Exhibit 10.5

CLEARWATER PAPER CORPORATION

ANNUAL INCENTIVE PLAN

Effective January 1, 2009

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CLEARWATER PAPER CORPORATION

ANNUAL INCENTIVE PLAN

Effective January 1, 2009

 

1. ESTABLISHMENT AND PURPOSE

(a) The Clearwater Paper Corporation Annual Incentive Plan (the “Plan”) was
adopted by the Board of Directors of Clearwater Paper Corporation and approved
by its sole stockholder on December 1, 2008, to become effective January 1,
2009, to provide rewards to those employees of Clearwater Paper Corporation and
its subsidiaries who are in a position to contribute to the achievement by
Clearwater Paper Corporation and its subsidiaries of certain business
performance objectives.

(b) Pursuant to the Employee Matters Agreement by and between Potlatch
Corporation and Clearwater Paper Corporation (the “EMA”), the liability for
paying 2008 annual bonuses to “Clearwater Employees” (as defined in the EMA)
under the Potlatch Corporation Management Performance Award Plan II (the “MPAP
II”) shall be transferred to this Plan if the “Distribution” (as defined in the
EMA) occurs prior to the date for payment of such bonuses under the MPAP II. If
such transfer occurs, the amounts and recipients of such bonuses shall be
determined in accordance with the terms of the MPAP II, but the payment of such
bonuses shall be made in accordance with the terms and conditions of this Plan.

(c) The Plan is intended to comply with the requirements of Section 409A of the
Code, to the extent applicable, and, in the case of covered employees, the
exception for “qualified performance-based compensation” under Section 162(m) of
the Code.

 

2. DEFINITIONS

(a) “Award” means an award under the Plan.

(b) “Award Year” means a Year with respect to which Awards are made.

(c) “Board of Directors” means the Board of Directors of Clearwater Paper
Corporation.

(d) “CEO” means the Chief Executive Officer of Clearwater Paper Corporation.

(e) “Change of Control” means the effective date of any one of the following
events:

(i) Upon consummation of a merger or consolidation involving Clearwater Paper (a
“Business Combination”), in each case, unless, following such Business
Combination,

(A) all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the then outstanding shares of common stock
of Clearwater

 

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Paper (the “Outstanding Common Stock”) and the then outstanding voting
securities of Clearwater Paper entitled to vote generally in the election of
directors (the “Outstanding Voting Securities”) immediately prior to such
Business Combination beneficially own, directly or indirectly, more than fifty
percent (50%) of, respectively, the then outstanding shares of common stock and
the combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors of the corporation or other entity
resulting from such Business Combination (including, without limitation, a
corporation or other entity which as a result of such transaction owns
Clearwater Paper either directly or through one or more subsidiaries),

(B) no individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act))
(a “Person”) (excluding any corporation or other entity resulting from such
Business Combination or any employee benefit plan (or related trust) sponsored
or maintained by Clearwater Paper or any of its Subsidiaries or such other
corporation or other entity resulting from such Business Combination)
beneficially owns, directly or indirectly, thirty percent (30%) or more of,
respectively, the then outstanding shares of common stock or common equity of
the corporation or other entity resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation or other entity except to the extent that such ownership is based on
the beneficial ownership, directly or indirectly, of Outstanding Common Stock or
Outstanding Voting Securities immediately prior to the Business Combination, and

(C) at least a majority of the members of the board of directors or similar
governing body of the corporation or other entity resulting from such Business
Combination were members of the Board of Directors at the time of the execution
of the initial agreement, or of the action of the Board of Directors, providing
for such Business Combination; or

(ii) On the date that individuals who, as of 11:59 p.m. (Pacific) on the date of
the Distribution, constitute the Board of Directors (the “Incumbent Board”)
cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that any individual who becomes a member of the
Board of Directors on or subsequent to the day immediately following the date of
the Distribution whose election, or nomination for election by Clearwater
Paper’s stockholders, was approved by a vote of at least a majority of the
members of the Board of Directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for purposes of this proviso, any such individual whose appointment
to the Board of Directors occurs as a result of an actual or threatened election
contest with respect to the election or removal of a member or members of the
Board of Directors, an actual or threatened solicitation of proxies or consents
or any other actual or threatened action by, or on behalf of, any Person other
than the Incumbent Board; or

