American Express Company DEF 14A 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box:
American Express Company
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
ANNUAL MEETING OF SHAREHOLDERS
March 14, 2007
TABLE OF CONTENTS
March 14, 2007
We are providing these proxy materials to you in connection with the solicitation of proxies by the Board of Directors of American Express Company for the 2007 Annual Meeting of Shareholders and for any adjournment or postponement of the Meeting. In this proxy statement, we refer to American Express Company as the Company, we, our or us.
We are holding the Annual Meeting at 10:00 a.m. Eastern Time, on Monday, April 23, 2007, at the Companys New York City headquarters and invite you to attend in person. If you need special assistance at the Meeting because of a disability, you may contact Stephen P. Norman, our Secretary, by telephone at (212) 640-5583, by e-mail at firstname.lastname@example.org or by writing to him at 200 Vesey Street, New York, New York 10285.
The Company has arranged for a live audio Web cast of the 2007 Annual Meeting to be accessible to the general public on the Internet at http://ir.americanexpress.com. A replay of the Meetings audio Web cast will also be available at the same Web site address beginning later the same day.
We intend to mail this proxy statement and a proxy card to shareholders starting on or about March 16, 2007.
You may vote all shares that you owned as of February 28, 2007, which is the record date for the Annual Meeting. On February 28, 2007, we had 1,186,512,240 common shares outstanding and eligible to vote. Each common share is entitled to one vote on each matter properly brought before the Meeting.
Ownership of Shares
You may own common shares in one or more of the following ways:
If your shares are registered directly in your name, you are the holder of record of these shares and we are sending these proxy materials directly to you. As the holder of record, you have the right to give your proxy directly to us, to give your voting instructions by telephone or by the Internet, or to vote in person at the Meeting. If you hold your shares in street name, your broker, bank or other holder of record is sending these proxy materials to you. As a holder in street name, you have the right to direct your broker, bank or other holder of record how to vote by filling out the voting instruction form that accompanies your proxy materials. Regardless of how you hold your shares, we invite you to attend the Meeting.
How to Vote
Your vote is important. We encourage you to vote promptly. Internet and telephone voting is available through 11:59 p.m. Eastern Time on Wednesday, April 18, 2007, for shares held in employee plans and through 11:59 p.m. Eastern Time on Sunday, April 22, 2007, for all other shares. You may vote in the following ways:
By Telephone. If you are located in the United States or Canada you can vote your shares by calling the toll-free telephone number on your proxy card or in the instructions that accompany your proxy materials. You may vote by telephone 24 hours a day. The telephone voting system has easy-to-follow instructions and allows you to confirm that the system has properly recorded your votes. If you vote by telephone, you do not need to return your proxy card or your voting instruction form.
By Internet. You can also vote your shares by the Internet. Your proxy card indicates the Web site you may access for Internet voting. You may vote by the Internet 24 hours a day. As with telephone voting, you will be able to confirm that the system has properly recorded your votes. If you hold your shares in street name, please follow the Internet voting instructions that accompany your proxy materials. You may incur telephone and Internet access charges if you vote by the Internet. If you vote by the Internet, you do not need to return your proxy card or your voting instruction form.
By Mail. If you are a holder of record, you can vote by marking, dating and signing your proxy card and returning it by mail in the enclosed postage-paid envelope. If you hold shares in street name, please complete and mail the voting instruction form.
At the Annual Meeting. The way you vote your shares prior to the Meeting will not limit your right to change your vote at the Meeting if you attend in person. If you hold your shares in street name, you must obtain a proxy, executed in your favor, from the holder of record if you wish to vote these shares at the Meeting.
All shares that have been properly voted and not revoked will be voted at the Meeting. If you sign and return your proxy card without any voting instructions, your shares will be voted as the Board of Directors recommends.
Revocation of Proxies. You can revoke your proxy at any time before your shares are voted if you (1) submit a written revocation to our Secretary, (2) submit a later-dated proxy (or voting instruction form if you hold shares in street name), (3) provide subsequent telephone or Internet voting instructions or (4) vote in person at the Meeting.
Shares Held Under Plans
If you participate in the Shareholders Stock Purchase Plan, your proxy card includes the number of shares enrolled in that plan as well as any shares you have acquired through dividend reinvestment. If you participate in the ISP, the Ameriprise Financial 401(k) Plan or the Employee Stock Ownership Plan of Amex Canada, Inc., your proxy card includes shares that the relevant plan has credited to your account.
To allow sufficient time for the ISP, the Employee Stock Ownership Plan of Amex Canada, Inc. and the Ameriprise Financial 401(k) Plan trustees to vote, the trustees must receive your voting instructions by 11:59 p.m. Eastern Time on Wednesday, April 18, 2007. If the trustees for the ISP and the Employee Stock Ownership Plan of Amex Canada, Inc. do not receive your instructions by that date, the trustees will not vote your shares. If the trustee of the Ameriprise Financial 401(k) Plan does not receive your instructions by that date, the trustee will vote your shares in the same proportion of votes that the trustee received from other plan participants who did vote.
We maintain the confidentiality of the votes of individual shareholders. We do not disclose these votes to any member of management, unless we must disclose them for legal reasons. However, if a shareholder writes a comment on the proxy card, the comment will be forwarded to management. In reviewing the comment, management may learn how the shareholder voted. In addition, the Inspectors of Election and selected employees of our independent tabulating agent may have access to individual votes in the normal course of counting and verifying the vote.
Quorum and Required Vote
Quorum. We will have a quorum and will be able to conduct the business of the Annual Meeting if the holders of a majority of the votes that shareholders are entitled to cast are present at the Meeting, either in person or by proxy.
Votes Required for Proposals. To elect Directors and adopt the other proposals, the following proportion of votes is required:
Routine and Non-Routine Proposals. New York Stock Exchange (NYSE) rules determine whether proposals presented at shareholder meetings are routine or not routine. If a proposal is routine, a broker or other entity holding shares for an owner in street name may vote on the proposal without receiving voting instructions from the owner. If a proposal is not routine, the broker or other entity may vote on the proposal only if the owner has provided voting instructions. A broker non-vote occurs when the broker or other entity is unable to vote on a proposal because the proposal is not routine and the owner does not provide any instructions.
We believe that under the rules of the NYSE, the election of directors and ratification of the selection of our independent registered public accountants are routine items and that the proposal to adopt the American Express Company 2007 Incentive Compensation Plan and the shareholder proposal are not routine items.
Broker Vote. If you hold your shares in a bank or brokerage account you should be aware that if you fail to instruct your bank or broker how to vote within 10 days of the Meeting, the bank or broker is permitted to vote your shares in its discretion on your behalf on routine items. Banks and brokers have historically cast their votes on routine items in support of management in the absence of instructions from their clients. Thus, if you wish to vote against managements recommendations on Items 1 and 2, the two routine matters in this proxy statement, you should complete and return your voting instruction form before April 13, 2007.
