American Express 2006 Annual Report Download - page 102

[ 100 ]
notes to consolidated fi nancial statements
american express company
RESTRICTED STOCK AWARDS
Restricted Stock Awards (RSAs) granted in 2003 and
thereafter, generally vest ratably at 25 percent per year
beginning with the first anniversary of the grant date.
RSAs granted prior to 2003 generally cliff vest four
years after the grant date. The compensation expense
associated with these awards is recognized straight-line
over the vesting period.
As of December 31, 2006, the total unrecognized
compensation cost related to unvested RSAs was $221
million. This cost is expected to be recognized over a
weighted-average period of 2.4 years. The total fair value
of shares vested during 2006, 2005, and 2004 was $176
million, $290 million, and $97 million, respectively.
PORTFOLIO GRANTS
The Company awards Portfolio Grants (PG) that earn
value based on the Company’s financial performance and
the Company’s total shareholder return versus that of the
S&P Financial Index and, beginning with PGs granted
in 2006 the S&P 500, over a 3-year performance period,
subject to certain adjustments. The fair value of the PG
is estimated at the date of grant and updated quarterly
and recognized over the performance period.
SUMMARY OF STOCK PLAN EXPENSE
The components of the Company’s pretax stock-
based compensation expense (net of cancellations) and
associated income tax benefit are as follows:
(Millions) 2006 2005 2004
Restricted stock awards $153 $144 $112
Stock options 86 84 69
Portfolio grants(a) 55 26 —
Other 422
Total compensation expense, pretax $298 $256 $183
Income tax benefit $104 $ 90 $ 64
(a) 2005 expense represents PG expenses subsequent to July 1, 2005,
when as a result of the adoption of SFAS No. 123(R), these awards
were accounted for as stock-based compensation. PG expense for the
first six months of 2005 and for the year ended December 31, 2004
was $23 million and $60 million, respectively.
NOTE 16 RETIREMENT PLANS
DEFINED BENEFIT PENSION PLANS
The Company sponsors the American Express
Retirement Plan (the Plan) for eligible employees in the
United States. The Plan is a noncontributory defined
benefit plan which is a qualified plan under the Employee
Retirement Income Security Act of 1974, as amended
(ERISA). Under the Plan, the cost of retirement
benefits is measured by length of service, compensation
and other factors. These benefits are funded through
a trust and the Company’s funding of retirement
costs complies with the applicable minimum funding
requirements specified by ERISA. The funded status of
the Plan on an ERISA basis for the years ended 2006
and 2005 was 113 percent and 114 percent, respectively.
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 credited with an amount determined
by an employee’s age, years of service, and compensation
as defined by the Plan (primarily base pay, certain
incentive pay and commissions, shift differential, and
overtime). Employees’ balances are also credited daily
with interest at a fixed-rate 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 October 1 through
November 30. The interest rate varies from a minimum
of 5 percent to a maximum 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 a lump-
sum payout at vested termination, death, disability or
retirement.
The Company also sponsors an unfunded non-
qualified Supplemental Retirement Plan (the SRP) for
all employees who are compensated over a certain level
to supplement their pension benefits that are limited by
the Internal Revenue Service. The SRP is a supplemental
plan and its terms generally parallel those of the Plan
but the SRP’s definition of compensation and payment
options differ.
Most employees outside the United States are covered
by local retirement plans, some of which are funded,
while other employees receive payments at the time of
retirement or termination under applicable labor laws or
agreements. The Company complies with the minimum
funding requirements in all countries.
Effective July 2006, the Company amended its U.K.
pension plans. Employees who were participating in the
existing defined benefit plans were given a choice between
remaining in the plans and making contributions toward
their benefits or moving to the new defined contribution
plan. Participants who chose to move no longer accrue
benefits under these plans as of July 1, 2006. There was
no gain or loss as a result of this change and the overall
impact to the projected benefit obligation was minimal.
The Company measures the obligations and related
asset values for its pension and other postretirement
benefit plans as of September 30th of each year.
Adoption of SFAS No. 158
On September 29, 2006, the FASB issued Statement
No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans”
(SFAS No. 158), which amends FASB Statements No.