Exhibit (10)(q)(ii)

POTLATCH CORPORATION

PERFORMANCE SHARE AGREEMENT

2005 STOCK INCENTIVE PLAN

THIS PERFORMANCE SHARE AGREEMENT made and entered into the Grant Date specified
in the attached addendum to this Agreement by and between POTLATCH CORPORATION,
a Delaware corporation (the “Corporation”), and the employee of the Corporation
named in the attached addendum (“Employee”),

W I T N E S S E T H:

WHEREAS, the Corporation maintains the 2005 Stock Incentive Plan (the “Plan”),
which is incorporated into and form a part of this Agreement, and the Employee
has been selected to receive a contingent grant of performance shares under
Section 10 of the Plan (Performance Shares),

NOW, THEREFORE, for valuable consideration, the parties agree as follows:

 

  1. Definitions. The following terms used in this Agreement shall have the
meanings set forth in this Paragraph.

 

  (a) “Agreement” means this Performance Share Agreement.

 

  (b) “Board” means the Board of Directors of the Corporation.

 

  (c) “Code” means the Internal Revenue Code of 1986, as amended.

 

  (d) “Common Stock” means the $1 par value Common Stock of the Corporation.

 

  (e) “Committee” means the committee appointed by the Board to administer the
Plan.

 

  (f) “Corporation” means Potlatch Corporation, a Delaware corporation.

 

  (g) “Date of Grant” means the date on which the Committee determined to award
this target contingent grant of performance share as specified in the addendum
to this Agreement

--------------------------------------------------------------------------------

  (h) “Disability” means the Employee qualifies for continuing benefits under
the Corporation’s Disability Income Plan after the first full 24 consecutive
months of disability.

 

  (i) “Performance Share Award” means an Award granted pursuant to Section 10 of
the Plan.

 

  (j) “Plan” means the Potlatch Corporation 2005 Stock Incentive Plan, pursuant
to which the parties have entered into this Agreement.

 

  (k) “Securities Act” means the Securities Act of 1933, as amended.

 

  (l) “Share” means one share of Common Stock, adjusted in accordance with
Section 16 of the Plan.

 

  (m) “Subsidiary” means any corporation in an unbroken chain of corporations
beginning with the Corporation if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

2. Award. Subject to the terms of this Agreement and the addendum attached to
this Agreement, the Employee is hereby awarded a target contingent grant of
performance shares in the number set forth in the attached addendum to this
Agreement. The number of Shares actually payable to the Employee is contingent
on the performance achieved as specified in the addendum to this Agreement. This
award has been granted pursuant to the Plan, a copy of which the Employee may
obtain upon request to the Corporation.

3. Performance Measure. The performance measure is a comparison of the
percentile ranking of the Corporation’s total shareholder return (stock price
appreciation plus dividends as calculated pursuant to Paragraph 5 below) as
compared to the total shareholder return performance of a selected peer group of
forest products industry companies as specified in the Performance Schedule
contained in the addendum to this Agreement.

4. Performance Period. The performance period is the period specified in the
addendum to this Agreement and represents the period during which the total
shareholder return for Potlatch Corporation and the selected peer group of
forest products industry companies is measured.

5. Calculation of Total Shareholder Return. Total shareholder return for any
given common stock shall be expressed as a percentage and calculated by:

 

  (i) subtracting (a) the beginning average stock price for one share of stock
(determined by calculating the average closing stock price during the two
calendar months preceding the beginning of the performance

 

2

--------------------------------------------------------------------------------

    period) from (b) the ending average stock price for such share of stock
(determined by calculating the average closing stock price during the final two
calendar months of the performance period, after taking into account the affect
of any stock dividends, stock splits, consolidations, recapitalizations,
reorganizations or like events with respect to such share); and

 

  (ii) adding to the difference determined under subparagraph (i) above, all
cash dividends actually paid on such share of stock during the performance
period; and

 

  (iii) dividing the sum determined by subparagraphs (i) and (ii) above by the
beginning average stock price determined pursuant to subparagraph (i)(a) above.

6. Dividend Equivalents. During the performance period dividend equivalents
shall be accrued and paid out as additional Shares in relation to the calculated
number of performance shares earned at the end of the performance period. For
the purpose of converting dividend equivalents into Shares, the ending average
stock price for Potlatch Shares (as determined pursuant to Paragraph 5(i)(b)
above) shall be used.