How We Count Votes. In determining whether we have a quorum, we count abstentions and broker non-votes as present and entitled to vote.
In counting votes on the proposals:
Multiple Shareholders Sharing the Same Address
In accordance with the notices we previously sent to street-name shareholders who share a single address, we are sending only one annual report and proxy statement to that address unless we have received contrary instructions from any shareholder at that address. This practice, known as householding, is designed to reduce our printing and postage costs. However, if any shareholder residing at such an address wishes to receive a separate annual report or proxy statement, he or she may contact the Companys Secretary. If you are receiving multiple copies of our annual report and proxy statement, you can request householding by contacting the Companys Secretary. The contact information for the Companys Secretary is stated on page 1 under General Information.
Cost of Proxy Solicitation
We will pay the expenses of soliciting proxies on behalf of the Board of Directors. Our Directors, officers or employees may solicit proxies for us in person, or by telephone, facsimile or electronic transmission. We have hired Morrow & Co. to help us distribute and solicit proxies. We will pay Morrow $17,500 plus expenses for these services.
Our business is managed by the Companys employees under the direction and oversight of the Board of Directors. Except for Kenneth I. Chenault, our Chairman and Chief Executive Officer, none of our Board members is an employee of the Company. The Board limits membership of the Audit Committee, Compensation and Benefits Committee and Nominating and Governance Committee to independent non-management Directors. We keep Directors informed of our business through discussions with management, materials we provide to them, visits to our offices and their participation in Board and Board Committee meetings.
The Board of Directors has adopted Corporate Governance Principles which, along with the charters of the Board Committees, the Companys Code of Conduct for employees and the Code of Business Conduct for Directors, provide the framework for the governance of the Company. The Board of Directors has also appointed a Corporate Governance Officer to promote best practices and help the Company remain in the forefront of good corporate governance. The Corporate Governance Officer periodically reviews the Companys governance principles and practices to assure that they continue to reflect high standards and makes recommendations to the Nominating and Governance Committee in connection with the Companys governance practices.
A complete copy of the Companys governance principles, the charters of the Board Committees and the Codes of Conduct for employees and Directors may be found on the Companys Investor Relations Web site at http://ir.americanexpress.com. Copies of these materials also are available without charge upon written request to the Secretary of the Company.
Summary of the Corporate Governance Principles
Independence of Directors. A substantial majority of the Board of Directors shall consist of independent, non-management Directors who meet the criteria for independence required by the New York Stock Exchange.
A Director is independent if he or she does not have a material relationship with the Company or one of its subsidiaries.
The Board has established the following guidelines to assist it in determining Director independence.
1. A Director will not be considered independent if:
2. The Board has determined that a material relationship with the Company will be deemed to exist if a Director is:
3. The Board of Directors also has determined that the following relationships are not material and do not impair a Directors independence:
Based on these guidelines, on February 26, 2007 the Board of Directors determined that 11 of the Companys 14 Director nominees are independent: Ms. Burns and Messrs. Akerson, Chernin, Leschly, Levin, McGinn, Miller, Popoff, Reinemund, Walter and Williams. The other two non-management Directors, Ms. Barshefsky and Mr. Jordan, as well as Mr. Chenault, are not independent under these guidelines.
Composition of the Board. Directors should be persons who have achieved prominence in their field and who possess significant experience in areas of importance to the Company, such as general management, finance, marketing, technology, law, international business or public sector activities.
Directors should possess integrity, independence, energy, forthrightness, analytical skills and commitment to devote the necessary time and attention to the Companys affairs. Directors should possess a willingness to challenge and stimulate management and the ability to work as part of a team in an environment of trust.
Executive Sessions. The non-management Directors shall meet periodically in executive session without the Chief Executive Officer present, and the independent non-management Directors shall meet in executive session at least once annually.
The executive sessions of non-management Directors shall be presided over by the Director who is the chairman of the Committee responsible for the issue being discussed. General discussions, such as the review of the Companys overall performance, shall be presided over by the longest serving Director. The Board schedules at least three executive sessions of non-management Directors each year, including one executive session of independent Directors only. However, any Director may request additional executive sessions of non-management Directors to discuss any matter of concern. During 2006, the Board held four executive sessions of non-management Directors, one of which included independent Directors only.
Voting for Directors. Currently, the Director nominees who receive the plurality of votes cast are elected as Directors. In any non-contested election of Directors, any Director nominee who receives a greater number of votes withheld from his or her election than votes for such election shall submit his or her resignation to the Board within 30 days of the shareholder vote. In deciding whether or not to accept the resignation, the Board shall consider all factors deemed relevant, including the stated reason why shareholders who cast withhold votes did so, the qualifications of the Director, and whether the Directors resignation from the Board would be in the best interests of the Company and its shareholders. The Board will also consider a range of possible responses to the shareholder vote, including, for example, acceptance of the resignation or rejection of the resignation and having the Director continue to serve but curing the grievance causing the withheld votes. Only the Companys independent Directors, excluding the nominee in question, shall decide the nominees status. The Board shall reach its decision within 90 days of the shareholder vote and disclose its final decision in a Form 8-K filed with the Securities and Exchange Commission within four business days of such decision, together with a full explanation of the process and the reasons for rejecting the tendered resignation, if applicable.
In January 2007, the Board committed to seek shareholder approval in 2008 to amend its charter documents to establish majority voting for Directors in uncontested elections.
Communicating with Directors. The Board of Directors has provided a means by which shareholders and other interested parties may send communications to the Board or to individual members of the Board. Such communications, whether by letter, e-mail or telephone, should be directed to the Companys Secretary, who will forward them to the intended recipients. However, unsolicited advertisements or invitations to conferences or promotional material may not, in the discretion of the Companys Secretary, be forwarded to the Directors.
If a shareholder wishes to communicate a concern to the Chair of the Audit Committee about the Companys financial statements, accounting practices or internal controls, the concern should be submitted in writing to the Chair of the Audit Committee in care of the Companys Secretary. If the concern relates to the Companys governance practices, business ethics or corporate conduct, the concern should be submitted in writing to the Chair of the Nominating and Governance Committee in care of the Companys Secretary. If the shareholder is unsure as to which category his or her concern relates, he or she may communicate it to any one of the independent Directors in care of the Companys Secretary. The contact information for the Companys Secretary is stated on page 1 under General Information.
The Companys whistleblower policy prohibits the Company or any of its employees from retaliating or taking any adverse action against anyone for raising a concern in good faith. If a shareholder nonetheless prefers to raise his or her concern to the Board in a confidential or anonymous manner, the concern may be directed to the Office of the Ombudsperson at the Companys headquarters or by telephone at 1-800-297-1010. The Ombudsperson will refer the concern to the Chair of the Audit Committee who will assure that the matter is properly investigated.
