American Express 1998 Annual Report Download - page 49

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47
common stock on the date of grant and a maximum
term of 10 years. Options generally vest at 331
/3per-
cent per year. The Company also sponsors the American
Express Incentive Savings Plan, under which purchases
of the Company’s common shares are made by or on
behalf of participating employees.
In 1998, the Compensation and Benefits Committee
adopted a restoration stock option program applicable
to existing and future stock option awards. This program
provides that employees who exercise options that have
been outstanding at least five years by surrendering pre-
viously owned shares as payment will automatically
receive a new (restoration) stock option with an exercise
price equal to the market price on the date of exercise.
The size of the restoration option is equal to the num-
ber of shares surrendered plus any shares surrendered or
withheld to satisfy the employees’ income tax require-
ments. The term of the restoration option, which is
exercisable six months after grant, is equal to the remain-
ing life of the original option. Senior officers must be in
compliance with their stock ownership guidelines to
exercise restoration options.
The Company granted 0.1 million, 1.4 million and
1.4 million restricted stock awards with a weighted
average grant date value of $88.97, $67.08 and $46.14
per share for 1998, 1997 and 1996, respectively. Restric-
tions generally expire four years from date of grant. The
compensation cost that has been charged against income
for the Company’s restricted stock awards was $36 mil-
lion, $48 million and $39 million for 1998, 1997 and
1996, respectively.
The Company has elected to follow APB Opinion
No. 25, “Accounting for Stock Issued to Employees,”
and related Interpretations in accounting for its employee
stock options. Therefore, no compensation cost has been
recognized related to stock options. If the Company had
elected to account for its stock options under the fair
value method of SFAS No. 123, “Accounting for Stock-
Based Compensation,” the Company’s net income and
earnings per common share would have been reduced to
the pro forma amounts indicated below:
(millions, except per share amounts) 1998 1997 1996
Net income:
As reported $ 2,141 $ 1,991 $ 1,901
Pro forma $ 2,060 $ 1,948 $ 1,877
Basic EPS:
As reported $ 4.71 $ 4.29 $ 4.02
Pro forma $ 4.53 $ 4.20 $ 3.96
Diluted EPS:
As reported $ 4.63 $ 4.15 $ 3.89
Pro forma $ 4.45 $ 4.07 $ 3.84
1998 1997 1996
Dividend yield 2.0% 2.6% 3.1%
Expected volatility 23% 20% 23%
Risk-free interest rate 5.5% 6.2% 5.9%
Expected life of stock option 5 years 5 years 7 years
The fair value of each option is estimated on the date of
grant using a Black-Scholes option-pricing model with
the following weighted average assumptions used for
grants in 1998, 1997 and 1996, respectively: