EQUITY-BASED COMPENSATION PLANS

The following table details our compensation expense and the related income tax benefit as of December 31, 2012, 2011 and 2010:

(Dollars in thousands)



	2012		2011		2010
Employee equity-based compensation expense:
Performance shares	$	3,440	$	3,821	$	3,368
Restricted stock units	627		583		584
Total employee equity-based compensation expense	$	4,067	$	4,404	$	3,952

Director deferred compensation expense	$	2,008	$	619	$	946

Actual tax benefit realized for tax deductions from equity-based plans	$	525	$	—	$	—

PERFORMANCE SHARES

Performance share awards granted under the stock incentive plans have a three-year performance period and shares are issued at the end of the period if the performance measure is met. The performance measure is based on the percentile ranking of our total shareholder return relative to the total shareholder return performance of both a selected peer group of companies and a larger group of indexed companies over the three-year performance period. The number of shares actually issued, as a percentage of the amount subject to the performance share award, could range from 0% to 200%. Performance share awards granted under our stock incentive plans do not have voting rights unless and until shares are issued upon settlement. If shares are issued at the end of the three-year performance measurement period, the recipients will receive distribution equivalents in the form of additional shares at the time of payment equal to the distributions that would have been paid on the shares earned had the recipients owned the shares during the three-year period. Therefore, the shares are not considered participating securities.

A Monte Carlo simulation method is used to estimate the stock prices of Potlatch and the selected peer companies at the end of the three-year performance period. The expected volatility of each company’s stock price and covariance of returns among the peer companies are key assumptions within the Monte Carlo simulation. Historical volatility over a term similar to the performance period is considered a reasonable proxy for forecasted volatility. Likewise, because the returns of Potlatch and the peer group companies are correlated, the covariance, a measure of how two variables tend to move together, is calculated over a historical term similar to the performance period and applied in the simulations. The simulations use the stock prices of Potlatch and the peer group of companies as of the award date as a starting point. Multiple simulations are generated, resulting in share prices and total shareholder return values for Potlatch and the peer group of companies. For each simulation, the total shareholder return of Potlatch is ranked against that of the peer group of companies. The future value of the performance share unit is calculated based on a multiplier for the percentile ranking and then discounted to present value. The discount rate is the risk-free rate as of the award date for a term consistent with the performance period. Awards are also credited with dividend equivalents at the end of the performance period, and as a result, award values are not adjusted for dividends.

The following table presents the key inputs used in calculating the fair value of the performance share awards in 2012, 2011 and 2010, and the resulting fair values:



	2012			2011			2010
Shares granted	85,028			77,767			81,162
Stock price as of valuation date	$	31.11		$	39.10		$	31.88
Risk-free rate	0.40		%	1.26		%	1.29		%
Fair value of a performance share	$	34.24		$	55.84		$	45.30

The following table summarizes outstanding performance share awards as of December 31, 2012, 2011 and 2010, and changes during those years:

(Dollars in thousands – except per-share amounts)



	2012					2011					2010
	SHARES			WEIGHTED AVG. GRANT DATE FAIR VALUE		SHARES			WEIGHTED AVG. GRANT DATE FAIR VALUE		SHARES			WEIGHTED AVG. GRANT DATE FAIR VALUE
Unvested shares outstanding at January 1	154,594				$50.54	184,601				$38.45	171,595				$40.04
Granted	85,028			34.24		77,767			55.84		81,162			45.30
Vested	(76,812		)	45.30		(103,960		)	33.32		(57,291		)	52.75
Forfeited	(2,596		)	44.99		(3,814		)	42.77		(10,865		)	39.24
Unvested shares outstanding at December 31	160,214			44.50		154,594			50.54		184,601			38.45
Total grant date fair value of share awards vested during the year	$	3,480				$	3,464				$	3,022
Aggregate intrinsic value of unvested share awards at December 31	$	6,019				$	4,747				$	5,752

As of December 31, 2012, there was $3.3 million of unrecognized compensation cost related to unvested performance share awards, which is expected to be recognized over a weighted average period of 1.5 years.

RESTRICTED STOCK UNITS

Our 2005 Stock Incentive Plan also allows for awards to be issued in the form of RSU grants. During 2012, 2011 and 2010, certain officers and other select employees of the company were granted RSU awards that will accrue distribution equivalents based on distributions paid during the RSU vesting period. The distribution equivalents will be converted into additional RSUs that will vest in the same manner as the underlying RSUs to which they relate, therefore the shares are not considered participating securities. The terms of the awards state that the RSUs will vest in a given time period of one to three years, and the terms of certain awards follow a vesting schedule within the given time period.

A summary of the status of outstanding RSU awards as of December 31, 2012, 2011 and 2010, and changes during these years is presented below:



	2012					2011					2010
	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	36,359				$35.60	41,715				$29.37	41,559				$32.57
Granted	20,225			31.53		18,053			38.57		21,559			33.17
Vested	(14,861		)	32.41		(21,510		)	26.26		(16,639		)	42.23
Forfeited	(1,504		)	33.36		(1,899		)	32.78		(4,764		)	29.56
Unvested shares outstanding at December 31	40,219			34.82		36,359			35.60		41,715			29.37
Total grant date fair value of RSU awards vested during the year (in thousands)	$	482				$	565				$	703
Aggregate intrinsic value of unvested RSU awards at December 31 (in thousands)	$	1,575				$	1,131				$	1,395

As of December 31, 2012, there was $0.6 million of total unrecognized compensation cost related to outstanding RSU awards, which is expected to be recognized over a weighted average period of 1.0 years.

STOCK OPTIONS

All outstanding stock options were granted with an exercise price equal to the market price on the date of grant, were fully exercisable after two years and expire not later than 10 years from the date of grant. No new stock options were granted in 2012, 2011 or 2010.

A summary of the status of outstanding stock options as of December 31, 2012, 2011 and 2010 and changes during those years is presented below:



	2012					2011					2010
	SHARES			WEIGHTED AVG. EXERCISE PRICE		SHARES			WEIGHTED AVG. EXERCISE PRICE		SHARES			WEIGHTED AVG. EXERCISE PRICE
Outstanding at January 1	144,684				$23.34	222,130				$21.64	329,426				$21.14
Shares exercised	(60,857		)	17.66		(77,446		)	18.47		(107,296		)	20.10
Outstanding and exercisable at December 31	83,827			27.46		144,684			23.34		222,130			21.64
Total intrinsic value of options exercised during the year (in thousands)	$	938				$	1,496				$	1,609

There were no unvested stock options outstanding during 2012, 2011 or 2010.

The following table summarizes information about stock options outstanding at December 31, 2012:



	OPTIONS OUTSTANDING AND EXERCISABLE
RANGE OF OPTION PRICES	NUMBER OUTSTANDING AT 12/31/12	WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE	WEIGHTED AVERAGE OPTION PRICE		AGGREGATE INTRINSIC VALUE (IN THOUSANDS)
$19.2569	24,882	0.92 years	$	19.26
$30.9204	58,945	1.92 years	30.92
$19.2569 to $30.9204	83,827	1.62 years	27.46		$	980

Cash received from stock option exercises for the years ended December 31, 2012, 2011 and 2010 was $1.1 million, $1.4 million and $2.2 million, respectively.