Other. Non-management Directors shall have access to individual members of management or to other employees of the Company on a confidential basis. Directors are authorized to conduct independent investigations and to hire outside consultants or experts at the Companys expense. Directors shall also have access to Company records and files, and Directors may contact other Directors without informing Company management of the purpose or even the fact of such contact.
The Company believes that each Director should have a substantial personal investment in the Company. A personal holding of 20,000 shares of the Company is recommended for each Director. Directors are expected to acquire and maintain this share ownership threshold within five years of joining the Board.
The Board of Directors encourages all its members to attend the Annual Meeting of Shareholders. In April 2006, all of the then incumbent Directors were present at the Annual Meeting of Shareholders.
During 2006, the Board of Directors met 11 times. All of our Directors attended 75% or more of the meetings of the Board and Board Committees on which they served in 2006.
The following table lists our five Committees, the Directors who currently serve on them and the number of Committee meetings held in 2006.
Membership on Board Committees
C = Chair
The responsibilities of the Audit Committee are described in the following Report of the Audit Committee.
All members of the Audit Committee are independent Directors as required by the listing standards of the NYSE and the Companys Corporate Governance Principles. The Board has also determined that Messrs. Akerson and Walter meet the requirements for being audit committee financial experts as defined by SEC rules.
Report of the Audit Committee
The role of the Audit Committee is to assist the Board of Directors in its oversight of the Companys financial reporting process. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. The Companys independent registered public accountants are responsible for auditing the Companys financial statements and expressing an opinion as to their conformity to accounting principles generally accepted in the United States.
In the performance of its oversight function, the Audit Committee has reviewed and discussed with management and the independent accountants the Companys audited financial statements. The Audit Committee also has discussed with the independent accountants the matters required to be discussed by Statement on Auditing Standards No. 61 relating to communication with audit committees. In addition, the Audit Committee has received from the independent accountants the written disclosures and letter required by Independence Standards Board Standard No. 1 relating to independence discussions with audit committees, has discussed with the independent accountants their independence from the Company and its management, and has considered whether the independent accountants provision of non-audit services to the Company is compatible with maintaining the accountants independence.
The Audit Committee discussed with the Companys internal auditors and independent accountants the overall scope and plans for their respective audits. The internal auditors are responsible for preparing an annual audit plan and conducting internal audits under the control of the Companys General Auditor, who is accountable to the Audit Committee. The Audit Committee met with the internal auditors and independent accountants, with and without management present, to discuss the results of their examinations, their evaluations of the Companys internal controls and the overall quality of the Companys financial reporting. In addition, the Audit Committee met with the Chief Executive Officer and Chief Financial Officer of the Company to discuss the processes that they have undertaken to evaluate the accuracy and fair presentation of the Companys financial statements and the effectiveness of the Companys systems of disclosure controls and procedures and internal control over financial reporting.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the Companys audited financial statements be included in the Companys 2006 Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2006 for filing with the Securities and Exchange Commission.
Daniel F. Akerson, Chairman
Ursula M. Burns
Richard A. McGinn
Robert D. Walter
Compensation and Benefits Committee
The Compensation and Benefits Committee (Compensation Committee) has oversight responsibility for the compensation and benefit programs for executive officers and other employees. The processes and procedures by which the Compensation Committee considers and determines named executive officer compensation are described in the Compensation Discussion and Analysis included in this proxy statement. The Compensation Committee may delegate all or a portion of the authority granted to it by the Board to one or more Compensation Committee members, senior executives or committees in accordance with applicable laws, regulations and plan requirements. All members of the Compensation Committee are independent Directors as required by the listing standards of the NYSE and the Companys Corporate Governance Principles.
Compensation Committee Interlocks and Insider Participation. The members of the Compensation Committee are Messrs. Leschly, McGinn, Miller, Popoff and Walter. None of the members is a former or current officer or employee of the Company or any of its subsidiaries. None of the members has any relationship required to be disclosed under this caption under the rules of the SEC.
Nominating and Governance Committee
The Nominating and Governance Committee considers and recommends candidates for election to the Board, advises the Board on Director compensation, oversees the annual performance evaluations of the Board and Board Committees, advises the Board on corporate governance matters and administers the Companys Related Person Transaction Policy. All members of the Nominating and Governance Committee are independent Directors as required by the listing standards of the NYSE and the Companys Corporate Governance Principles.
Director Nomination Process. The Nominating and Governance Committee considers and recommends candidates for election to the Board. The Committee also considers candidates for election to the Board who are submitted by shareholders. Each member of the Committee participates in the review and discussion of Director candidates. In addition, Directors who are not on the Committee may meet with and evaluate the suitability of candidates. In making its selections of candidates to recommend for election, the Committee seeks persons who have achieved prominence in their field and who possess significant experience in areas of importance to the Company, such as general management, finance, marketing, technology, law, international business or public sector activities. The minimum qualifications that the Nominating and Governance Committee believes must be met for a candidate to be nominated include integrity, independence, energy, forthrightness, strong analytical skills and the willingness to devote appropriate time and attention to the Companys affairs. Candidates should also demonstrate a willingness to work as part of a team in an atmosphere of trust and a commitment to represent the interests of all the shareholders rather than those of a specific constituency.
Shareholders who wish to submit nominees for election at an annual or special meeting of shareholders should follow the procedure described on page 60. The Nominating and Governance Committee applies the same
standards in considering candidates submitted by shareholders as it does in evaluating candidates submitted by members of the Board of Directors. Since our April 2006 Annual Meeting of Shareholders, the Nominating and Governance Committee has recommended Messrs. Levin, Reinemund and Williams for election as Directors. Messrs. Levin and Williams were recommended to the Nominating and Governance Committee by a third-party search firm, which the Committee retained to assist it in identifying and evaluating potential director nominees, and were elected to the Board in January 2007. Mr. Reinemund was recommended to the Nominating and Governance Committee by the Companys Chief Executive Officer and several non-management Directors.
The Executive Committee is authorized to meet instead of the full Board in emergencies or in the interval between Board meetings. Any action taken by the Executive Committee must be reported to the full Board at the next Board meeting. The Executive Committee has all the authority of the Board, except that the Committee cannot fill vacancies in the Board, fix the compensation of Directors, repeal, amend or adopt by-laws, repeal or amend any resolution of the Board that by its terms may not be repealed or amended by the Committee, or submit to shareholders any proposal that requires shareholder approval under New York law.
Public Responsibility Committee
The Public Responsibility Committee reviews issues that affect the communities in which we work or the public interest in general. These issues include the Companys consumer policies, legislation and regulation affecting the Company, philanthropic programs, the Companys political action committee, government relations activities, other policies affecting the communities in which the Company operates, and the environment.
