3. Share-Based Compensation

On June 3, 2009, Devon's stockholders adopted the 2009 Long-Term Incentive Plan, which expires on June 2, 2019. This plan authorizes the Compensation Committee, which consists of independent non-management members of Devon's Board of Directors, to grant nonqualified and incentive stock options, restricted stock awards, performance restricted stock awards, Canadian restricted stock units, performance share units, stock appreciation rights and cash-out rights to eligible employees. The plan also authorizes the grant of nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights to directors. A total of 21.5 million shares of Devon common stock have been reserved for issuance pursuant to the plan. To calculate shares issued under the plan, options granted represent one share and other awards represent 1.84 shares.

Devon also has stock option plans that were adopted in 2005, 2003 and 1997 under which stock options and restricted stock awards were issued to certain management and professional employees. Options granted under these plans remain exercisable by the employees owning such options, but no new options or restricted stock awards will be granted under these plans. Devon also has stock options outstanding that were assumed as part of its 2003 acquisition of Ocean Energy.

The following table presents the effects of share-based compensation included in Devon's accompanying comprehensive statements of earnings. The vesting for certain share-based awards was accelerated as part of Devon's strategic repositioning. The associated expense for these accelerated awards is included in restructuring costs in the accompanying comprehensive statements of earnings. See Note 4 for further details.

	2011	2010	2009
	(In millions)
Gross general and administrative expense	$ 181	$ 188	$ 209
Share-based compensation expense capitalized pursuant to the full cost method of accounting for oil and gas properties	$ 56	$ 58	$ 66
Related income tax benefit	$ 33	$ 40	$ 43

Stock Options

In accordance with Devon's incentive plans, the exercise price of stock options granted may not be less than the market value of the stock at the date of grant. In addition, options granted are exercisable during a period established for each grant, which may not exceed eight years from the date of grant. The recipient must pay the exercise price in cash or in common stock, or a combination thereof, at the time that the option is exercised. Generally, the service requirement for vesting ranges from zero to four years.

The fair value of stock options on the date of grant is expensed over the applicable vesting period. Devon estimates the fair values of stock options granted using a Black-Scholes option valuation model, which requires Devon to make several assumptions. The volatility of Devon's common stock is based on the historical volatility of the market price of Devon's common stock over a period of time equal to the expected term of the option and ending on the grant date. The dividend yield is based on Devon's historical and current yield in effect at the date of grant. The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for the expected term of the option at the date of grant. The expected term of the options is based on historical exercise and termination experience for various groups of employees and directors. Each group is determined based on the similarity of their historical exercise and termination behavior. The following table presents a summary of the grant-date fair values of stock options granted and the related assumptions. All such amounts represent the weighted-average amounts for each year.

	2011	2010	2009
Grant-date fair value	$ 23.11	$ 25.41	$ 22.85
Volatility factor	46.0%	45.3%	47.7%
Dividend yield	1.0%	1.0%	0.9%
Risk-free interest rate	0.8%	1.1%	2.1%
Expected term (in years)	4.2	4.5	4.0

The following table presents a summary of Devon's outstanding stock options.


		Weighted Average
	Options	Exercise Price	Remaining Term	Intrinsic Value
	(In thousands)		(In years)	(In millions)
Outstanding at December 31, 2010	11,434	$ 62.64
Granted	1,962	$ 66.98
Exercised	(2,366)	$ 47.51
Forfeited	(487)	$ 73.32
Outstanding at December 31, 2011	10,543	$ 66.35	4.31	$ 40
Vested and expected to vest at December 31, 2011..	10,428	$ 66.33	4.27	$ 40
Exercisable at December 31, 2011	6,716	$ 65.39	2.90	$ 39

The aggregate intrinsic value of stock options that were exercised during 2011, 2010 and 2009 was $81 million, $47 million and $51 million, respectively. As of December 31, 2011, Devon's unrecognized compensation cost related to unvested stock options was $70 million. Such cost is expected to be recognized over a weighted-average period of 3.0 years.

Restricted Stock Awards and Units

These awards and units are subject to the terms, conditions, restrictions and limitations, if any, that the Compensation Committee deems appropriate, including restrictions on continued employment. Generally, the service requirement for vesting ranges from zero to four years. During the vesting period, recipients of such awards receive dividends that are not subject to restrictions or other limitations. Devon estimates the fair values of restricted stock awards and units as the closing price of Devon's common stock on the grant date of the award or unit, which is expensed over the applicable vesting period. The following table presents a summary of Devon's unvested restricted stock awards and units.

	Restricted Stock Awards & Units	Weighted Average Grant-Date Fair Value
	(In thousands)
Unvested at December 31, 2010	5,311	$ 70.60
Granted	2,301	$ 65.40
Vested	(2,188)	$ 72.05
Forfeited	(200)	$ 71.18
Unvested at December 31, 2011	5,224	$ 67.85

The aggregate fair value of restricted stock awards and units that vested during 2011, 2010 and 2009 was $145 million, $184 million and $165 million, respectively. As of December 31, 2011, Devon's unrecognized compensation cost related to unvested restricted stock awards and units was $305 million. Such cost is expected to be recognized over a weighted-average period of 2.8 years.

Performance Based Restricted Stock Awards

In December 2011, certain members of Devon's senior management were granted performance based share awards. Vesting of the awards is dependent on Devon meeting certain internal performance targets and the recipient meeting certain service requirements. Generally, the service requirement for vesting ranges from zero to four years. If Devon meets or exceeds the performance target, the awards vest after the recipient meets the related requisite service period. If the performance target and service period requirement are not met, the award does not vest. Once vested, recipients are entitled to dividends on the awards. Devon estimates the fair values of the awards as the closing price of Devon's common stock on the grant date of the award, which is expensed over the applicable vesting period. The following table presents a summary of Devon's performance based restricted stock awards.

	Performance Restricted Stock Awards	Weighted Average Grant-Date Fair Value
	(In thousands)
Unvested at December 31, 2010	—	$ —
Granted	184	$ 65.10
Unvested at December 31, 2011	184	$ 65.10

As of December 31, 2011, Devon's unrecognized compensation cost related to these awards was $4 million. Such cost is expected to be recognized over a weighted-average period of 2.4 years.

Performance Share Units

In December 2011, certain members of Devon's senior management were granted performance share units. Each unit that vests entitles the recipient to one share of Devon common stock. The vesting of these units is based on comparing Devon's total shareholder return ("TSR") to the TSR of a predetermined group of fourteen peer companies over the specified two- or three-year performance period. The vesting of units may be between zero and 200 percent of the units granted depending on Devon's TSR as compared to the peer group on the vesting date.

During the vesting period, recipients will receive dividend equivalents with respect to each outstanding performance share unit. The fair value of each performance share unit is estimated as of the date of grant using a Monte Carlo simulation with the following assumptions used for all grants made under the plan: (i) a risk-free interest rate; (ii) a volatility assumption based on the historical realized price volatility of Devon and the designated peer group; and (iii) an estimated ranking of Devon among the designated peer group. The fair value of the unit on the date of grant is expensed over the applicable vesting period.

The following table presents a summary of Devon's performance share units.

	Share Units	Weighted Average Grant-Date Fair Value
	(In thousands)
Unvested at December 31, 2010	—	$ —
Granted (1)	171	$ 81.70
Unvested at December 31, 2011	171	$ 81.70

____________________________

(1) A maximum of 341,000 common shares could be awarded based upon Devon's final TSR ranking.

As of December 31, 2011, Devon's unrecognized compensation cost related to unvested units was $8 million. Such cost is expected to be recognized over a weighted-average period of 2.3 years.