American Express 2007 Annual Report Download - page 103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
PORTFOLIO GRANTS
The Company awards cash-settled PGs that earn value based
on the Company’s financial performance and the Company’s
total shareholder return versus that of the S&P 500 Index (for
PGs granted prior to 2006, the S&P Financial Index was used).
These awards vest after a three-year performance period and
are subject to adjustments and approval by management and
the CBC. The PGs are classified as liabilities and, therefore, the
fair value is estimated at the date of grant and updated quarterly
and recognized over the performance period. Cash paid upon
vesting of PGs was $55 million, $56 million, and $66 million in
2007, 2006 and 2005, respectively.
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) 2007 2006 2005
Restricted stock awards(a) $135 $ 137 $ 129
Stock options(b) 78 80 77
Portfolio grants(c) 62 54 24
Performance/market-based stock
options and other(d) 14 2
Total compensation expense,
pretax $276 $ 275 $ 232
Income tax benefit $ 96 $ 96 $ 81
(a) As of December 31, 2007, the total unrecognized compensation cost related
to unvested RSAs was $241 million. This cost is recognized on a straight-
line basis over the weighted-average remaining vesting period of 2.4 years.
(b) As of December 31, 2007, the total unrecognized compensation cost related
to unvested options was $132 million. This cost is recognized on a straight-
line basis over the weighted-average remaining vesting period of 2.5 years.
(c) 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
was $23 million.
(d) As of December 31, 2007, the total unrecognized compensation cost related
to performance-based and market-based options was $18.9 million and $5.8
million, respectively.
NOTE 18 RETIREMENT PLANS
The Company sponsors defined benefit pension plans, defined
contribution plans and defined benefit post-employment
benefit plans for its employees. The following table provides a
summary of the total cost related to these plans:
(Millions) 2007 2006 2005
Defined benefit pension plan
cost(a) $ 28 $124 $ 112
Defined contribution plan cost(a) 173 106 109
Defined benefit post-
employment
plan cost 31 39 35
Net periodic benefit cost $ 232 $269 $ 256
(a) Amendments to the U.S. defined benefit and defined contribution plans
were effective in the third quarter of 2007. These amendments are further
described in the next paragraph.
In January 2007, the Company approved amendments to
the American Express Retirement Plan (the Plan) and the
Supplemental Retirement Plan (the SRP) effective July 1, 2007,
which provided that active participants immediately vested in
their accrued benefits, but no longer accrue future benefits other
than interest credits under the plans. As a result of this action,
there was a net reduction in the projected benefit obligation
of $91 million and a related curtailment gain of $63 million
($39 million after-tax) on the date the plan amendment was
approved. As a result of these changes, the Company has
modified the existing defined contribution plan in the United
States to provide for greater Company contributions as further
described in the “Defined Contribution Retirement Plan”
section of this note.
The following sections provide additional information
relating to each of these benefit arrangements.
DEFINED BENEFIT PENSION PLANS
The Company sponsors the Plan for eligible employees in
the United States. The Plan is a noncontributory defined
benefit plan and was amended effective July 1, 2007. The Plan
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 2007 and 2006 was 120
percent and 113 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.
Employees’ balances are 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 (1)
10 percent or (2) the annual maximum interest rate set by the
U.S. government for determining lump-sum values. Prior to the
amendment as of July 1, 2007, these balances were also credited
each pay period 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 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 SRP
for employees compensated above a certain level to supplement
their pension benefits that are limited by the Internal Revenue
Service. The SRP is a supplemental plan that was also amended
as of July 1, 2007, and its terms generally parallel those of the
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