(iii) Upon the acquisition on or after the date of the Distribution by any
Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of thirty percent (30%) or more of either

(A) the then Outstanding Common Stock, or

 

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(B) the combined voting power of the Outstanding Voting Securities;

provided, however, that the following acquisitions shall not be deemed to be
covered by this paragraph (iii):

 

  (I) any acquisition of Outstanding Common Stock or Outstanding Voting
Securities by the Corporation,

 

  (II) any acquisition of Outstanding Common Stock or Outstanding Voting
Securities by any employee benefit plan (or related trust) sponsored or
maintained by the Corporation, or

 

  (III) any acquisition of Outstanding Common Stock or Outstanding Voting
Securities by any corporation pursuant to a transaction which complies with
clauses (A), (B) and (C) of Section 2(e)(i); or

(iv) Upon the consummation of the sale, lease or exchange of all or
substantially all of the assets of Clearwater Paper; or

(v) Upon the approval by the stockholders of Clearwater Paper of a complete
liquidation or dissolution of Clearwater Paper.

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

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

(h) “Committee” means the committee which shall administer the Plan in
accordance with Section 3.

(i) “Corporation” means Clearwater Paper Corporation and its Subsidiaries.

(j) “Covered Employee” means a “covered employee” within the meaning of
Section 162(m) of the Code and the regulations thereunder.

(k) “Distribution” means the distribution by Potlatch Corporation to its
stockholders of all of the outstanding shares of the common stock of Clearwater
Paper then owned by Potlatch Corporation, pursuant to the Separation and
Distribution Agreement between Potlatch Corporation and Clearwater Paper.

(l) “Employee” means a full-time salaried employee (including any Officer) of
the Corporation.

(m) “Guidelines” means the Clearwater Paper Corporation Stock Ownership
Guidelines.

(n) “Management Deferred Compensation Plan” means the Clearwater Paper
Corporation Management Deferred Compensation Plan, and any successor plan.

 

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(o) “Officer” means any Employee who is a Board of Directors elected officer of
the Corporation and who is the chief manager of an Organization Unit.

(p) “Organization Unit” means a major organizational component or profit center
of the Corporation as determined in accordance with rules and regulations
adopted by the Committee, the Employees of which are eligible to participate in
the Plan.

(q) “Participant” means any Officer and any Employee actively employed by the
Corporation during an Award Year in an Organization Unit in a position
designated as a participating position in accordance with rules and regulations
adopted by the Committee.

(r) “Plan” means the Clearwater Paper Corporation Annual Incentive Plan, adopted
effective January 1, 2009.

(s) “Separation from Service” means termination of a Participant’s service as an
employee consistent with Section 409A of the Code and the regulations
promulgated thereunder. For purposes of the Plan, “Separation from Service”
generally means termination of a Participant’s employment as a common-law
employee of Clearwater Paper and each Affiliate (as defined herein) of
Clearwater Paper. A Separation from Service will not be deemed to have occurred
if a Participant continues to provide services to Clearwater Paper or an
Affiliate in a capacity other than as an employee and if the former employee is
providing a level of bona fide services that is fifty percent (50%) or more of
the average level of services rendered, during the immediately preceding
thirty-six (36) months of employment with Clearwater Paper or an Affiliate;
provided, however, that a Separation from Service will be deemed to have
occurred if it is reasonably anticipated that a Participant’s service with
Clearwater Paper and its Affiliates will terminate after a certain date or the
level of bona fide services that the Participant will perform after such date
(whether as an employee or another capacity) will permanently reduce to a rate
that is less than twenty percent (20%) of the bona fide level of services
rendered, on average, during the immediately preceding thirty-six (36) months
(or if employed by Clearwater Paper and its Affiliates less than thirty-six
(36) months, such lesser period). However, the employment relationship is
treated as continuing intact while the individual is on military leave, sick
leave, or other bona fide leave of absence if the period of such leave does not
exceed six months, or if longer, so long as the individual’s right to
reemployment with the service recipient is provided either by statute or by
contract. If the period of leave exceeds six months and the individual’s right
to reemployment is not provided either by statute or by contract, the employment
relationship is deemed to terminate on the first date immediately following such
six-month period. For purposes of determining when a Separation from Service
occurs “Affiliate” means any other entity which would be treated as a single
employer with Clearwater Paper under Section 414(b) or (c) of the Code, provided
that in applying such Sections and in accordance with the rules of Treasury
Regulations Section 1.409A-1(h)(3), the language “at least 50 percent” shall be
used instead of “at least 80 percent.”