COMPENSATION OF DIRECTORS
It is the goal of the Nominating and Governance Committee to maintain the level of Director compensation above the mid-point of comparable companies. In 2005, the Committee engaged an independent compensation advisory firm, Frederic W. Cook & Co., Inc., to review Director compensation. As a result of that review, the Committee recommended that the Directors receive the compensation described below. The Committee undertakes such a review approximately every two years.
The following table provides information on the Companys compensation of non-management Directors for 2006. In addition, the Company reimburses Directors for out-of-pocket expenses attendant to Board membership.
This column includes the expense recognized by the Company in its financial statements in 2006 in accordance with Statement of Financial Accounting Standards No. 123(R) (SFAS 123R) with respect to the SEUs granted in 2006 and the change in value during 2006 of each Directors aggregate SEU balance (including dividend equivalents credited) relating to awards under the Share Equivalent Unit Plan in 2006 and prior years.
As of December 31, 2006, the SEU balance in each Directors account was: Mr. Akerson 9,776; Ms. Barshefsky 18,948; Mr. Bowen 0; Ms. Burns 11,673; Mr. Chernin 3,418; Mr. Dolan 5,996; Mr. Jordan 66,000; Mr. Leschly 9,776; Mr. McGinn 9,776; Mr. Miller 12,904; Mr. Popoff 18,895; and Mr. Walter 17,318. These amounts represent the aggregate number of SEUs granted under the Share Equivalent Unit Plan for all years of service as a Director, additional units credited as a result of the reinvestment of dividend equivalents and, for Messrs. Jordan, Miller and Popoff and Ms. Barshefsky and Ms. Burns, retainer amounts deferred into their SEU accounts under the Deferred Compensation Plan described below in note 4 and dividend equivalents thereon. The SEUs do not count toward the share ownership guidelines we have established for Directors.
Deferred Compensation Plan. Non-management Directors may defer the receipt of up to 100% of their annual retainer fees into either: (1) a cash account that we value based on a schedule linked to our return on equity, which is the same schedule we use for the deferred compensation plan in which management participates shown on page 51, and/or (2) the SEU account described above. Under either alternative, Directors will receive cash payments and will not receive shares upon payout of their deferrals. This column includes the above-market portion of the earnings during 2006 on amounts deferred under this plan in cash accounts for the following Directors in the amounts stated: Mr. Akerson $91,228; Mr. Dolan $48,753; Mr. Jordan $225,646; Mr. Leschly $115,122; Mr. Popoff $46,622; and Mr. Walter $2,631. Earnings in 2006 were considered to be above-market to the extent that the rate of interest exceeded 5.76%.
Directors Charitable Award Program. The Company maintains a Directors Charitable Award Program for Directors elected prior to July 1, 2004. To fund this program we purchased joint life insurance on the lives of participating Directors, including Mr. Chenault, and advisors to the Board. We will receive a $1,000,000 benefit following the death of a Director and $500,000 following the death of an advisor. We expect to donate one-half of the benefit to the American Express Foundation and one-half to the charitable organization that the Director or advisor recommends. In 2006, the Company paid premiums for policies on the following Directors in the amounts stated: Mr. Akerson $25,574; Ms. Burns $18,942; Mr. Dolan $18,942; Mr. Leschly $35,741; Mr. Miller $24,925; and Mr. Walter $16,450, which amounts are included in this column.
Matching Gift Program. Directors are eligible to participate in the Companys Matching Gift Program on the same basis as Company employees. Under this program, the American Express Foundation matches gifts to approved charitable organizations up to $8,000 per calendar year.
OWNERSHIP OF OUR COMMON SHARES
The table below shows how many American Express common shares certain individuals and entities beneficially owned on February 28, 2007. These individuals and entities include: (1) owners of more than 5% of our outstanding common shares; (2) our nominees for Director; (3) the executive officers named in the Summary Compensation Table on page 39 and (4) all nominees for Director and current executive officers as a group. A person has beneficial ownership over shares if the person has voting or investment power over the shares or the right to acquire such power within 60 days. Investment power means the power to direct the sale or other disposition of the shares. Each person has sole voting and investment power over the shares, except as we describe below.
In 1995 we signed an agreement with Berkshire designed to ensure that Berkshires investment in our Company will be passive. The agreement remains in effect so long as Berkshire owns 10% or more of our voting securities. Berkshire made similar commitments to the Board of Governors of the Federal Reserve System. Berkshire and its subsidiaries have also agreed to follow our Board of Directors recommendations
in voting Company common shares they own so long as Mr. Chenault is our Chief Executive Officer and Berkshire owns 5% or more of our voting securities. With certain exceptions, Berkshire and its subsidiaries may not sell Company common shares to any person who owns more than 5% of our voting securities or who attempts to change the control of the Company.
Item 1Election of Directors
Our Board of Directors currently has 13 members. Each current Director is standing for election to hold office until the next Annual Meeting of Shareholders. In addition, Mr. Steven S. Reinemund has been nominated for election to the Board. If a Director resigns or retires during the year, the Board of Directors, with input from the Nominating and Governance Committee, may elect another Director as a replacement. The Board may also add new members during the year based on a number of factors, such as the size of the Board and the Boards desire to add fresh perspectives or expertise. During 2006, Mr. Bowen did not stand for re-election because he had reached the mandatory retirement age, and Mr. Dolan resigned due to a change in his principal occupation.
The Board has appointed Daniel T. Henry, Stephen P. Norman and Louise M. Parent as proxies who will vote your shares on your behalf. Their names appear on the proxy card. These individuals intend to vote for the election of each of the 14 nominees unless you indicate on the proxy card or voting instructions that your vote is withheld from any or all of the nominees. The telephone and Internet voting procedures will include instructions on how to withhold your vote from any or all nominees. We expect that each nominee will be able to serve if elected as a Director. However, if any nominee is not able to serve, the persons named as proxies may vote for another person as nominated by the Nominating and Governance Committee.
The Board of Directors recommends a vote FOR the election of these nominees as Directors.
We describe below the principal occupation in italics and other information about our nominees.
Managing Director, The Carlyle Group, a private equity firm, March 2003 to present. Chairman and Chief Executive Officer, XO Communications, Inc., September 1999 to January 2003. XO Communications, Inc. filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in June 2002, and emerged from bankruptcy proceedings in January 2003, at which time a majority interest was acquired by its senior secured lenders. Director, Hawaiian Telcom Communications, Inc., Willcom, Inc. and Freescale Semiconductor, Inc.
Senior International Partner, Wilmer Cutler Pickering Hale and Dorr LLP, attorneys, Washington, D.C., 2001 to present. United States Trade Representative and a member of the Presidents Cabinet from 1997 to 2001. Board of Directors, Council on Foreign Relations. Director, The Estée Lauder Companies Inc., Starwood Hotels & Resorts Worldwide, Inc. and Intel Corporation.
