Compensation Arrangements.

Compensation arrangements of our Automotive segment that are included in our consolidated financial statements are discussed below.

Automotive

On March 23, 2010, Federal-Mogul entered into the Second Amended and Restated Employment Agreement, which extended Mr. Alapont's employment with Federal-Mogul for three years. Also on March 23, 2010, Federal-Mogul amended and restated the Stock Option Agreement by and between Federal-Mogul and Mr. Alapont dated as of February 15, 2008 (the “Restated Stock Option Agreement”). The Restated Stock Option Agreement removed Mr. Alapont's put option to sell stock received from a stock option exercise to Federal-Mogul for cash. The Restated Stock Option Agreement provides for payout of any exercise of Mr. Alapont's stock options in stock or, at the election of Federal-Mogul, in cash. The awards were previously accounted for as liability awards based on the optional cash exercise feature; however, the accounting impact associated with this modification is that the stock options are now considered an equity award as of March 23, 2010.

Federal-Mogul revalued the four million stock options granted to Mr. Alapont at March 23, 2010, resulting in a revised fair value of $27 million. This amount was reclassified from accounts payable, accrued expenses and other liabilities to partners' equity due to their equity award status. As these stock options were fully vested as of March 23, 2010, no further expense related to these stock options will be recognized. Federal-Mogul recognized $4 million and $22 million in expense associated with these stock options during the years ended December 31, 2010 and 2009, respectively. These options had no intrinsic value as of December 31, 2011 and an intrinsic value of $5 million as of December 31, 2010. These options expire on December 27, 2014. None of these stock options have been exercised or forfeited as of December 31, 2011.

The stock option fair values were estimated using the Black-Scholes valuation model with the following assumptions:



	March 23, 2010 Valuation						December 31, 2009 Valuation
	Plain Vanilla Options			Options Connected to Deferred Compensation			Plain Vanilla Options			Options Connected to Deferred Compensation
Exercise price	$	19.50		$	19.50		$	19.50		$	19.50
Options outstanding (in millions)	2			2			2			2
Expected volatility	58		%	58		%	61		%	61		%
Expected dividend yield	—		%	—		%	—		%	—		%
Risk-free rate over the estimated expected option life	1.18		%	1.18		%	1.41		%	1.47		%
Expected option life (in years)	2.4			2.4			2.5			2.6
Fair value of options (in millions)	$	13.7		$	13.7		$	12.0		$	12.2
Fair value of vested portion of options (in millions)	$	13.7		$	13.7		$	9.6		$	9.8

For all noted valuations, expected volatility is based on the average of five-year historical volatility and implied volatility for a group of comparable auto industry companies as of the measurement date. Risk-free rate is determined based upon U.S. Treasury rates over the estimated expected option lives. Expected dividend yield is zero as Federal-Mogul has not paid dividends to holders of its common stock in the recent past nor does it expect to do so in the future. Expected option lives are primarily equal to one-half of the time between the measurement date and the end of the option term.

Mr. Alapont's Deferred Compensation Agreement was also amended and restated on March 23, 2010. The amended and restated agreement did not include any provisions that impacted the accounting for this agreement. Since the amended and restated agreement continues to provide for net cash settlement at the option of Mr. Alapont, it continues to be treated as a liability award as of December 31, 2011 and through its eventual payout. The amount of the payout shall be equal to approximately $10 million (500,000 shares of Federal-Mogul's common stock multiplied by the March 23, 2010 stock price of $19.46), offset by 75% of the intrinsic value of any exercise by Mr. Alapont of two million of the options noted above ("options connected to deferred compensation"). During the years ended December 31, 2011, 2010 and 2009, Federal-Mogul recognized $1 million, $2 million and $3 million, respectively, in expense associated with Mr. Alapont's deferred compensation agreement. The deferred compensation agreement had intrinsic values of $10 million and $8 million as of December 31, 2011 and 2010, respectively. The intrinsic value of $8 million at December 31, 2010 was derived under the assumption that the two million options connected to deferred compensation had been exercised as of that date because the market price of Federal-Mogul's common stock was greater than the exercise price of the options on December 31, 2010.

The Deferred Compensation Agreement fair values were estimated using the Monte Carlo valuation model with the following assumptions:



	Year Ended December 31,
	2011			2010			2009
Exercise price of options connected to deferred compensation	$	19.50		$	19.50		$	19.50
Expected volatility	60		%	58		%	61		%
Expected dividend yield.	—		%	—		%	—		%
Risk-free rate over the estimated expected life	0.17		%	0.59		%	1.47		%
Expected life (in years)	1.5			2.0			2.6
Fair value (in millions)	$	8		$	7		$	5
Fair value of vested portion (in millions)	$	8		$	7		$	—

Expected volatility is based on the average of five-year historical volatility and implied volatility for a group of auto industry comparator companies as of the measurement date. Risk-free rate is determined based upon U.S. Treasury rates over the estimated expected life. Expected dividend yield is zero as Federal-Mogul has not paid dividends to holders of its common stock in the recent past nor does it expect to do so in the future. Expected life is equal to one-half of the time to the end of the term.