Note 4. Share Based Compensation Plans

The Company has five active stock option plans, two of which provide for the grant of stock options to employees, one provides for the grant of stock options to non-employee directors, and another provides for the grant of stock options to key executives on a matching basis provided they use a proportion of their annual bonus to purchase common stock in the Company on the open market or from the Company. The fifth plan is a savings plan which provides for the grant of stock options to all Company employees provided they commit to make regular savings over a pre-defined period which can then be used to purchase common stock upon vesting of the options. The stock options have vesting periods ranging from 24 months to 6 years and in all cases stock options granted expire within 10 years of the date of grant. All grants are at the sole discretion of the Compensation Committee of the Board of Directors. Grants may be priced at market value or at a premium or discount. The aggregate number of shares of common stock reserved for issuance which can be granted under the plans is 2,640,000.

The fair value of the options above is calculated using the Black-Scholes model. In some cases certain performance related options are dependent upon external factors such as the Company's stock price. The fair value of these options is calculated using a Monte Carlo model. The following assumptions were used to determine the fair value of options calculated using the Black-Scholes model:


	2011			2010			2009
Dividend yield		0.2	%		1.0	%		2.5	%
Expected life		5 years			5 years			5 years
Volatility		78.3	%		82.3	%		76.5	%
Risk free interest rate		1.22	%		1.36	%		1.24	%

The following table summarizes the transactions of the Company's stock option plans for the year ended December 31, 2011:


	Number of Shares			Weighted Average Exercise Price		Weighted Average Fair Value
Options outstanding at December 31, 2010		1,517,481		$	4.74
Granted – at discount		19,085		$	0.00	$	29.45
– at market value		9,680		$	27.89	$	17.72
Exercised		(233,867	)	$	3.01
Forfeitures		(15,126	)	$	3.94
Expired		(68,033	)	$	0.13

Options outstanding at December 31, 2011		1,229,220		$	5.44

The following table summarizes information about options outstanding at December 31, 2011:


Range of Exercise Price	Number Outstanding		Weighted Average Remaining Life in Years		Weighted Average Exercise Price		Number Exercisable and Fully Vested		Weighted Average Remaining Life in Years		Weighted Average Exercise Price
$0 - $5		751,826		7.55	$	0.82		40,884		5.84	$	0.00
$5 - $10		26,970		3.45	$	9.66		26,970		3.45	$	9.66
$10 - $15		399,168		3.07	$	11.47		0		0.00	$	0.00
$20 - $25		25,456		6.16	$	20.38		25,456		6.16	$	20.38
$25 - $30		24,420		6.51	$	27.09		16,120		5.15	$	27.09
$30 - $35		1,380		9.37	$	32.60		0		0.00	$	0.00

		1,229,220						109,430

The aggregate intrinsic value of fully vested stock options was $0.6 million. Of the 109,430 stock options that are exercisable, 25,084 have performance conditions attached. The total compensation cost for 2011, 2010 and 2009 was $3.1 million, $3.1 million and $1.5 million, respectively. In 2009, this charge included a gain of $2.4 million related to the gain on stock options forfeited upon resignation of the Company's former CEO. The total compensation cost related to non-vested stock options not yet recognized at December 31, 2011 was $3.6 million and this cost is expected to be recognized over the weighted-average period of 1.45 years.

No stock options awards were modified in 2011 or 2010. On February 13, 2009, we extended the vesting period for 132,470 grants made under a key employee performance related stock option plan from February 13, 2009 to February 13, 2011, and modified the performance criteria to reflect the longer vesting period. Additional compensation cost of $0.2 million was required to be recognized for these modified stock options in the period February 13, 2009 to February 13, 2011.

The total intrinsic value of options exercised in 2011, 2010 and 2009 was $2.2 million, $3.7 million and $0.4 million, respectively. The amount of cash received from the exercise of stock option awards in 2011, 2010 and 2009 was $0.7 million, $0.2 million and $0.2 million, respectively. The Company's policy is to issue shares from treasury stock to holders of stock options who exercise those options. During 2011, 2010 and 2009 the new total fair value of shares vested was $2.9 million, $4.4 million and $1.1 million, respectively.

The total options vested in 2011 were 290,363 (2010 – 174,298, 2009 – 176,848).

An additional long-term incentive plan is in place to reward selected executives for delivering exceptional performance. Under this plan a discretionary bonus will be payable to eligible executives if the Innospec share performance out-performs that of competitors, as measured by the Russell 2000 Index, by a minimum of 10% over the five years from January 2008 to December 2012. The amount of bonus which can be earned will be a set cash amount for each one percentage point of out-performance. The maximum bonus under this plan will be payable for an out-performance versus the Russell 2000 Index of 30%. The maximum bonus under this plan, in respect of the current participants, is $8 million (2010 – $8 million, 2009 – $8 million). No bonus is payable under this plan if the Innospec stock price does not out-perform the Russell 2000 Index by more than 10% over the five year period, or the Russell 2000 Index falls in value over the same period. The fair value of these liability cash-settled stock appreciation rights is calculated on a quarterly basis using a Monte Carlo model and summarized as follows:


(in millions)	2011		2010		2009
Balance at January 1	$	0.8	$	0.2	$	0.1
Compensation charge		1.4		0.6		0.1

Balance at December 31	$	2.2	$	0.8	$	0.2

The following assumptions were used in the Monte Carlo model:


	2011			2010			2009
Dividend yield		0.0	%		0.5	%		1.0	%
Volatility		53.5	%		69.0	%		82.2	%
Risk free interest rate		0.36	%		1.05	%		1.65	%