(t) “Subsidiary” means any corporation fifty percent (50%) or more of the voting
stock of which is owned by Clearwater Paper or by one or more of such
corporations.

(u) “Year” means the calendar year.

 

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3. ADMINISTRATION OF THE PLAN

The Plan shall be administered by the Compensation Committee of the Board of
Directors, or such other committee as may be designated and appointed by the
Board of Directors, which shall consist of at least three (3) members of the
Board of Directors. Notwithstanding the foregoing, with respect to Participants
who are Covered Employees, except in the case of a Change of Control as
explained below, the Committee shall consist solely of “outside directors”
within the meaning of Section 162(m). No member of the Committee shall be
eligible to participate and receive Awards under the Plan while serving as a
member of the Committee.

In addition to the powers and duties otherwise set forth in the Plan, the
Committee shall have full power and authority to administer and interpret the
Plan, to establish procedures for administering the Plan, to adopt and
periodically review such rules and regulations consistent with the terms of the
Plan as the Committee deems necessary or advisable in order to properly carry
out the provisions of the Plan, to receive and review an annual report to be
submitted by the CEO which shall describe and evaluate the operation of the
Plan, and to take any and all necessary action in connection therewith. The
Committee’s interpretation and construction of the Plan and its determination of
the amount of any Award thereunder shall be conclusive and binding on all
persons. In making such determinations, the Committee shall be entitled to rely
on information and reports provided by the CEO.

Within thirty (30) days after a Change of Control, the Committee shall appoint
an independent committee consisting of at least three (3) current (as of the
effective date of the Change of Control) or former Corporation officers and
directors, which shall thereafter administer all claims for benefits under the
Plan. Upon such appointment the Committee shall cease to have any responsibility
for claims administration under the Plan.

 

4. ELIGIBILITY AND PARTICIPATION

In accordance with rules and regulations adopted by the Committee, the CEO (the
Committee in the case of Covered Employees) shall designate the Organization
Units and the individuals who will participate in the Plan for an Award Year.

 

5. AWARDS

Awards shall be determined in accordance with Sections 6, 7 and 8 following the
close of the Award Year and, unless deferred in accordance with the Management
Deferred Compensation Plan, shall be paid no later than March 15 following the
close of the Award Year.

 

6. DETERMINING THE ACTUAL FUNDED BONUS POOL

The total amount of Awards made to all Participants with respect to any Award
Year shall be determined pursuant to this Section 6. For each Award Year, the
Committee shall determine the Target Bonuses, Target Bonus Pool and the
available range of Corporate Performance Modifiers in accordance with this
Section 6 prior to or during the first 90 days of such Award Year.

(a) Target Bonus Pool. The Target Bonus Pool for an Award Year shall be
determined first. The Target Bonus Pool for an Award Year shall be the sum of
the Target

 

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Bonuses for all Participants for the Award Year. A Participant’s Target Bonus
shall be an amount equal to a percentage of the Participant’s base salary, based
on the position to which the Participant is assigned, as determined in
accordance with rules and regulations adopted by the Committee. If a Participant
does not qualify as a Participant for the entire period of the applicable Award
Year, the Target Bonus will be prorated to reflect the number of half calendar
months that the Employee was a Participant.

