Occidental Petroleum 2006 Annual Report Download - page 72

Adoption of SFAS No. 123(R)
As discussed in Note 3, on July 1, 2005, Occidental changed its method of accounting for stock-based compensation from the APB Opinion No.
25 intrinsic value accounting method to the fair value recognition provisions of SFAS No. 123(R). Prior to July 1, 2005, Occidental had already
been expensing its SARs, RSUs and PSAs. On July 1, 2005, Occidental began expensing its Options and recording compensation expense for
all its other stock-based incentive awards using fair value amounts in accordance with SFAS No. 123(R).
The table below summarizes certain stock-based incentive amounts for the year (all amounts in millions):
  
  
    
  
  
    
 
 
As of December 31, 2006, there was $256 million of pre-tax unrecognized compensation expense related to all unvested stock-based incentive
award grants. This expense is expected to be recognized over a weighted average period of 2.1 years.

Certain employees are granted Options that are settled in physical stock and SARs that are settled either only in stock or only in cash.
Exercise prices of the Options and SARs are equal to the quoted market value of Occidental’s stock on the grant date. Generally, the Options and
SARs vest ratably over three years with a maximum term of ten years. These Options and SARs may be forfeited or accelerated under certain
circumstances.
The fair value of each Option or stock-settled SAR is measured on the grant date using the Black Scholes option valuation model and
expensed on a straight-line basis over the vesting period. The expected life is estimated based on the actual weighted average life of historical
exercise activity of the grantee population at the grant date. The volatility factors are based on the historical volatilities of Occidental common stock
over the expected lives as estimated on the grant date. The risk-free interest rate is the implied yield available on zero coupon (US Treasury Strip)
T-notes at the grant date with a remaining term equal to the expected life. The dividend yield is the expected annual dividend yield over the
expected life, expressed as a percentage of the stock price on the grant date. Estimates of fair value are not intended to predict actual future
events or the value ultimately realized by employees who receive stock-based incentive awards, and subsequent events may not be indicative of
the reasonableness of the original estimates of fair value made by Occidental.
The grant date assumptions used in the Black Scholes valuation for Options and stock-settled SARs were as follows:
    

    
    
    
    
The grant date fair value of each stock-settled SAR granted in 2006 and 2005 was $14.77 and $10.76, respectively. The grant date fair value
of each Option granted in 2004 and 2003 was $4.02 and $1.60, respectively. The fair value of the cash-settled SARs is also estimated using the
Black Scholes model and is recalculated using updated assumptions each quarter until they are exercised. Changes in the fair value between
the date of grant and the date when the cash-settled SARs are exercised are recognized as compensation expense.
61