7. Settlement of Awards. The Corporation shall deliver to the Employee one Share
for each performance share (and dividend equivalents) earned as determined in
accordance with the provisions set forth in the addendum to this Agreement. The
earned performance shares payable to the Employee (including Shares payable
pursuant to Paragraph 6 above) shall be paid solely in Shares. Any fractional
share will be rounded to the closest whole share.

8. Time of Payment. Except as otherwise provided in this Agreement, the
performance shares earned as specified in the addendum to this Agreement will be
delivered to the Employee (or, in the case of the Employee’s death before
delivery, to the Employee’s beneficiary) as soon as practicable after the end of
the performance period as set forth in the addendum to this Agreement.

9. Committee Discretion to Reduce Award. Notwithstanding any provision in this
Agreement to the contrary, the Committee retains the right, at its sole and
absolute discretion, to reduce or eliminate any award that may become payable
hereunder if the Committee determines that any one or more of the following
conditions have occurred:

 

  (a) The stockholder return to the Corporation’s stockholders has been
insufficient;

 

  (b) The stockholder return to the Corporation’s stockholders has been
negative;

 

  (c) The financial performance of the Corporation has been inadequate; or

 

  (d) The operational performance of the Corporation has been inadequate

In addition, the Committee may reduce or eliminate the award granted hereby
based on the Employee’s individual performance.

10. Retirement, Disability, or Death During Performance Period. If the
Employee’s employment with the Corporation terminates during the performance
period because of the Employee’s retirement under the Salaried Employees’
Retirement Plan, Disability,

 

3

--------------------------------------------------------------------------------

or death, the Employee (or, in the case of the Employee’s death, the Employee’s
beneficiary) shall be entitled to a prorated number of the performance shares
earned as specified in the addendum to this Agreement. The prorated number of
performance shares earned is determined at the end of the performance period
based on the ratio of the number of completed calendar months the Employee is
employed during the performance period to the total number of months in the
performance period.

11. Termination of Employment During the Performance Period. Except as provided
in Section 12, if the Employee’s employment with the Corporation terminates
during the performance period for any reason other than retirement under the
Salaried Employees’ Retirement Plan, Disability, or death, the entire target
contingent grant of performance shares granted under this Agreement shall be
automatically terminated as of the date of such termination of employment.

12. Change of Control. If a Change in Control occurs before January 1, 2009 and
if in connection with such Change in Control the Corporation terminates
Employee’s employment other than for Cause or Disability or Employee shall
terminate employment for Good Reason within 90 days after the occurrence of the
event giving rise to Good Reason, then the employee will earn a prorated number
of performance shares based on the ratio of the number of completed calendar
months from the beginning of the performance period to the Date of Termination
compared to the total number of months in the performance period specified in
the addendum to this Agreement. For the purpose of determining the number of
Shares to be awarded, this ratio shall be applied to the number or Shares
specified in the Target Grant of Performance Shares set forth in the addendum to
this Agreement and no performance measure shall be considered. The prorated
performance shares to be awarded (including Shares payable pursuant to Paragraph
6 above) will be delivered to the Employee as soon as practicable following the
date of Termination. For this purpose, the terms, “Change in Control,” Cause,”
“Disability,” “Good Reason” and “Date of Termination” shall have the meaning set
forth in the employment agreement entered into between the Corporation and the
Employee as of February 6, 2006.

13. Available Shares. The Corporation agrees that it will at all times during
the performance period reserve and keep available sufficient authorized but
unissued or reacquired Common Stock to satisfy the requirements of this
Agreement. The number of Shares reserved shall be proportionately adjusted for
any increase or decrease in the number of issued and outstanding Shares by
reason of stock dividends, stock splits, consolidations, recapitalizations,
reorganizations or like events, as determined by the Committee pursuant to the
Plan.

Subject to any required action by the stockholders, if the Corporation shall be
a party to any merger, consolidation or other reorganization, this Agreement
shall apply to the securities to which a holder of the number of Shares subject
to this Agreement would have been entitled.

14. Applicable Taxes. In the event the Corporation determines that it is
required to withhold state or federal income tax as a result of the award of the
Shares, the Employee will make arrangements satisfactory to the Corporation to
enable it to satisfy such withholding requirements.

