American Express 2007 Annual Report Download - page 102

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The fair value of each option is estimated on the date of
grant using a Black-Scholes-Merton option-pricing model.
The following weighted-average assumptions are used for
grants in 2007, 2006, and 2005, the majority of which were
granted in the beginning of each year:
2007 2006 2005
Dividend yield 1.0% 0.9% 0.9%
Expected volatility 19% 23% 24%
Risk-free interest rate 4.8% 4.3% 3.6%
Expected life of
stock option (years) 4.7 4.6 4.5
Weighted-average fair
value per option $13.39 $12.76 $12.59
The dividend yield assumes that the current dividend payout
will continue with no anticipated changes. The expected
volatility is based on weighted historical and implied volatilities
of the Company’s common stock price. The expected life of
the options is based on historical data and is not necessarily
indicative of exercise patterns that may occur.
Stock Options with Performance-Based and
Market-Based Conditions
On November 30, 2007, the Compensation and Benefits
Committee of the Board of Directors (the CBC) approved
and granted to the Company’s CEO a special non-qualified
stock option award with performance-based and market-based
conditions. The grant is for 1,375,000 shares with an exercise
price per share of $58.98 and a contractual term of 10 years from
date of grant. The grant consists of four separate components,
each allocated 25 percent of the total shares granted that
individually cliff vest at the end of 6 years based on a specified
performance-based or market-based metric being achieved
for each component. Each component may individually pro-
rata vest between years 4 and 6 if the Company’s CEO retires
during that period and the specified six-year performance or
market metric is subsequently achieved.
Performance-Based Conditions
Three of the stock award components have performance-
based conditions that individually vest based on Company
performance measured by revenue growth, earnings per share
growth, or return on equity performance over the vesting
period. Compensation expense for the fair value of each of these
three components will be recognized over the six-year vesting
period when it is determined it is probable (as defined by SFAS
123(R)) the specific performance metric for the component will
be achieved.
The fair value of each performance-based option is estimated
at the date of grant (November 30, 2007) using a Black-Scholes-
Merton option-pricing model with the following assumptions:
November 30,
2007
Dividend yield 1.2%
Expected volatility 23%
Risk-free interest rate 4.0%
Expected life of stock option (years) 8
Fair value per option $18.37
Aggregate fair value (millions) $ 18.9
Market-Based Conditions
The fourth stock award component has a market-based
condition that vests based on the Company’s total shareholder
return as compared to the S&P 500 Index. Compensation
expense for the fair value of this component is fixed and is
recognized ratably over the six-year vesting period irrespective
of the probability of the market metric being achieved as
required by SFAS 123(R) for awards containing market-based
conditions.
The fair value of each market-based option is estimated at
the date of grant (November 30, 2007) using a Monte Carlo
Valuation model with the following assumptions:
November 30,
2007
Dividend yield 1.2%
Expected volatility – Company 27%
Expected volatility – S&P 500 Index 16%
Risk-free interest rate 4.6%
Expected life of
stock option (years) 8
Fair value per option $17.25
Aggregate fair value (millions) $ 5.9
On January 31, 2008, the CBC approved and granted to the
Company’s CEO a second special grant of non-qualified
stock option award with performance-based and market-
based conditions. The number of shares underlying the
option award, terms, and performance-based and market-
based conditions are the same as the option award granted on
November 30, 2007, except that the exercise price per share
is $49.13.
RESTRICTED STOCK AWARDS
RSAs granted in 2003 and thereafter vest ratably, substantially
all at 25 percent per year, beginning with the first anniversary of
the grant date. RSAs granted prior to 2003 generally cliff vest
4 years after the grant date.
The aggregate intrinsic value of outstanding RSAs as of
December 31, 2007, was approximately $391 million. The total
fair value of shares vested during 2007, 2006, and 2005 was
$203 million, $176 million, and $290 million, respectively.
100