the period if the employee provides the requisite service and the performance measure is met. For 2016 and prior years, and for 40% of performance shares granted in 2017, the performance measure used was a comparison of the percentile ranking of our total stockholder return (TSR) compared to the TSR performance of a selected peer group or index. The performance measure is considered to represent a “market condition” under authoritative accounting guidance, and thus, the market condition is considered when determining the estimate of the fair value of the performance share awards. In 2017, for 60% of the performance share awards granted, a return on invested capital (ROIC) performance measure is being used to determine the number of performance shares ultimately issuable. The final ROIC calculation is the average of the three one-year ROIC results for each year in the performance period. The number of shares actually issued, as a percentage of the amount subject to the performance share award, could range from 0%-200%.

Performance share awards granted under our Stock Plans do not represent common stock, and therefore the holders do not have voting rights unless and until shares are issued upon settlement. During the performance period, dividend equivalents accrue based on dividends paid, if any, and are converted into additional performance shares, which vest or are forfeited in the same manner as the underlying performance shares to which they relate. Generally, if an employee terminates prior to completing the requisite service period, all or a portion of their awards are forfeited and the previously recognized compensation cost is reversed. If an employee provides the requisite service through the end of the performance period, but the performance measure is not met, following authoritative guidance for awards with a market condition, previously recognized compensation cost is not reversed.

The fair value of performance share awards is estimated using a Monte Carlo simulation model. For performance shares granted in 2017, the following assumptions were used in our Monte Carlo model:



Closing price of stock on date of grant	$	56.75
Risk free rate	1.42		%
Measurement period	3 years
Volatility	35		%

In addition to the above assumptions, the dividend yields for all companies were assumed to be zero since dividends are included in the definition of total stockholder return.

A summary of the status of outstanding performance share awards as of December 31, 2017, 2016, and 2015, and changes during those years, is presented below:



	2017				2016				2015
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Outstanding share awards at January 1	175,683		$	62.26	92,563		$	84.18	300,864		$	59.77
Granted	33,907		58.58		93,397		39.70		47,513		62.05
Settled	(87,491	)	84.65		—		—		(245,525	)	50.43
Forfeited	(4,847	)	47.61		(10,277	)	54.55		(10,289	)	73.61
Outstanding share awards at December 31	117,252		45.10		175,683		62.26		92,563		84.18
Aggregate intrinsic value (in thousands)			$	5,323			$	11,516			$	4,214

On December 31, 2017, the three-year performance period for 41,538 performance shares granted in 2015 ended. The requisite market condition performance measure was not met, and as such no shares were paid or issued under those awards.

On December 31, 2016, the service and performance period for 45,953 outstanding shares granted in 2014 ended. Those performance shares were settled and distributed in the first quarter of 2017. The number of shares actually settled, as a percentage of the outstanding amount, was 89.0%. After adjusting for the related minimum tax withholdings, a net 27,878 shares were issued in the first quarter of 2017.

As of December 31, 2017, there was $2.3 million of unrecognized compensation cost related to outstanding performance share awards. The cost is expected to be recognized over a weighted average period of 1.2 years.

STOCK OPTIONS

Beginning in 2014, stock options were granted to certain employees under our Stock Plans. The stock options are generally subject to a vesting period of one to three years, with generally the same service period. Upon vesting, the holder is entitled to purchase a specified number of shares of Clearwater Paper common stock at a price per share equal to the closing market price of Clearwater Paper common stock on the date of grant. Once options have vested they are exercisable. The options are exercisable for 10 years from the date of grant.

Stock options granted under our Stock Plan do not represent common stock, and therefore the holders do not have voting rights unless and until shares have been issued to the employee.

The fair value of stock option awards was determined using a Black-Scholes option-pricing model. The Black-Scholes model utilizes a range of assumptions related to dividend yield, volatility, risk-free interest rate and employee exercise behavior. Expected volatility is based on Clearwater Paper's historical stock prices. The risk-free interest rate is based on constant maturity treasury rates with maturities matching the options' expected life on the grant date. The expected life, estimated in accordance with Securities and Exchange Commission Staff Accounting Bulletin 110, is the approximate mid-point between the expected vesting time and the remaining contractual life.



Volatility	30	%
Risk-free interest rate	2.05	%
Expected life-years	6.0

A summary of the status of outstanding stock option awards as of December 31, 2017, and changes during the year, is presented below:



		Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding options at December 31, 2014		150,580		$	66.84				$	258
Granted		142,542		61.93		$	20.82
Forfeited		(15,429	)	64.12
Outstanding options at December 31, 2015		277,693		$	64.47				$	—
Granted		280,191		38.86		14.42
Forfeited		(30,830	)	47.79
Outstanding options at December 31, 2016		527,054		$	51.83				$	7,232
Granted		158,484		56.45		18.82
Forfeited		(22,306	)	50.74
Expired		(5,913	)	66.97
Outstanding options at December 31, 2017	2,017	657,319		$	52.84			7.4	$	—

As of December 31, 2017, there was $3.1 million of unrecognized compensation cost related to nonvested stock options. The cost is expected to be recognized over a weighted average period of 1.4 years.

During 2017, 124,617 stock option awards vested with a weighted average exercise price of $61.95 and total fair value of $7.7 million. These options are outstanding at December 31, 2017 and became exercisable on January 1, 2018. The weighted average remaining contractual term of options that vested during the year is 7.0 years.

Exercisable stock option awards are included in the detail of outstanding stock option awards above. A summary of the status of exercisable stock option awards as of December 31, 2017, and changes during the year, is presented below:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Exercisable options at January 1, 2017	137,860		$	66.85
Expired	(5,913	)	66.97
Exercisable options at December 31, 2017	131,947		$	66.85	6.0	$	—

DIRECTOR AWARDS

In connection with joining our Board of Directors, in January 2009 our outside directors at that time were granted an award of phantom common stock units, which were credited to an account established on behalf of each director and vested ratably over a three-year period with the final vesting in January 2012. Subsequent equity awards have been granted annually in May, or on a pro-rata basis as applicable, to our outside directors in the form of phantom common stock units as part of their annual compensation, which are credited to their accounts. These awards vest ratably over a one-year period. These accounts will be credited with additional phantom common stock units equal in value to dividends paid, if any, on the same amount of common stock. Upon separation from service as a director, the vested portion of the phantom common stock units held by the director in a stock unit account are converted to cash based upon the then market price of the common stock and paid to the director.

Due to its cash-settlement feature, we account for these awards as liabilities rather than equity and recognize the equity-based compensation expense or income at the end of each reporting period based on the portion of the award that is vested and the increase or decrease in the value of our common stock.

We recorded director equity-based compensation benefit totaling $2.8 million for the year ended December 31, 2017, compensation expense totaling $4.8 million for the year ended December 31, 2016, and compensation benefit totaling $4.1 million for the year ended December 31, 2015.

At December 31, 2017, the liability amounts associated with director equity-based compensation included in "Other long-term obligations" and "Accounts payable and accrued liabilities" on our Consolidated Balance Sheet were $3.6 million and $2.4 million, respectively. At December 31, 2016, the liability amounts associated with director equity-based compensation in "Other long-term obligations" and "Accounts payable and accrued liabilities" on our Consolidated Balance Sheet were $7.9 million and $3.2 million, respectively.