NOTE 14. EQUITY-BASED COMPENSATION PLANS

As of December 31, 2017, we had two stock incentive plans under which performance stock awards (PSAs), restricted stock units (RSUs) and deferred compensation stock equivalent units were outstanding. All of these plans have received shareholder approval. We were originally authorized to issue up to 1.6 million shares and 1.0 million shares under our 2005 Stock Incentive Plan and 2014 Stock Incentive Plan, respectively. At December 31, 2017, approximately 0.4 million shares were authorized for future awards. We issue new shares of common stock to settle PSAs, RSUs and deferred compensation stock equivalent units. We estimate forfeitures each period.

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

(Dollars in thousands)	2017		2016		2015
Employee equity-based compensation expense:
Performance stock awards	$	3,582	$	3,437	$	3,877
Restricted stock units		1,140		953		881
Total employee equity-based compensation expense	$	4,722	$	4,390	$	4,758

Deferred compensation stock equivalent units expense	$	657	$	732	$	376

Total tax benefit recognized for shared-based payment awards	$	379	$	317	$	319

PERFORMANCE STOCK AWARDS

PSAs 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 measures are met. The performance measures are 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 PSA, could range from 0% to 200%. PSAs 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 dividend equivalents in the form of additional shares at the time of payment equal to the dividends 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 PSAs in 2017, 2016 and 2015, and the resulting fair values:

	2017			2016			2015
Stock price as of valuation date	$	43.60		$	25.92		$	40.00
Risk-free rate		1.61	%		0.88	%		1.07	%
Expected volatility		24.22	%		23.82	%		21.09	%
Expected dividends		3.44	%		5.79	%		3.75	%
Expected term (years)		3.00			3.00			3.00
Fair value of a performance share	$	53.85		$	30.02		$	36.71

The following table summarizes outstanding PSAs as of December 31, 2017, 2016 and 2015, and the changes during those years:

	2017					2016					2015
(Dollars in thousands, except per share amounts)	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		203,788		$	32.59		161,049		$	41.26		160,233		$	53.86
Granted		78,033		$	53.85		125,469		$	30.02		78,974		$	36.71
Vested		(78,129	)	$	36.71		(82,730	)	$	45.57		(77,078	)	$	62.78
Forfeited		(3,061	)	$	34.68		—		$	—		(1,080	)	$	41.29
Unvested shares outstanding at December 31		200,631		$	39.19		203,788		$	32.59		161,049		$	41.26
Total grant date fair value of share awards vested during the year	$	2,868				$	3,770				$	4,839
Aggregate intrinsic value of unvested share awards at December 31	$	10,011				$	8,488				$	4,697

As of December 31, 2017, there was $4.0 million of unrecognized compensation cost related to unvested PSAs, which is expected to be recognized over a weighted average period of 1.4 years.

RESTRICTED STOCK UNITS

Our 2005 Stock Incentive Plan and 2014 Stock Incentive Plan also allow for awards to be issued in the form of RSU grants. During 2017, 2016 and 2015, certain officers and other employees of the company were granted RSU awards that will accrue dividend equivalents based on dividends paid 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. 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.

The following table summarizes outstanding RSU awards as of December 31, 2017, 2016 and 2015, and the changes during those years:

	2017					2016					2015
(Dollars in thousands, except per share amounts)	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		71,420		$	31.61		44,531		$	40.95		32,455		$	42.24
Granted		26,507		$	43.64		43,320		$	26.08		27,820		$	39.99
Vested		(29,039	)	$	39.65		(16,431	)	$	39.92		(15,385	)	$	44.50
Forfeited		(1,017	)	$	31.63		—		$	—		(359	)	$	40.27
Unvested shares outstanding at December 31		67,871		$	32.87		71,420		$	31.61		44,531		$	40.95
Total grant date fair value of RSU awards vested during the year	$	1,151				$	656				$	289
Aggregate intrinsic value of unvested RSU awards at December 31	$	3,387				$	2,975				$	1,347

As of December 31, 2017, there was $1.1 million of total unrecognized compensation cost related to outstanding RSU awards, which is expected to be recognized over a weighted average period of 1.4 years.

DEFERRED COMPENSATION STOCK EQUIVALENT UNITS

A long-term incentive award is granted annually to our directors, and payable upon a director's separation from service. Directors may also elect to defer their annual retainers, payable in the form of stock. All stock unit equivalent accounts are credited with dividend equivalents. As of December 31, 2017, there were 141,938 shares outstanding that will be distributed in the future to directors as common stock.

Issuance of restricted stock units awarded to certain officers and employees may also be deferred. All stock unit equivalent accounts are credited with dividend equivalents. As of December 31, 2017, there were 74,067 RSUs which had vested, but issuance of the related stock had been deferred.