 

4

--------------------------------------------------------------------------------

If any payments or transfers to or for the benefit of the Employee are deemed an
“excess parachute payment” as defined in Section 280G of the Internal Revenue
Code of 1986 (the “Code”) subject to the excise tax imposed by Section 4999 of
the Code, the Corporation shall pay to the Employee an additional amount
determined under the terms of Section 9 of the employment agreement entered into
between the Corporation and the Employee as of February 6, 2006.

15. Relationship to Other Benefits. Performance share awards shall not be taken
into account in determining any benefits under any pension, savings, disability,
severance, group insurance or any other pay related plan of the Corporation.

16. Required Deferral. In the event the award of shares would cause the Employee
to qualify as a “covered employee” pursuant to Section 162(m) of the Code, that
portion of the award that would exceed the amount deductible by the Corporation
under 162(m) of the Code shall be automatically deferred until the Employee’s
compensation is no longer subject to Section 162(m) of the Code. Any portion of
the award so deferred shall be converted to stock units and dividend equivalents
shall accrue on the stock units and be paid out as additional shares after the
Employee’s compensation is no longer subject to Section 162(m) of the Code.

17. Stockholder Rights. Neither Employee nor Employee’s representative shall
have any rights as a stockholder with respect to any Shares subject to this
Agreement until such Shares shall have been issued to Employee or Employee’s
representative.

18. Transfers, Assignments, Pledges. Except as otherwise provided in this
Agreement, the rights and privileges conferred by this Agreement shall not be
transferred, assigned, pledged or hypothecated in any way (whether by operation
of law or otherwise) and shall not be subject to sale under execution,
attachment or similar process. Upon any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of this award, or of any right or privilege
conferred by this Agreement, contrary to the provisions of this Paragraph, or
upon any attempted sale under any execution, attachment or similar process upon
the rights and privileges conferred by this Agreement, this Award and the rights
and privileges conferred by this Agreement shall immediately become null and
void.

However, this Paragraph 18 shall not preclude: (i) an Employee from designating
a beneficiary to succeed, after the Employee’s death, to any rights of the
Employee or benefits distributable to the Employee under this Agreement not
distributed at the time of the Employee’s death; or (ii) a transfer of any award
hereunder by will or the laws of descent or distribution. In that regard, any
such rights shall be exercisable by the Employee’s beneficiary, and such
benefits shall be distributed to the beneficiary, in accordance with the
provisions of this Agreement and the Plan. The beneficiary shall be the named
beneficiary or beneficiaries designated by the Employee in writing filed with
the Corporation in such form and at such time as the Corporation shall require.
If a

 

5

--------------------------------------------------------------------------------

deceased Employee fails to designate a beneficiary, or if the designated
beneficiary does not survive the Employee, any benefits distributable to the
Employee shall be distributed to the legal representative of the estate of the
Employee. If a deceased Employee designates a beneficiary and the designated
beneficiary survives the Employee but dies before the complete distribution of
benefits to the designated beneficiary under this Agreement, then any benefits
distributable to the designated beneficiary shall be distributed to the legal
representative of the estate of the designated beneficiary.

19. No Employment Rights. Nothing in this Agreement shall be construed as giving
Employee the right to be retained as an employee or as impairing the rights of
the Corporation to terminate his or her employment at any time, with or without
cause.

20. Administration. The authority to manage and control the operation and
administration of this Agreement shall be vested in the Committee, and the
Committee shall have all powers with respect to this Agreement as it has with
respect to the Plan. Any interpretation of this Agreement by the Committee and
any decision made by it with respect to this Agreement is final and binding.

21. Interpretation. This Agreement shall be interpreted and construed in a
manner consistent with the terms of the applicable Plan. If there is any
discrepancy between the terms and conditions of this Agreement and the terms and
conditions of the applicable Plan, the provisions of the Plan shall control.

22. Applicable Law. Except as provided in Paragraph 20 of this Agreement, this
Agreement shall be interpreted and construed in a manner consistent with the
Plan and in accordance with the laws of the State of Delaware without regard to
choice of law principles. If there is any discrepancy between the terms and
conditions of this Agreement and the terms and conditions of the Plan, the terms
and conditions of the Plan shall control.

