INCENTIVE STOCK PLANS

The Rayonier Incentive Stock Plan (“the Stock Plan”) provides up to 15.8 million shares to be granted for incentive stock options, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and restricted stock units, subject to certain limitations. At December 31, 2014, a total of 6.2 million shares were available for future grants under the Stock Plan. Under the Stock Plan, shares available for issuance are reduced by 1 share for each option or right granted and by 2.27 shares for each performance share, restricted share or restricted stock unit granted. The Company issues new shares of stock upon the exercise of stock options, the granting of restricted stock, and the vesting of performance shares.

Total stock-based compensation cost recorded in “Selling and general expenses” was $7.1 million, $10.7 million and $14.2 million for the years ended December 31, 2014, 2013 and 2012, respectively. For the years ended December 31, 2014, 2013 and 2012, stock-based compensation expense of $0.7 million, $0.9 million and $0.8 million, respectively, was recorded in “Cost of sales.” Stock-based compensation expense of $0.1 million was capitalized to “Timber and Timberlands, net” in each of the years ended December 31, 2014, 2013 and 2012 as part of the allocation of timber-related costs.

Tax benefits recognized related to stock-based compensation expense for the three years ended December 31, 2014 were $1.7 million, $3.1 million and $4.0 million, respectively.

As a result of the spin-off and pursuant to the Employee Matters Agreement, the Company made certain adjustments to the exercise price and number of Rayonier stock-based compensation awards, which are described below. For additional information on the spin-off of the Performance Fibers business, see Note 3 — Discontinued Operations.

Fair Value Calculations by Award

Restricted Stock

Restricted stock granted under the Stock Plan generally vests upon completion of a one to five year period. The fair value of each share granted is equal to the share price of the Company’s stock on the date of grant. Restricted stock was impacted by the spin-off as follows:

•

Holders of Rayonier restricted stock, including Rayonier non-employee directors, retained those awards and also received restricted stock of Rayonier Advanced Materials, in an amount that reflects the distribution to Rayonier stockholders, by applying the distribution ratio (one share of Rayonier Advanced Materials for every three shares of Rayonier stock held) to Rayonier restricted stock awards as though they were unrestricted Rayonier common shares.

•

Performance share awards granted in 2013 (with a 2013-2015 performance period) were cancelled as of the distribution date and were replaced with time-vested restricted stock of the post-separation employer of each holder (Rayonier or Rayonier Advanced Materials, as the case may be). The restricted shares will vest 24 months after the distribution date, generally subject to the holder’s continued employment. The number of shares of restricted stock granted was determined in a manner intended to preserve the original value of the performance share award.

The Company compared the fair value of the reissued restricted stock held by Rayonier employees with the fair value of the restricted stock and 2013 performance share awards immediately before the modification. The replacement of the 2013 performance share awards with restricted stock resulted in $0.7 million of incremental value. After adjusting the incremental value for cancellations prior to December 31, 2014, the additional expense to be recognized over the two-year vesting period ending in the second quarter of 2016 totaled $0.4 million.

As of December 31, 2014, there was $4.2 million of unrecognized compensation cost related to Rayonier and Rayonier Advanced Materials restricted stock held by Rayonier employees. The Company expects to recognize this cost over a weighted average period of 3.5 years.

A summary of the Company’s restricted shares is presented below:



	2014	2013	2012
Restricted shares granted	186,783	33,607	18,742
Weighted average price of restricted shares granted	$36.42	$57.54	$42.40
(Amounts in millions)
Intrinsic value of restricted stock outstanding (a)	$5.1	$1.7	$2.1
Fair value of restricted stock vested	$1.3	$1.3	$1.8
Cash used to pay the minimum withholding tax requirements in lieu of receiving common shares	—	$0.3	$0.6


(a)	Intrinsic value of restricted stock outstanding is based on the market price of the Company’s stock at December 31, 2014.



	2014
	Number of Shares			Weighted Average Grant Date Fair Value
Non-vested Restricted Shares at January 1,	39,232			$55.66
Granted	186,783		(a)	36.42
Vested	(23,599	)		55.86
Cancelled	(18,393	)		39.90
Non-vested Restricted Shares at December 31,	184,023		(b)	$37.53


(a)	Includes restricted shares granted to Rayonier employees in replacement of the 2013 performance share awards.


