Annual Report 2007 in PDF - Cairn Energy PLC

NOTES TO THE ACCOUNTS
CONTINUED
7. Staff Costs (continued)
The Cairn Energy PLC share options have been valued using a binomial model. The main inputs to the model include the
number of options, share price, leaver rate, trigger points, discount rate and volatility.
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Leaver rate assumptions are based on past history of employees leaving the Company prior to options vesting and are
revised to equal the number of options that ultimately vest.
Trigger points are the profit points at which the relevant percentage of employees are assumed to exercise their options.
The risk free rate is based on the yield on a zero coupon Government bond with a term equal to the expected term on the
option being valued.
Volatility was determined as the annualised standard deviation of the continuously compounded rates of return on the
shares of a peer group of similar companies selected from the FTSE as disclosed in the Directors’ Remuneration Report on
pages 57 to 68 over a ten-year period to the date of award.
94 CAIRN ENERGY PLC ANNUAL REPORT 2007
2002 Plan 2003 Plan
Vesting % 85.74% – 89.48% 85.74% – 88.34%
Trigger points 25% profit – 15% 25% profit – 15%
50% profit – 25% 50% profit – 25%
75% profit – 25% 75% profit – 25%
100% profit – 15% 100% profit – 15%
125% profit – 10% 125% profit – 10%
No trigger – 10% No trigger – 10%
Risk free rate 4.0% – 4.8% 4.0% – 4.8%
Volatility 40.24% 40.24%
2006 Plan
Under the 2006 Share Option Plan (the ‘2006 Plan’), certain executive directors and employees had been granted ‘phantom
options’ (which are equity settled) over ‘units’ in the Group. 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, being 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 is dependent on continued employment with the
Group and the extent to which predetermined performance conditions are met over a three-year period.
The following table details the number and notional exercise price of share options issued under the 2006 Plan at the Balance
Sheet date:
Notional
exercise
Number price (£)
Outstanding at the beginning of the year – –
Granted during the year 3,998,172 1.07
Lapsed during the year (218,692) 1.07
Exercised during the year – –
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Outstanding at the end of the year 3,779,480 1.07
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Exercisable at the end of the year –
Weighted average fair value of options granted in year £0.18
Weighted average remaining contractual life of outstanding options 9.24 years
The fair value of the awards has been calculated using a binomial model. The main inputs to the model are as per the 2002 and
2003 Plans detailed above. For details on the vesting conditions attached to the 2006 Plan refer to the Directors’ Remuneration
Report on pages 58 to 63.