Annual Report 2007 in PDF - Cairn Energy PLC

DIRECTORS’ REMUNERATION REPORT
CONTINUED
Share Options
Details of the Group’s current share option plans are as follows:
1. 1996 Second Share Option Scheme (‘1996 Scheme’)
2. 2002 Unapproved Share Option Plan (‘2002 Plan’)
3. 2003 Approved Share Option Plan (‘2003 Plan’)
4. 2006 Share Option Plan (‘2006 Plan’)
5. Cairn India Share Option Schemes (‘Cairn India Schemes’).
1996 Scheme
The 1996 Scheme was adopted in 1996 and expired in May 2006. The date of grant of the last award of options under the 1996
Scheme was 1 October 2002. Details of the options outstanding as at 31 December 2007 under the 1996 Scheme are set out in
Note 7 of the Notes to the Accounts.
2002 Plan and 2003 Plan
The principal difference between the 2002 Plan and the 2003 Plan is that the approval of the Inland Revenue was not sought
for the 2002 Plan. The 2003 Plan was approved by shareholders at the 2003 AGM and subsequently by the Inland Revenue.
The date of grant of the first award of options under the 2002 Plan was 18 March 2003. The date of grant of the first award
of options under the 2003 Plan was 30 June 2003.
Following the adoption of the 2006 Plan (see below), no further awards will be granted under the 2002 Plan or the 2003 Plan.
The date of grant of the last award of options under these arrangements was 4 July 2006.
Options granted under the 2002 Plan and the 2003 Plan are exercisable three to ten years following the date of grant and are
subject to performance conditions on exercise. In the case of all outstanding options under these arrangements, the option
holder may only exercise their awards if Cairn’s share price has increased by 5% on a compound basis over the period from the
date of grant of options up to the date they are exercised. In addition, the percentage increase in Cairn’s share price over the
period must be at least equal to or greater than the percentage movement in the FTSE Oil & Gas Index.
2006 Plan
The 2006 Plan was approved by shareholders at an EGM held in November 2006, conditional on the flotation of Cairn India
becoming effective, which occurred on 9 January 2007. The date of grant of the first award of options under the 2006 Plan was
9 January 2007. No options will be granted under the 2006 Plan to the Company’s executive directors or to any employee or
director of the Cairn India Group.
The 2006 Plan, together with the 2006 LTIP described below, reflects the fact that, following the flotation of Cairn India, there
are two distinct arms to the Group’s business (namely, a majority shareholding in Cairn India and an exploration and production
business owned and operated by the Capricorn Group) and therefore seeks to incentivise employees of the Group in relation to
the arm(s) which they can affect.
The 2006 Plan enables selected employees (excluding those that are employed by the Cairn India Group) to be granted
‘phantom options’ (which are equity settled) over ‘units’ in the Capricorn Group (see below under 2006 LTIP for how these units
are created and valued). On the exercise of an option, participants will generally become entitled to such number of Cairn
shares as have a market value equal to the notional gain that they realise (i.e. the difference between the ‘notional exercise price’
attributable to their option and the price of the units in respect of which their option has been exercised). However, the extent to
which options become exercisable will be dependent on continued employment with the Group and the extent to which
pre-determined performance conditions are met over a specified period.
All options granted under the 2006 Plan are currently subject to a Capricorn unit price target measured over a three-year
performance period. Under this target, vesting will occur as follows:
Average annual compound growth in
Percentage of Capricorn units comprised in option that vest Capricorn unit price over the performance period
0% Less than 5%
50% 5%
100% 10% or more
50%–100% on a straight-line basis More than 5% but less than 10%
Notwithstanding the above condition, no part of an option will vest unless the notional total shareholder return (‘TSR’) of a
Capricorn unit over the performance period is sufficient to place it at or above the median level in the same comparator group
of companies that is used for the purposes of the Capricorn awards granted pursuant to the 2006 LTIP (see below).
58 CAIRN ENERGY PLC ANNUAL REPORT 2007