American Express 2005 Annual Report Download - page 92

Stock Options
The weighted average remaining contractual life of the
stock options outstanding as of December 31, 2005 was
5.1 years. The aggregate intrinsic value of the stock
options outstanding and exercisable as of December 31,
2005 was $1.9 billion and $1.7 billion, respectively. The
total intrinsic value of options exercised during 2005,
2004 and 2003 was $455 million, $633 million and
$191 million, respectively.
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 2005, 2004 and 2003:
2005 2004 2003
Dividend yield 0.9% 0.8% 1.0%
Expected volatility 24% 30% 34%
Risk-free interest rate 3.6% 2.9% 2.9%
Expected life of stock
option (years) 4.5 4.2 4.5
Weighted average fair value
per option $ 12.59 $ 13.27 $ 10.08
The dividend yield reflects the assumption that the cur-
rent dividend payout will continue with no anticipated
increases. The expected life of the options is based on
historical data and is not necessarily indicative of
exercise patterns that may occur.
Restricted Stock Awards
Restricted Stock Awards (RSAs) granted in 2005, 2004
and 2003 generally vest ratably at 25 percent per
year beginning with the first anniversary of the grant
date. RSAs granted prior to 2003 generally vest four
years from date of grant. The compensation expense
associated with these awards is recognized straight-line
over the vesting period.
As of December 31, 2005, there was $216 million of
total unrecognized compensation cost related to RSAs.
That cost is expected to be recognized over a weighted-
average period of 2.4 years. The total fair value of shares
vested during 2005, 2004 and 2003 was $290 million,
$97 million and $34 million, respectively.
Portfolio Grants
In addition, the Company grants Portfolio Grants which
are awards that earn value based on the Company’s or
segment’s financial performance and the Company’s
total shareholder return versus that of the S&P Financial
Index over a 3-year performance period, subject to busi-
ness and individual adjustments. The fair value of the
award is estimated at the date of grant and updated quar-
terly and recognized over the performance period.
The components of the Company’s pretax stock-based
compensation expense (net of cancellations) and asso-
ciated income tax benefit, are as follows:
(Millions) 2005 2004 2003
Stock options $84 $69 $31
Restricted stock awards 144 112 72
Portfolio grants
(a)
26 ——
Total $ 254 $ 181 $ 103
Income tax benefit $89 $63 $36
(a)The 2005 expense represents only the amount recognized since July 1,
2005, when as a result of the adoption of SFAS 123(R), these awards
were accounted for as stock-based compensation although paid in cash.
NOTE 16 Retirement Plans
Defined Benefit Pension Plans
The Company sponsors the American Express Retire-
ment Plan (the Plan), a noncontributory defined benefit
plan which is a qualified plan under the Employee Retire-
ment Income Security Act of 1974, as amended (ERISA),
under which the cost of retirement benefits for eligible
employees in the United States is measured by length of
service, compensation and other factors and is currently
being funded through a trust. Funding of retirement costs
for the Plan complies with the applicable minimum fund-
ing requirements specified by ERISA. The Plan is a cash
balance plan and employees’ accrued benefits are based
on notional account balances, which are maintained for
each individual. Each pay period these balances are cred-
ited with an amount equal to a percentage, determined
by an employee’s age plus service, of compensation as
defined by the Plan (which includes, but is not limited
to, base pay, certain incentive pay and commissions, shift
differential, and overtime). Employees’ balances are also
credited daily with a fixed rate of interest that is updated
each January 1 and is based on the average of the daily
five-year U.S. Treasury Note yields for the previous Octo-
ber 1 through November 30, with a minimum crediting
rate of 5 percent and a maximum crediting rate equal to
the lesser of (i) 10 percent or (ii) the annual maximum
interest rate set by the U.S. Government for determining
lump-sum values. Employees and their beneficiaries have
the option to receive annuity payments upon retirement
or select a lump-sum payout at vested termination, death,
disability or retirement.
In addition, the Company sponsors an unfunded non-
qualified Supplemental Retirement Plan (the SRP) for cer-
tain highly compensated employees to replace the benefit
that cannot be provided by the Plan due to Internal Rev-
enue Service limits. The SRP is an excess benefit plan and
its terms generally parallel those of the Plan but the SRP’s
definition of compensation and payment options differ.
Notes to Consolidated
Financial Statements
AXP / AR.2005
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