(b) Actual Funded Bonus Pool. The Actual Funded Bonus Pool for an Award Year
shall be determined next. The Actual Funded Bonus Pool for each Award Year shall
be determined in accordance with rules and regulations adopted by the Committee.
The Actual Funded Bonus Pool shall be represented by a bookkeeping entry only
and no Employee of the Corporation shall have any vested right therein. The
Actual Funded Bonus Pool for an Award Year shall be equal to the Target Bonus
Pool for the Award Year adjusted by one or more “Corporate Performance
Modifiers”. A Corporate Performance Modifier shall be a percentage determined in
accordance with rules and regulations adopted by the Committee. A Corporate
Performance Modifier may range from a minimum of zero to a maximum of two
hundred percent (200%).

(c) Qualifying Performance Criteria. In its rules and regulations concerning the
determination of the Corporate Performance Modifiers, the Committee may take
into consideration one or more of the following performance criteria, either
individually, alternatively or in any combination, applied either to the
Corporation as a whole or to Clearwater Paper, an Organization Unit or
Subsidiary, either individually, alternatively or in any combination, and
measured on an absolute basis or relative to a pre-established target, to
previous years’ results or to a designated comparison group or index, in each
case as specified by the Committee: (i) cash flow (including operating cash
flow), (ii) earnings per share, (iii) (A) earnings before interest, (B) earnings
before interest and taxes, (C) earnings before interest, taxes and depreciation,
(D) earnings before interest, taxes, depreciation and amortization, or
(E) earnings before any combination of such expenses or deductions, (iv) return
on equity, (v) total stockholder return, (vi) share price performance,
(vii) return on capital, (viii) return on assets or net assets, (ix) revenue,
(x) income or net income, (xi) operating income or net operating income,
(xii) operating profit or net operating profit, (xiii) operating margin or
profit margin (including as a percentage of revenue), (xiv) return on operating
revenue, (xv) return on invested capital, (xvi) market segment shares or
(xvii) economic profit (“Qualifying Performance Criteria”). After the end of the
Award Year the Committee shall determine and certify the extent to which the
Qualifying Performance Criteria have been met. The Committee may appropriately
adjust any evaluation of performance under a Qualifying Performance Criteria to
exclude any of the following events that occur during a performance period:
(i) asset write-downs, (ii) litigation or claim judgments or settlements,
(iii) the effect of changes in tax law, accounting principles or other such laws
or provisions affecting reported results, (iv) accruals for reorganization and
restructuring programs and (v) any extraordinary, nonrecurring items as
described in Accounting Principles Board Opinion No. 30 and/or in managements’
discussion and analysis of financial condition and results of operations
appearing in the Corporation’s annual report to stockholders for the applicable
year.

 

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7. ALLOCATING THE ACTUAL FUNDED BONUS POOL AMONG ORGANIZATION UNITS

The Actual Funded Bonus Pool for each Award Year shall be allocated among the
Organization Units in accordance with rules and regulations adopted by the
Committee. The allocation methodology to be used for a particular Award Year
shall be determined by the Committee prior to or during the first 90 days of the
Award Year. The resulting allocations of the Actual Funded Bonus Pool for the
Award Year may be adjusted up or down at the discretion of the CEO, except that
they may not be adjusted up in the case of a Covered Employee.

 

8. DETERMINING INDIVIDUAL AWARDS

Each Officer shall determine the amount of the Award to each Participant who is
assigned to such Officer’s Organization Unit in accordance with rules and
regulations adopted by the Committee, by allocating such Organization Unit’s
portion of the Actual Funded Bonus Pool among the Participants employed in such
Organization Unit in proportion to the product of the Participant’s Target Bonus
and the Participant’s individual performance modifier. Each Participant’s Award
shall be subject to review by and approval of the CEO. Notwithstanding the
foregoing, in the case of an Award to an Officer, the CEO, any Covered Employee,
or any individual who is subject to Section 16 of the Exchange Act, this
determination shall be made solely by the Committee.

The Committee shall determine the Covered Employee’s, Officer’s or other
Section 16 individual’s available range of individual performance modifiers at
the same time as it determines his or her Target Bonus at the beginning of the
Award Year. The Committee may decrease, but not increase, the individual
performance modifier when it determines the Covered Employee’s actual Award
after the end of the Award Year. Such Covered Employee’s Award also may not be
increased based on his or her individual performance (other than increases
resulting from application of the pre-determined individual performance
modifiers) or based on the Committee’s (or the CEO’s or another Officer’s)
exercise of discretion to reduce the bonuses payable to other Participants.