(b)	Represents all Rayonier restricted shares outstanding as of December 31, 2014, including 2012 restricted share awards held by Rayonier Advanced Materials employees.

Performance Share Units

The Company’s performance share units generally vest upon completion of a three-year period. The number of shares, if any, that are ultimately awarded is contingent upon Rayonier’s total shareholder return versus selected peer group companies. The performance share payout is based on a market condition and as such, the awards are valued using a Monte Carlo simulation model. The model generates the fair value of the award at the grant date, which is then amortized over the vesting period.

Performance share awards outstanding as of the spin-off were treated as follows:

•

Performance share awards granted in 2012 (with a 2012-2014 performance period) remained subject to the same performance criteria as applied immediately prior to the spin-off, except that total shareholder return at the end of the performance period was based on the combined stock prices of Rayonier and Rayonier Advanced Materials and any payment earned was to be in shares of Rayonier common stock and shares of Rayonier Advanced Materials common stock.


•	Performance share awards granted in 2013 (with a 2013-2015 performance period) were cancelled as of the distribution date and were replaced with time-vested restricted stock of the post-separation employer of each holder, as discussed in the Restricted Stock section above.

•

Performance share awards granted in 2014 (with a 2014-2016 performance period) were cancelled and replaced with performance share awards of the post-separation employer of each holder (Rayonier or Rayonier Advanced Materials, as the case may be), and are subject to the achievement of performance criteria that relate to the post-separation business of the applicable employer during a performance period ending December 31, 2016. The number of shares underlying each such performance share award were determined in a manner intended to preserve the original value of the award.

A comparison of the fair value of modified performance share awards held by Rayonier employees with the fair value of the awards immediately before the modification did not yield any incremental value. As such, the Company did not record any incremental compensation expense related to performance shares. The replacement of the 2013 performance share awards with time-vested restricted stock did result in incremental compensation expense, as discussed above.

The Stock Plan allows for the cash settlement of the minimum required withholding tax on performance share unit awards. As of December 31, 2014, there was $1.6 million of unrecognized compensation cost related to the Company’s performance share unit awards, which is solely attributable to awards granted in 2014 to Rayonier employees. This cost is expected to be recognized over a weighted average period of 2.0 years.

A summary of the Company’s performance share units is presented below:



	2014	2013	2012
Common shares of Company stock reserved for performance shares	130,164	276,240	337,360
Weighted average fair value of performance share units granted	$40.33	$59.16	$56.36
(Amounts in millions)
Intrinsic value of outstanding performance share units (a)	$5.8	$22.1	$36.3
Fair value of performance shares vested	—	$7.0	$22.2
Cash used to pay the minimum withholding tax requirements in lieu of receiving common shares	$1.8	$11.0	$7.2


(a)	Intrinsic value of outstanding performance share units is based on the market price of the Company's stock at December 31, 2014.



	2014
	Number of Units			Weighted Average Grant Date Fair Value
Outstanding Performance Share units at January 1,	524,746			$54.57
Granted	286,340		(a)	40.33
Units Distributed	(231,717	)		50.63
Cancelled at Spin-off	(315,297	)		48.28
Other Cancellations/Adjustments	(55,048	)		46.59
Outstanding Performance Share units at December 31,	209,024			$51.01


(a)	Includes performance shares reissued to Rayonier employees subsequent to the cancellation of the 2014 performance shares at spin-off.

Expected volatility was estimated using daily returns on the Company’s common stock for the three-year period ending on the grant date. The risk-free rate was based on the 3-year U.S. treasury rate on the date of the award. The dividend yield was not used to calculate fair value as all awards granted after January 1, 2010 receive dividend equivalents. The following chart provides a tabular overview of the assumptions used in calculating the fair value of the awards granted for the three years ended December 31, 2014:



	2014 (a)		2013		2012
Expected volatility	19.7	%	23.2	%	36.9	%
Risk-free rate	0.7	%	0.4	%	0.4	%


(a)	Represents assumptions used in the July 2014 valuation of re-issued 2014 performance share units with a remaining term of 2.5 years. The initial fair value of the 2014 awards assumed an expected volatility of 22.8% and a risk-free rate of 0.8%.