Senior Vice President and President, Business Group Operations, Xerox Corporation, a global company engaged in manufacturing, servicing and financing a complete range of document equipment and services, January 2003 to present; President, Document Systems and Solutions Group, October 2001 to December 2002; Senior Vice President, Corporate Strategic Services, May 2000 to October 2001. Director, Boston Scientific Corporation, National Association of Manufacturers, the University of Rochester and the Rochester Business Alliance.
Chairman and Chief Executive Officer, American Express Company, April 2001 to present; Chief Executive Officer, January 2001 to April 2001. Director, International Business Machines Corporation. Member, the World Trade Center Memorial Foundation. Trustee, NYU Hospitals Center and the New York University School of Medicine Foundation.
President, Chief Operating Officer and Director, News Corporation, a diversified international media and entertainment company, October 1996 to present. Director, DirecTV, Inc. and Gemstar-TV Guide International, Inc.
Senior Managing Director, Lazard Freres & Co. LLC, an investment banking firm, January 2000 to present. Of counsel, Akin Gump Strauss Hauer & Feld LLP, attorneys, Washington, D.C. and Dallas, Texas, January 2000 to present. Director, Asbury Automotive, Inc., J.C. Penney Company Inc., and Xerox Corporation. Trustee, Howard University.
Founder and Partner, Care Capital LLC, a private equity firm, May 2000 to present. Director, The Maersk Group. Member, Advisory Board of Daimler Chrysler and the Emory University Business School Deans Advisory Council.
President, Yale University, a private, independent university, July 1993 to present. Director Satmetrix Systems, Inc. Trustee of the William and Flora Hewlett Foundation.
General Partner, RRE Ventures, an investment advisory and venture capital firm, August 2001 to present. Director, Via Systems, Inc.
Former President and Chief Executive Officer, AXA Financial, Inc., a U.S.-based financial services organization providing asset management, financial advisory and insurance services, May 2001 to present. President and Chief Executive Officer, August 1997 to May 2001. Director, KeySpan Corporation and Korn/Ferry International. Member of the Board of Governors of the United Way of Tri-State, Chairman of the Board of Directors of Phoenix House, Trustee of the New York City Police Foundation and Chairman of the Partnership for New York Citys Security and Risk Management Task Force. Director, Institute for Medical Research.
Former Chairman and Chief Executive Officer, The Dow Chemical Company, a company that produces chemicals and chemical products, December 2000 to April 2004. Chairman, Chemical Financial Corporation, a bank holding company, April 2004 to April 2006. Director, Qwest Communications International Inc., United Technologies Corp. and Shin-Etsu Chemical Co. Ltd. Director Emeritus, Indiana University Foundation. Member, American Chemical Society.
Chairman of the Board, PepsiCo, Inc., a company that produces beverages and convenient foods, October 2006 to present. Chairman and Chief Executive Officer, May 2001 to October 2006. Director, Johnson & Johnson. Trustee, United States Naval Academy Foundation. Chairman, National Minority Supplier Council.
Executive Chairman of the Board, Cardinal Health, Inc., a company that provides products and services supporting the health care industry, April 2006 to present; Chairman and Chief Executive Officer 1979 to April 2006. Director, Battelle Memorial Institute. Member, The Business Council.
Chairman, Chief Executive Officer and President, Aetna Inc., a company providing managed care benefits and health insurance, October 2006 to present; President and Chief Executive Officer from February 2006 to October 2006; President, from May 2002 to February 2006; Executive Vice President and Chief of Health Operations from March 2001 to May 2002. Member of the Board of Trustees of The Conference Board. Member of Deans Advisory Council and the Corporate Visiting Committee at the Massachusetts Institute of Technology.
Item 2Selection of Independent Registered Public Accountants
On February 26, 2007, the Audit Committee of the Board of Directors appointed PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year beginning January 1, 2007.
Each year the Audit Committee reviews our accounting firms qualifications, performance and independence in accordance with regulatory requirements and guidelines. At least every ten years, the Audit Committee charter requires a detailed review of the Companys accounting firm, which includes a comparison of resources available in other firms. The Committee conducted such a review in 2004, and appointed PricewaterhouseCoopers on November 22, 2004 as our independent registered public accounting firm for the year beginning January 1, 2005.
We are asking shareholders to ratify the Committees selection. In the event the shareholders fail to ratify the appointment, the Audit Committee will consider it a direction to consider other accounting firms for the subsequent year.
One or more representatives of PricewaterhouseCoopers will be present at the Meeting and will be given the opportunity to make a statement if he or she desires to do so and will be available to respond to appropriate questions.
The aggregate fees billed or to be billed for each of the last two fiscal years for professional services rendered for the audit of the Companys annual financial statements, review of financial statements included in the Companys Quarterly Reports on Form 10-Q and services that were provided in connection with statutory and regulatory filings or engagements and other attest services were $13.9 million for 2006 and $14.6 million for 2005.
The aggregate fees billed or to be billed for each of the last two fiscal years for assurance and related services that were reasonably related to the performance of the audit or review of the Companys financial statements were $1.7 million for 2006 and $1.9 million for 2005. The nature of the services performed for these fees included, among other things, employee benefit plan audits, internal control reviews, attest services not required by statute or regulation, and consultations concerning financial accounting and reporting matters not classified as audit.
The aggregate fees billed or to be billed for each of the last two fiscal years for professional services rendered for tax compliance and expatriate tax services were $204,000 for 2006 and $2.5 million for 2005. PricewaterhouseCoopers tax fees in 2005 include amounts related to projects underway prior to its appointment as our independent accountant.
All Other Fees
There were no fees billed or to be billed for 2006 for products and services other than those reported in the three prior categories. Fees billed for such other services in 2005 were $785,000. The other services performed in 2005 included access to online technical accounting guidance as well as certain advisory services relating to expatriate support and regulatory compliance.
Services to Associated Organizations
PricewaterhouseCoopers did not provide such services during 2006 or 2005.
Policy on Pre-Approval of Services Provided by Independent Registered Public Accountants
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the engagement of the Companys independent registered public accountants are subject to the specific pre-approval of the Audit Committee. All audit and permitted non-audit services to be performed by the Companys independent registered public accountants require pre-approval by the Audit Committee in accordance with pre-approval procedures established by the Audit Committee. The procedures require all proposed engagements of the Companys independent registered public accountants for services of any kind to be directed to the Companys General Auditor and then submitted for approval to the Audit Committee prior to the beginning of any services.
Other Transactions with PricewaterhouseCoopers
We have a number of business relationships with individual member firms of the worldwide PricewaterhouseCoopers organization. Our subsidiaries provide card and travel services to some of these firms and these firms pay fees to our subsidiaries. These services are in the normal course of business and we provide them pursuant to arrangements that we offer to other similar clients.
The Board of Directors recommends a vote FOR the following resolution:
RESOLVED, that the appointment by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP, independent registered public accountants, to audit the accounts of the Company and its subsidiaries for 2007 is ratified and approved.