In no event may the Award granted to the CEO exceed $2.5 million, or the Award
granted to any other individual Covered Employee exceed $1.5 million.

 

9. FORM AND TIME OF PAYMENT OF AWARDS

(a) All non-deferred Awards under the Plan shall be paid in cash to all
Participants other than those subject to the Guidelines. For a Participant
subject to the Guidelines, the Award shall be paid in a combination of fifty
percent (50%) cash and fifty percent (50%) common stock of Clearwater Paper if
the Participant has not incrementally reached the required ownership level at
the end of each of his or her first five (5) years under the Guidelines or has
not maintained one hundred percent (100%) of the applicable guideline amount in
subsequent years. The number of shares of common stock shall be determined by
dividing the dollar value of the portion of the Award allocated as stock by the
closing price of Clearwater Paper’s common stock on the date of the Committee
meeting at which the Award payments are approved. Award amounts shall be
prorated for the portion of the Award Year the Employee was an eligible
Participant in accordance with rules and regulations adopted by the Committee. A
Participant whose employment is terminated before the payment of an Award for
any reason other than death, disability (within the meaning of
Section 409A(a)(2)(C) of the Code) or early, normal or

 

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deferred retirement under the Clearwater Paper Salaried Retirement Plan shall
not be entitled to receive an Award. Notwithstanding any other provision of this
Plan, in no event may the achievement of performance goals for any Participant
who is a Covered Employee be waived except in the event of such Participant’s
death or disability (within the meaning of Section 409A(a)(2)(C) of the Code) or
pursuant to Section 15 below.

(b) Notwithstanding the foregoing, a Participant may be permitted to elect to
defer receipt of payment of all or a portion of an Award (other than an Award
from the Special Awards Fund described in Section 10) subject to, and in
accordance with, the terms of the Management Deferred Compensation Plan.

(c) Notwithstanding any other provision of the Plan, the Board of Directors or
the Committee may, in its sole discretion, determine limits on the amount and
alter the time and form of payment of Awards with respect to an Award Year if
any of the following conditions occurs: (i) Clearwater Paper does not declare
cash dividend with respect to its common stock during such Award Year, or
(ii) the Actual Funded Bonus Pool determined pursuant to Section 6(b) for such
Award Year exceeds six percent (6%) of Clearwater Paper’s consolidated net
earnings, before taxes, for such Award Year.

 

10. SPECIAL AWARDS FUND

(a) Creation of the Fund. A Special Awards Fund shall be established with
respect to each Award Year in an amount determined by the Committee but not to
exceed ten percent (10%) of the Target Bonus Pool for such Award Year. The
Special Awards Fund shall be represented by a bookkeeping entry only and no
Employee of the Corporation shall have any vested right therein. The Special
Awards Fund shall be in addition to the Bonus Pool created under Sections 5-9
above.

(b) Eligibility. Awards may be made in a total amount equal to the Special
Awards Fund to those Employees of the Corporation who are not Participants with
respect to such Award Year, but who in the judgment of an Officer have made
outstanding contributions to the success of the Corporation.

(c) Selection. After the close of the Award Year, recipients of Awards under the
Special Awards Fund shall be selected by the CEO upon the recommendation of an
Officer. The amount of each individual’s Award under the Special Awards Fund
shall be determined by the CEO upon the recommendation of an Officer and shall
fall within a range set forth in rules and regulations adopted by the Committee,
expressed as minimum and maximum percentages of annualized salary at the end of
the year. Awards under the Special Awards Fund shall be announced by March 1
following the close of the Award Year.

(d) Payment. Awards under the Special Awards Fund shall be paid in full in cash
no later than March 15 following the close of the Award Year.

 

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11. NO ASSIGNMENT OF INTEREST

The interest of any person in the Plan or in payments to be received pursuant to
it shall not be subject to option or assignable either by voluntary or
involuntary assignment or by operation of law, and any act in violation of this
section shall be void.