Non-Qualified Employee Stock Options

The exercise price of each non-qualified stock option granted under the Stock Plan is equal to the closing market price of the Company’s stock on the grant date. Under the Stock Plan, the maximum term is ten years from the grant date. Awards vest ratably over three years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility for each grant and is calculated using the historical change in the daily market price of the Company’s common stock over the expected life of the award. The expected life is based on prior exercise behavior. The Company has elected to value each grant in total and recognize the expense for stock options on a straight-line basis over three years.

At the time of the spin-off, each Rayonier stock option was converted into an adjusted Rayonier stock option and a Rayonier Advanced Materials stock option. The exercise price and number of shares subject to each stock option were adjusted in order to preserve the aggregate value of the original Rayonier stock option as measured immediately before and immediately after the spin-off. A comparison of the fair value of modified awards held by Rayonier employees, including options in both Rayonier and Rayonier Advanced Materials shares, with the fair value of the awards immediately before the modification did not yield any incremental value. As such, the Company did not record any incremental compensation expense related to stock options.

The following table provides an overview of the weighted average assumptions and related fair value calculations of options granted for the three years ended December 31, 2014:



	2014 (a)		2013		2012
Expected volatility	39.3	%	39.0	%	39.3	%
Dividend yield	4.6	%	3.4	%	3.6	%
Risk-free rate	2.2	%	1.0	%	1.3	%
Expected life (in years)	6.3		6.3		6.4
Fair value per share of options granted (b)	$10.58		$14.01		$11.85
Fair value of options granted (in millions)	$3.2		$2.7		$2.8


(a)	The majority of 2014 stock option awards were granted prior to the spin-off. As such, the weighted average assumptions and fair values reflect pre-spin information, including dividends, stock prices and grants to Rayonier Advanced Materials employees in addition to Rayonier employees.


(b)	The fair value per share of each option grant was adjusted at the spin-off to preserve the aggregate value of the original Rayonier stock option. The adjusted weighted average fair value per share applied to Rayonier employee awards was $8.23 for 2014 grants, $10.70 for 2013 grants and $9.04 for 2012 grants.

A summary of the status of the Company’s stock options as of and for the year ended December 31, 2014 is presented below. The information reflects options in Rayonier common shares, including those awards held by Rayonier Advanced Materials employees.



	2014
	Number of Shares	Weighted Average Exercise Price (per common share)		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Options outstanding at January 1,	1,393,222	$33.79	(a)
Granted	305,305	42.47	(b)
Exercised	(251,547)	22.54	(c)
Cancelled	(44,585)	31.48	(c)
Modified in connection with spin-off	(32,495)	36.28	(a)
Options outstanding at December 31,	1,369,900	$27.21	(d)	6.1	$4.9
Options vested and expected to vest	1,367,044	$27.19	(d)	6.1	$4.9
Options exercisable at December 31,	923,570	$24.17	(d)	4.9	$4.9


(a)	Reflects exercise prices prior to the spin-off.


(b)	Represents the weighted-average exercise price at time of grant. Exercise prices were modified at the time of the spin-off. The adjusted weighted-average exercise price of 2014 grants was $31.52.


(c)	Represents the weighted-average of exercise prices in place at the time of exercise or cancellation. Pre-spin activity was not adjusted to reflect the subsequent modification of exercise prices.


(d)	Reflects exercise prices as of December 31, 2014.

A summary of additional information pertaining to the Company’s stock options is presented below:



	2014	2013	2012
(Amounts in millions)
Intrinsic value of options exercised (a)	$4.0	$12.3	$20.5
Fair value of options vested	$3.1	$2.6	$3.3


(a)	Intrinsic value of options exercised is the amount by which the fair value of the stock on the exercise date exceeded the exercise price of the option.

As of December 31, 2014, there was $0.6 million of unrecognized compensation cost related to Rayonier and Rayonier Advanced Materials stock options held by the Company’s employees. This cost is expected to be recognized over a weighted average period of 1.4 years.