Item 3Proposal to Approve the American Express Company 2007 Incentive Compensation Plan
The Board of Directors approved the American Express Company 2007 Incentive Compensation Plan (the 2007 Plan) in February 2007 and recommends that the shareholders also approve the 2007 Plan. The 2007 Plan provides for the grant of long-term equity and cash incentive compensation awards.
The Board of Directors believes that the 2007 Plan is important for the Companys continuing efforts to attract, motivate and retain highly qualified and experienced employees. Awards under the 2007 Plan provide incentives for key employees and other individuals to enhance shareholder value and to contribute to the Companys future success.
If approved, the 2007 Plan will replace the 1998 Incentive Compensation Plan (the 1998 Plan), and no new awards will be granted under the 1998 Plan. This replacement is needed because the 1998 Plans Section 162(m) tax deductibility provisions (the Million Dollar Cap provisions) are expiring in April 2007, and its ten-year term is expiring next year. Awards outstanding under the 1998 Plan will continue to be governed by the terms of that plan and the agreements under which they were granted.
The 2007 Plan continues many of the features of the 1998 Plan, but is updated to reflect changes to NYSE rules regarding equity compensation, other regulatory changes and market and corporate governance developments, based on a review conducted with the help of outside compensation consultants. Set forth below are a few highlights of the 2007 Plan, which are subject to the more detailed summary and plan document referred to below.
Summary of 2007 Plan
The full text of the 2007 Plan is attached to this proxy statement as Exhibit A. The principal features of the 2007 Plan are described below, but the description is qualified in its entirety by reference to the 2007 Plan itself. This 2007 Plan will not become effective unless shareholders approve it.
The primary objective of the 2007 Plan is to promote shareholder value and the Companys future success by providing appropriate retention and performance incentives to employees of the Company and its affiliates.
The 2007 Plan is administered by the Compensation and Benefits Committee of the Board of Directors (the Compensation Committee), which consists exclusively of Directors, each of whom is: (a) a non-employee director within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended; (b) an outside director within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code), and (c) an independent director for purposes of the rules and regulations of the NYSE.
The Compensation Committee has exclusive discretion to select the participants who will receive awards, to determine the type, size and terms of each award, and to adopt rules, procedures or sub-plans to accommodate the granting of awards to employees outside the United States. The Compensation Committee will also make all
other determinations that it decides are necessary or desirable in the interpretation and administration of the 2007 Plan. The Compensation Committee may delegate its authority under the 2007 Plan to one or more of its members or to appropriate officers, in accordance with guidelines it establishes.
Notwithstanding the Compensation Committees broad authority under the 2007 Plan, the Compensation Committee may not directly or indirectly reprice stock options or stock appreciation rights, nor permit the surrender or exchange of an outstanding award for cash or a replacement award. In addition, certain amendments to the 2007 Plan require shareholder approval, as described under Plan Amendment below.
Employees and other individuals performing services for the Company are eligible to receive awards under the 2007 Plan; however, non-employee Directors are not eligible to receive awards. Approximately 15,000 persons, including the executive officers, may be considered for awards.
Types of Awards
The 2007 Plan allows for the granting of the following types of awards: stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance grants and awards providing benefits similar to the foregoing awards that may be required to obtain regulatory approval in certain jurisdictions or in situations where local regulations may adversely affect the employee (e.g., taxation before receipt of shares). Awards under the 2007 Plan may be paid in cash, common shares, or other Company securities (such as debentures, preferred stock, or convertible securities), as determined by the Compensation Committee.
The shares that remain available for grant under the 1998 Plan as of April 23, 2007, not to exceed 53 million shares, will continue to be available for issuance under the 2007 Plan. In addition, the following shares subject to awards outstanding under the 1998 Plan or granted under the 2007 Plan which are recovered or not issued by the Company will be available for issuance under the 2007 Plan: (i) shares related to awards issued under the 2007 Plan or the 1998 Plan that are forfeited, terminated, canceled, acquired by the Company or expire unexercised; (ii) shares surrendered or withheld to pay the exercise price of awards issued under the 2007 Plan or the 1998 Plan or to satisfy the tax withholding obligations with respect to awards issued under such plans; and (iii) shares originally linked to awards that are actually settled in cash or consideration other than common shares or other equity securities. Awards granted through the assumption of, or substitution for, outstanding awards previously granted by a company acquired by the Company or any affiliate or with which the Company or any affiliate combines, will not count against the maximum number of shares that may be issued under the 2007 Plan. As of February 28, 2007, a total of 104,366,107 common shares were subject to outstanding awards under the 1998 Plan, including stock options covering a total of approximately 96,437,172 common shares with a weighted average exercise price of $39.60 per share and a weighted average remaining term of 2.39 years, and 7,928,935 shares covered by restricted stock and letter of intent (now called restricted stock units under the 2007 Plan) awards. The awards granted in January 2007 under the 1998 Plan represented approximately 0.8% of common shares outstanding.
For purposes of counting shares against the share reserve under the 2007 Plan, awards denominated solely in common shares (such as stock options and restricted stock) and other awards or securities that may be exercised for or convertible into common shares will be counted against the 2007 Plan reserve on the date of grant of the award based on the maximum number of shares underlying the award, as determined by the Compensation Committee. Awards denominated in other than common shares issued pursuant to the 2007 Plan that are not exercisable for or convertible into common shares will be counted based on the actual number of shares issued, if any.
Common shares and other equity securities issued under the 2007 Plan may come from newly issued, treasury or reacquired shares or securities, or any combination thereof.
A stock option, which may be a nonqualified or an incentive stock option, is the right to purchase a specified number of common shares at a price (the Option Price) fixed by the Compensation Committee. Generally, the Option Price paid to the Company may be no less than the fair market value of the underlying common shares on the date of grant. The fair market value of a share of common stock on a given date is determined by the closing
price as reported on the NYSE composite tape on such date. The Company may not decrease the Option Price of an outstanding stock option without shareholder approval, other than to make equitable adjustments (e.g., for stock splits) under the anti-dilution provisions of the 2007 Plan described under Anti-Dilution Adjustment below.
Generally, stock options will expire not later than ten years after the date on which they are granted. Stock options must have a vesting period of at least one year (subject to certain exceptions, such as death, disability, retirement, and certain corporate transactions (each, a Defined Event)) and otherwise become exercisable at such times and in such installments as the Compensation Committee shall determine. Payment of the Option Price must be made in such form as determined by the Compensation Committee, including: (i) cash; (ii) tender of common shares having a fair market value equal to the Option Price; (iii) if permitted by the Compensation Committee, authorization for a third party to sell an appropriate number of shares acquired upon exercise of a stock option and to remit to the Company a sufficient portion of the sale proceeds to pay the entire Option Price and/or any related tax withholding obligations; or (iv) a combination of these methods of payment. No loans from the Company or any affiliate are permitted in connection with the 2007 Plan.