 

12. EMPLOYMENT RIGHTS

The selection of an Employee as a Participant shall not confer any right on such
Employee to receive an Award under the Plan or to continue in the employ of the
Corporation or limit in any way the right of the Corporation to terminate such
Participant’s employment at any time.

 

13. AMENDMENT OR TERMINATION OF THE PLAN

The Board of Directors or the Committee may amend, suspend or terminate the Plan
at any time; provided, however, that any amendment adopted or effective on or
after July 1 in any Award Year which would adversely affect the calculation of a
Participant’s Award or the Participant’s eligibility for an Award for such Award
Year shall be applied prospectively from the date the amendment was adopted or
effective, whichever is later; provided, further that if the Plan is terminated
effective on or after July 1 in any Award Year such termination shall not
adversely affect any Participant’s eligibility for a pro rata share of an Award
for the period of such Award Year before the date the termination was adopted or
effective, whichever is later, subject to all other applicable terms and
conditions of the Plan. The foregoing notwithstanding, no amendment adopted nor
termination of the Plan following the occurrence of a Change of Control shall be
effective if it (a) would reduce a Participant’s Target Bonus for the Award Year
in which the Change of Control occurs, (b) would reduce an Award earned and
payable to a Participant in respect of the Award Year that ended immediately
before the Award Year in which the Change of Control occurs, or (c) modify the
provisions of this sentence.

Notwithstanding the foregoing, the Vice President, Human Resources of Clearwater
Paper shall have the power and authority to amend the Plan with respect to any
amendment that (i) does not materially increase the cost of the Plan to the
Corporation or (ii) is required to comply with new or changed legal requirements
applicable to the Plan, including, but not limited to, Section 409A of the Code.

Without approval by vote of the shareholders, neither the Board of Directors,
the Committee nor the Vice President, Human Resources of Clearwater Paper shall
adopt any amendment that would modify the material terms of the Plan (within the
meaning of Section 162(m) of the Code) as to Covered Employees.

 

14. SUCCESSORS AND ASSIGNS

The Plan shall be binding upon the Corporation, its successors and assigns, and
any parent corporation of the Corporation’s successors or assigns.
Notwithstanding that the Plan may be binding upon a successor or assign by
operation of law, the Corporation shall require any successor or assign to
expressly assume and agree to be bound by the Plan in the same manner and to the
same extent that the Corporation would be if no succession or assignment had
taken place.

 

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15. CHANGE OF CONTROL

Notwithstanding any other provision of the Plan to the contrary, this Section 15
shall apply with respect to the determination of Awards and the payment of
Awards following a Change of Control. In the event that the employment of a
Participant terminates following a Change of Control, such Participant shall be
guaranteed payment of a prorated Award for the Award Year in which the Change of
Control occurs determined in accordance with Section 8 based on the
Participant’s Target Bonus. A prorated Target Bonus shall be calculated by
multiplying the Participant’s Target Bonus for the applicable Award Year by a
fraction, the numerator of which is the number of full months in the Award Year
completed at the effective time of the Change of Control, and the denominator of
which is twelve (12). With respect to any Award earned but not yet paid in
respect of the Award Year that ended immediately before the Award Year in which
a Change of Control that also is a change in the ownership or effective control
of Clearwater Paper or a change in the ownership of a substantial portion of the
assets of Clearwater Paper as defined in the regulations promulgated under
Section 409A of the Code (a “Code Section 409A Change of Control”) occurs, each
Participant shall be guaranteed payment of his or her Award determined in
accordance with Section 8 based on the performance results for the applicable
Award Year. Awards paid pursuant to this Section 15 shall be paid in a lump sum
in cash upon the earliest of (i) the time prescribed in Sections 5 and 9(a), or
(ii) the date the Participant Separates from Service for any reason other than
“misconduct,” as defined in Clearwater Paper’s Severance Program for Executive
Employees or Salaried Severance Plan, whichever applies to the Participant, or
any successor severance plan that applies to the Participant, following the Code
Section 409A Change of Control.

 

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