164Tullow Oil plc 2011 Annual Report and AccountsNotes to the Group financial statements continued Year ended 31 December 2011 Note 11. Share-based payments 2005 Performance Share Plan (PSP) Under the PSP, senior executives can be granted nil exercise price options (normally exercisable between three to ten years following grant. At the 2011 Annual General Meeting, the annual grant limit for an individual was increased to 300,000 shares. Awards made before 8 March 2010 were made as conditional awards to acquire free shares on vesting. To provide flexibility to participants, those awards have been converted into nil exercise price options. Awards vest subject to a Total Shareholder Return (TSR) performance condition. 50% (70% for awards granted to Directors in 2011) of an award is tested against a comparator group of oil and gas companies. The remaining 50% (30% for awards granted to Directors in 2011) is tested against constituents of the FTSE 100 index (excluding investment trusts). Performance is measured over a fixed three-year period starting on 1 January prior to grant, and an individual must normally remain in employment for three years from grant for the shares to vest. No dividends are paid over the vesting period. There are further details of PSP award measurement in the Directors' Remuneration Report on pages 88 to 99. The shares outstanding under the PSP are as follows: 2011 PSP shares2011 Average weighted share price at grant p2010 PSP shares2010 Average weighted share price at grant p 2009 PSP shares2009 Average weighted share price at grant pOutstanding at 1 January 4,101,876978.64,305,486687.0 3,856,913552.9Granted 2,173,9541342.61,274,9711281.0 1,572,567785.8Exercised during the year (389,126)942.5(1,441,136)371.2 (1,095,350)354.1Forfeited/expired during the year (29,170)1249.8(37,445)1120.7 (28,644)780.3 Outstanding at 31 December 5,857,5341116.04,101,876978.6 4,305,486687.0 The inputs of the option valuation model were: Risk free interest rate 1.6% pa1.9% pa 1.9% paExpected volatility 49%52% 54%Dividend yield 0.4% pa0.5% pa 0.8% paThe expected life is the period from date of grant to vesting. Expected volatility was determined by calculating the historical volatility of the Company's share price over a period commensurate with the expected life of the awards. The weighted average fair value of the awards granted in 2011 was 728.8 per award (2010: 700.8p). The Company recognised a total charge of $17.0 million (2010: $12.6 million) in respect of the PSP. 2005 Deferred Share Bonus Plan (DSBP) Under the DSBP, the portion of any annual bonus above 75% of the base salary of a senior executive nominated by the Remuneration Committee is deferred into shares. Awards normally vest following the end of three financial years commencing with that in which they are granted. They are granted as nil exercise price options, normally exercisable from when they vest until 10 years from grant. Awards granted before 8 March 2010 as conditional awards to acquire free shares have been converted into nil exercise price options to provide flexibility to participants. The shares outstanding under the DSBP are as follows: 2011DSBP shares2011 Share price at grant p 2010 DSBP shares2010 Share price at grant p 2009 DSBP shares2009 Share price at grantpOutstanding at 1 January 301,951896.6231,457716.3 200,633507.9Granted 65,9261362.092,9391281.0 135,291778.0Exercised during the year --(22,445)629.5 (104,467)396.0 Outstanding at 31 December 367,877980.0301,951896.6 231,457716.3 The inputs of the option valuation model were: Dividend yield 0.4% pa0.5% pa 1.0% paThe expected life is the period from the date of grant to the vesting date. The fair value of the awards granted in 2011 was 1344.1p per share subject to an award (2010: 1263.1p). The Company recognised a total charge of $1.7 million (2010: $1.3 million) in respect of the DSBP.
165www.tullowoil.comFINANCIAL STATEMENTS5 2010 Share Option Plan (2010 SOP) and 2000 Executive Share Option Scheme (2000 ESOS) The only share option scheme operated by the Company during the year was the 2010 SOP. Options have an exercise price equal to market value shortly before grant and normally only become exercisable from the third anniversary of the date of the grant. Options granted prior to 2011 were granted under the 2000 ESOS on very similar terms except that their exercise was subject to a performance condition. These awards are tested against constituents of the FTSE 100 index (excluding investment trusts) and 100% of awards will vest if the Company's TSR is above the median of the index over three years following grant. The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, share options under the 2010 SOP and 2000 ESOS during the year. 2011Number2011 WAEP p2010 Number2010 WAEP p 2009 Number2009 WAEP pOutstanding as at 1 January 13,941,969623.913,257,841436.6 14,688,105282.1Granted during the year 3,616,8981368.52,814,2181274.3 3,155,150781.0Exercised during the year (2,620,511)363.9(1,918,305)247.9 (4,486,268)168.4Forfeited/expired during the year (214,838)1176.6(211,785)939.0 (99,146)643.1 Outstanding at 31 December 14,723,518845.013,941,969623.9 13,257,841436.6 Exercisable at 31 December 5,782,542360.26,062,182246.1 5,700,412177.8The weighted average share price at exercise for options exercised in 2011 was 1387.2p (2010: 1231.9p). Options outstanding at 31 December 2011 had exercise prices of 82p to 1374.2p (2010: 79p to 1299.9p) and remaining contractual lives of 1 to 10 years. The fair values were calculated using a proprietary binomial valuation model. The principal inputs to the options valuation model were: Risk free interest rate 1.2-2.4% paExpected volatility 46-49%Dividend yield 0.4-0.6% paEmployee turnover 5% pa Early exercise At rates dependent upon potential gain from exerciseExpected volatility was determined by calculating the historical volatility of the Company's share price over a period commensurate with the expected lifetime of the awards. The fair values and expected lives of the options valued in accordance with FRS 20 were: Award date Weighted average exercise price p Weighted average fair value pWeighted average expected life from grant date yearsJan - Dec 2007 396.9 123.44.8Jan - Dec 2008 647.3 205.84.3Jan - Dec 2009 781.0 283.54.0Jan - Dec 2010 1274.3 456.24.3Jan - Dec 2011 1368.5 580.44.7The Company recognised a total charge of $19.0 million (2010: $11.5 million) in respect of the SOP and ESOS.