23. Term of the Agreement. The term of this Agreement shall end at either upon
delivery of any award payable hereunder to the Employee or, if earlier, upon the
termination of Employee’s employment with the Corporation or its Subsidiaries
for any reason other than retirement under the Salaried Employees’ Retirement
Plan, Disability or death.

 

6

--------------------------------------------------------------------------------

ADDENDUM TO PERFORMANCE SHARE AGREEMENT

POTLATCH CORPORATION 2005 STOCK INCENTIVE PLAN

Name of Employee: MICHAEL J COVEY

 

1. Date of Grant: February 6, 2006

 

2. Target Grant of Performance Shares: 20,800

 

3. Performance Period: January 1, 2006 through December 31, 2008

 

4. Performance Measure: The performance measure is a comparison of the
percentile ranking of Potlatch Corporation’s total shareholder return (TSR),
which includes stock price appreciation plus dividends paid during the
performance period, to the TSR performance of selected peer group of forest
products industry companies listed on Exhibit 1 hereto.

 

5. Performance Schedule: The performance schedule displayed on the back side of
Exhibit 1 shows the percentage of the target grant that will be awarded at the
end of the performance period depending upon the actual TSR percentile ranking
achieved by Potlatch during the performance period:

The percent of the target grant awarded for achieved TSR percentiles between the
levels shown above is determined by interpolation. The exact number of
performance shares awarded to the Employee after multiplication by the
appropriate factor (or determined by interpolation) plus dividend equivalents
accrued during the performance period will be rounded to the nearest whole
number of shares.

The document entitled Performance Share Agreement – Potlatch Corporation 2005
Stock Incentive Plan is incorporated by this reference into this addendum and
the terms of the Performance Share Agreement shall be controlling in the event
of any discrepancy.

IN WITNESS WHEREOF, the Corporation has caused this Addendum to the Performance
Share Agreement to be executed on its behalf by its duly authorized
representative, and the Employee has executed the same on the date indicated
below.

 

  POTLATCH CORPORATION

Date: 2/6/06

  By  

/S/ William T. Weyerhaeuser

    Chairman, Executive Compensation Committee

Date: 2/10/06

  By  

/S/ Michael J. Covey

    Employee

 

7

--------------------------------------------------------------------------------

Exhibit 1

Performance Share Measure

Forest Products Industry Peer Group

Company Name

 

1. Abitibi-Consolidated, Inc.

 

2. Bowater

 

3. Canfor Corporation

 

4. Caraustar Industries, Inc.

 

5. Cascades, Inc.

 

6. Chesapeake

 

7. Deltic Timber Corporation

 

8. Doman Industries Limited

 

9. Domtar, Inc.

 

10. Glatfelter

 

11. International Forest Products Limited

 

12. International Paper

 

13. Kimberly-Clark

 

14. Longview Fibre

 

15. Louisiana-Pacific

 

16. MeadWestvaco

 

17. Nexfor, Inc.

 

18. Norske Skog Canada Limited

 

19. Packaging Corp of America

 

20. Packaging Dynamics Corporation

 

21. Plum Creek

 

22. Pope & Talbot

 

23. Rayonier

 

24. Rock-Tenn Company

 

25. Smurfit-Stone

 

26. Sonoco Products Company

 

27. Taiga Forest Products

 

28. Tembec, Inc.

 

29. Temple Inland

 

30. Universal Forest Products

 

31. West Fraser Timber Company

 

32. Weyerhaeuser

If two of the listed companies merge during the applicable performance period,
their combined TSR will be used for ranking purposes. If any listed company goes
out of business or otherwise ceases to exist as an independent company during
the applicable performance period, it will not be taken into consideration in
determining TSR ranking for that performance period.

(over)

 

8

--------------------------------------------------------------------------------

Performance Schedule

 

TSR Rank  

Percentile

Rank

 

Percent of

Target Paid

  1st   Top   200 % 2nd   97th   200 % 3rd   94th   190 % 4th   90th   183 % 5th
  87th   175 % 6th   84th   168 % 7th   81st   160 % 8th   78th   153 % 9th  
74th   145 % 10th   71st   138 % 11th   68th   130 % 12th   65th   123 % 13th  
61st   115 % 14th   58th   108 % 15th   55th   100 % 16th   52nd   89 % 17th  
48th   79 % 18th   45th   68 % 19th   42nd   57 % 20th   39th   46 % 21st   36th
  36 % 22nd   32nd   25 % 23rd   29th   0  