No stock option may be exercised unless the holder has been employed by or performing services for the Company or one of its affiliates from the date of grant through the date of exercise, except that the Compensation Committee may permit exercise of a stock option after a participant is no longer employed by or performing services for the Company or one of its affiliates by reason of a period of Related Employment (as defined), or a Defined Event. In addition, the Compensation Committee may determine that stock options may be exercised for a minimum period following death, which period may extend beyond the original expiration date of the stock option.
Stock Appreciation Rights
Although the Compensation Committee does not intend to use such authority at the present time, the 2007 Plan authorizes the grant of stock appreciation rights. A stock appreciation right is a right to receive (without payment to the Company) cash, common shares, or other equity or debt securities of the Company or an affiliate, or any combination thereof, or property, or other forms of payment, or any combination thereof, as determined by the Compensation Committee, based on the increase in the fair market value of the number of common shares specified in the stock appreciation right. The Compensation Committee may grant stock appreciation rights either alone or in conjunction with stock options, performance grants or other awards. A stock appreciation right granted in conjunction with a previously granted stock option must have a per-share exercise price no less than the fair market value of a share on the date that the stock option was previously granted. The Company may not decrease the per-share exercise price of an outstanding stock appreciation right without shareholder approval, other than to make equitable adjustments (e.g., for stock splits) under the anti-dilution provisions of the 2007 Plan.
Stock appreciation rights must have a vesting period of at least one year (subject to certain exceptions, such as Defined Events), and otherwise become exercisable at such times and in such installments as the Compensation Committee shall determine.
No stock appreciation right may be exercised unless the holder has been employed by or performing services for the Company or one of its affiliates from the date of grant through the date of exercise, except that the Compensation Committee may permit exercise of a stock appreciation right after a participant is no longer employed by or performing services for the Company or one of its affiliates by reason of a period of Related Employment, or a Defined Event. In addition, the Compensation Committee may determine that stock appreciation rights may be exercised for a minimum period following death, which period may extend beyond the original expiration date of the stock appreciation right.
Restricted Stock and Restricted Stock Units
Generally, restricted stock is an award of common shares that are subject to a minimum vesting period of three years (with pro rata vesting permitted over such period) or such longer vesting period as determined by the Compensation Committee.
Restricted stock units (which were referred to as Letters of Intent under the 1998 Plan) are awards that are valued by reference to common shares, which value may be paid to a participant by delivery of such property as
the Compensation Committee shall determine, including without limitation, cash, common shares, other company securities or property, or other forms of payment, or any combination thereof. Generally, restricted stock units must have a vesting period of at least three years (with pro rata vesting permitted over such period) or such longer period as determined by the Compensation Committee.
Restricted stock and restricted stock units may also contain performance-based conditions to vesting, such as Company, business unit, participant and other performance objectives. The Compensation Committee may provide that the vesting period be shorter than three years in the case of those performance awards, as well as in other situations, such as Defined Events and in the case of payment of certain performance-based awards. Generally, in the event a participants employment with the Company and its affiliates terminates prior to the end of the restricted or vesting period (subject to the above exceptions), the Company will cancel shares of restricted stock and restricted stock units.
Prior to the expiration of the restricted period, a participant who has received an award of restricted stock has the right to vote and to receive dividends on the underlying unvested shares. However, the Compensation Committee may choose, at the time of the grant of an award of restricted stock, to restrict any cash dividends paid on such restricted stock, subject to such terms, conditions, restrictions or limitations, if any, as the Compensation Committee may establish. Any dividends that are not paid currently may, at the Compensation Committees discretion, accrue interest or be reinvested into additional shares of restricted stock subject to the same vesting or performance conditions as the underlying award.
A participant who has received a restricted stock unit does not have the right to vote or to receive dividends on the underlying shares. However, the Compensation Committee may choose, at the time of the grant of a restricted stock unit or any time thereafter up to the time of the awards payment, to include as part of such award an entitlement to receive cash dividend equivalents, subject to such terms, conditions, restrictions or limitations, if any, as the Compensation Committee may establish. Dividend equivalents shall be paid in such form and manner (i.e., lump sum or installments), and at such times as the Compensation Committee shall determine. All dividend equivalents that are not paid currently may, at the Compensation Committees discretion, be held in escrow and accrue interest or be reinvested into additional common shares subject to the same vesting or performance conditions as the underlying award.
Performance grants, including certain annual incentive awards and portfolio grants, are awards whose final value, if any, is determined by the degree to which performance objectives selected by the Compensation Committee are achieved during a specified period, subject to such adjustments as the Compensation Committee may approve based on relevant factors. The Compensation Committee establishes performance objectives that may be based upon Company, business unit, participant and/or other performance objectives. The Compensation Committee may make such adjustments in the computation of any performance measure or payout as it considers are appropriate. The maximum value of an award may be a fixed dollar amount, an amount that varies from time to time based on the value of a common share, or an amount that may be determined from other criteria specified by the Compensation Committee. Payment under a performance grant may vest over a period of time after the final value is determined.
The performance periods for performance grant awards must be a minimum of one year (subject to certain exceptions, such as Defined Events). In the past, the Company has structured both multi-year portfolio grant awards and annual incentive awards for certain executives as qualified performance-based compensation to maintain the Companys tax deduction for the compensation paid. (See Qualifying Performance-Based Awards below.)
Performance grants may be awarded alone or in conjunction with other awards. The Compensation Committee generally determines the value of a performance grant as soon as practicable after the end of the performance period or may determine value based upon a portion of the performance period upon earlier termination of the participants employment or performance of services, including upon a Defined Event. The rights of a participant in a performance grant are provisional and may be canceled or paid in whole or in part if the participants continuous employment with, or performance of services for, the Company and its affiliates terminates prior to payout, except termination by reason of a period of Related Employment. Payment of a performance grant may be made in cash, common shares, other securities issued by the Company or its affiliates or a combination thereof as determined by the Compensation Committee.
Qualified Performance-Based Awards
The Million Dollar Cap provisions limit the Companys tax deduction to $1 million per year for certain compensation paid to each of the Companys covered executives. Generally, the covered executives are the executive officers named in the Summary Compensation Table in our annual proxy statement. This limitation does not apply to qualified performance-based compensation awards. The 2007 Plan contains provisions permitting the Company to pay qualified performance-based compensation to covered executives, thereby reducing the after-tax cost of such compensation.
Stock options and stock appreciation rights may qualify as performance-based compensation if shareholders approve a maximum limit on the number of shares underlying such awards that may be granted to any participant over a specified period. To satisfy this requirement, stock options and stock appreciation rights are issued at fair market value and the maximum number of common shares underlying stock options and stock appreciation rights that may be granted to any participant in any one calendar year is limited to 2,000,000 (for 2007, this includes stock options and stock appreciation rights granted under the 1998 Plan during 2007), subject to the anti-dilution adjustments provided in the 2007 Plan.