 

9

--------------------------------------------------------------------------------

ADDENDUM TO PERFORMANCE SHARE AGREEMENT

POTLATCH CORPORATION 2005 STOCK INCENTIVE PLAN

Name of Employee: MICHAEL J COVEY

 

6. Date of Grant: February 6, 2006

 

7. Target Grant of Performance Shares: 15,528

 

8. Performance Period: January 1, 2005 through December 31, 2007

 

9. Performance Measure: The performance measure is a comparison of the
percentile ranking of Potlatch Corporation’s total shareholder return (TSR),
which includes stock price appreciation plus dividends paid during the
performance period, to the TSR performance of selected peer group of forest
products industry companies listed on Exhibit 1 hereto.

 

10. Performance Schedule: The performance schedule displayed on the back side of
Exhibit 1 shows the percentage of the target grant that will be awarded at the
end of the performance period depending upon the actual TSR percentile ranking
achieved by Potlatch during the performance period:

The percent of the target grant awarded for achieved TSR percentiles between the
levels shown above is determined by interpolation. The exact number of
performance shares awarded to the Employee after multiplication by the
appropriate factor (or determined by interpolation) plus dividend equivalents
accrued during the performance period will be rounded to the nearest whole
number of shares.

The document entitled Performance Share Agreement – Potlatch Corporation 2005
Stock Incentive Plan is incorporated by this reference into this addendum and
the terms of the Performance Share Agreement shall be controlling in the event
of any discrepancy.

IN WITNESS WHEREOF, the Corporation has caused this Addendum to the Performance
Share Agreement to be executed on its behalf by its duly authorized
representative, and the Employee has executed the same on the date indicated
below.

 

  POTLATCH CORPORATION Date: 2/6/06   By  

/S/ William T. Weyerhaeuser

    Chairman, Executive Compensation Committee Date: 2/10/06   By  

/S/ Michael J. Covey

    Employee

 

10

--------------------------------------------------------------------------------

Exhibit 1

Performance Share Measure

Forest Products Industry Peer Group

Company Name

 

1. Abitibi-Consolidated, Inc.

 

2. Bowater

 

3. Canfor Corporation

 

4. Caraustar Industries, Inc.

 

5. Cascades, Inc.

 

6. Chesapeake

 

7. Deltic Timber Corporation

 

8. Doman Industries Limited

 

9. Domtar, Inc.

 

10. Glatfelter

 

11. International Forest Products Limited

 

12. International Paper

 

13. Kimberly-Clark

 

14. Longview Fibre

 

15. Louisiana-Pacific

 

16. MeadWestvaco

 

17. Nexfor, Inc.

 

18. Norske Skog Canada Limited

 

19. Packaging Corp of America

 

20. Packaging Dynamics Corporation

 

21. Plum Creek

 

22. Pope & Talbot

 

23. Rayonier

 

24. Rock-Tenn Company

 

25. Smurfit-Stone

 

26. Sonoco Products Company

 

27. Taiga Forest Products

 

28. Tembec, Inc.

 

29. Temple Inland

 

30. Universal Forest Products

 

31. West Fraser Timber Company

 

32. Weyerhaeuser

If two of the listed companies merge during the applicable performance period,
their combined TSR will be used for ranking purposes. If any listed company goes
out of business or otherwise ceases to exist as an independent company during
the applicable performance period, it will not be taken into consideration in
determining TSR ranking for that performance period.

(over)

 

11

--------------------------------------------------------------------------------

Performance Schedule

 

TSR Rank  

Percentile

Rank

 

Percent of

Target Paid

  1st   Top   200 % 2nd   97th   200 % 3rd   94th   190 % 4th   91st   183 % 5th
  88th   175 % 6th   84th   168 % 7th   81st   160 % 8th   78th   153 % 9th  
75th   145 % 10th   72nd   138 % 11th   69th   130 % 12th   66th   123 % 13th  
63rd   115 % 14th   59th   108 % 15th   56th   100 % 16th   53rd   89 % 17th  
50th   79 % 18th   47th   68 % 19th   44th   57 % 20th   41st   46 % 21st   38th
  36 % 22nd   34th   25 % 23rd   31st   0  

 

12