Other performance-based awards under the 2007 Plan include performance grants and any other award whose value is determined by fixed, formulaic performance objectives and that meet other tax requirements. Such performance objectives may vary by participant and by award, and may be based upon the attainment of specific amounts of, or changes in, one or more of the following: revenue, revenue growth or product revenue growth; net income (before or after taxes); earnings (including earnings before taxes, earnings before interest and taxes or earnings before interest, taxes, depreciation and amortization) or earnings per share; shareholders equity or return on shareholders equity; assets, return on assets or net assets; capital or return on capital (including return on total capital or return on invested capital); book value or book value per share; economic value added models or equivalent metrics; operating income (before or after taxes); pre- or after-tax income (before or after allocation of corporate overhead or incentive compensation); expenses or reengineering savings; operating margins, gross margins or cash margin; cash flow, cash flow per share (before or after dividends) or cash flow return on investment; stock price or total shareholder return; market share; debt reduction; or regulatory achievements. The Compensation Committee may provide that in measuring the achievement of the performance objectives, an award may include or exclude items such as unrealized investment gains and losses, extraordinary, unusual or non-recurring items, asset write-downs, effects of accounting changes, currency fluctuations, acquisitions, divestitures, reserve-strengthening and other non-operating items. The foregoing objectives may be applicable to the Company as a whole, one or more of its subsidiaries, divisions, business units or business lines, or any combination of the foregoing, and may be applied on an absolute basis or be relative to other companies, industries or indices (e.g., stock market indices) or be based upon any combination of the foregoing. In addition to the performance objectives, the Compensation Committee may also condition payment of any such award upon the attainment of conditions, such as completion of a period of service, notwithstanding that the performance objective or objectives specified in the award are satisfied. The Compensation Committee shall have the discretion, by participant and by award, to reduce (but not to increase) some or all of the amount that would otherwise be payable under the award by reason of the satisfaction of the performance objectives set forth in the award. In making any such determination, the Compensation Committee is authorized in its discretion to take into account any such factor or factors it determines are appropriate, including, but not limited to, Company, business unit and individual performance.
Under such performance-based awards, in any one calendar year: (a) no participant may be paid cash, common shares (i.e., free and clear shares), other securities of the Company (other than shares of restricted stock or restricted stock units) or any combination of the foregoing with a value (as determined by the Compensation Committee) in excess of $20 million, and (b) no participant may receive more than 410,000 shares of restricted stock or shares provided through restricted stock units, subject to anti-dilution adjustments provided in the 2007 Plan. For purposes of the foregoing, the Compensation Committee will determine the calendar year or years in which amounts under these awards are deemed paid or received.
The maximum performance-based award values described above are designed to preserve flexibility for the Company to design appropriate incentive awards, to comply with the provisions of the Million Dollar Cap and to maintain the deductibility of such compensation paid to the covered executives. The tax benefits derived from such deductions preserve corporate assets and benefit the Company and its shareholders.
A participants rights in an award granted under the 2007 Plan may be assigned or transferred only in the event of death, or if permitted by the Compensation Committee, may be assigned or transferred without consideration to one or more members of the participants immediate family, to a partnership of which the only partners are the participant or members of the participants immediate family, or to a trust established by the participant for the exclusive benefit of the participant or one or more members of his immediate family.
The exercise or payment of awards and the issuance of shares under the 2007 Plan is conditioned upon a participant making satisfactory arrangements for the satisfaction of any liability to withhold federal, state, local or foreign income or other taxes. The Compensation Committee may permit a participant to pay taxes required to be withheld with respect to an award in any appropriate manner, including, without limitation, by the surrender to the Company of common shares owned by such person, or settled with common shares that are part of the award giving rise to the tax withholding liability.
If the Companys outstanding common shares are changed by reason of any stock split, stock dividend, combination, subdivision or exchange of shares, recapitalization, merger, consolidation, reorganization or other extraordinary or unusual event, the Compensation Committee will direct that appropriate changes be made in the maximum number or kind of securities that may be issued under the 2007 Plan and in the terms of certain outstanding awards, including the number of shares or securities subject to awards and the exercise price or other stock price or share-related provisions of awards.
The 2007 Plan will become effective following its approval by the shareholders at the Annual Meeting and, unless earlier terminated by the Board, will terminate on April 23, 2017.
The 2007 Plan may be amended in whole or in part at any time and from time to time by the Board; provided, however, that no amendment may be made without shareholder approval if such amendment would (a) increase the number of shares available for grant, (b) decrease the minimum stock option exercise price, (c) reduce the minimum vesting or performance periods under the Plan for awards, (d) change the aggregate or annual award limits, (e) amend or repeal the prohibitions against repricing or exchange of awards, or (f) in the absence of shareholder approval, adversely affect compliance with applicable laws, rules and regulations.
Award Forfeiture Provisions
Awards granted under the 2007 Plan will be subject to the Companys Policy regarding Recoupment of Incentive Compensation and the Companys Detrimental Conduct provisions. (See Compensation Discussion and AnalysisPolicy Regarding Recoupment of Incentive Compensation on page 32 and Detrimental Conduct on pages 32-33.)
New Plan Benefits
The benefits or amounts to be received by or allocated to participants and the number of shares to be granted under the 2007 Plan cannot be determined at this time because the amount and form of grants to be made to any eligible participant in any year is to be determined at the discretion of the Compensation Committee.
The closing market price of a share reported on the NYSE on March 9, 2007, was $56.90 per share.
Certain U.S. Federal Income Tax Consequences of Plan Awards
The following discussion is intended to provide only a general outline of the U.S. federal income tax consequences of participation in the 2007 Plan and the receipt of awards or payments thereunder by participants subject to U.S. taxes. It does not address any other taxes imposed by the United States, taxes imposed by any state or political subdivision thereof or foreign jurisdiction, or the tax consequences applicable to participants who are not subject to U.S. taxes.
Nonqualified Stock Options. A participant who exercises a nonqualified stock option recognizes taxable ordinary income in the year the option is exercised in an amount equal to the excess of the fair market value of the shares purchased on the exercise date over the purchase price. Subject to applicable provisions of the Code and regulations thereunder, including Section 162(m) of the Code, the Company is entitled to a tax deduction in an amount equal to the ordinary income recognized by the participant. Any gain or loss realized by the participant upon the subsequent disposition of the shares will be taxed as short-term (if held one year or less) or long-term (if held more than one year) capital gain but will not result in any further deduction for the Company.
Restricted Stock and Restricted Stock Units. A participant normally will not recognize taxable income and the Company will not be entitled to a deduction upon the grant of shares of restricted stock or restricted stock units. When the shares or units vest, the participant will recognize taxable ordinary income in an amount equal to the fair market value of the shares at that time less the amount, if any, paid for the shares, and, subject to applicable provisions of the Code and regulations thereunder, including Section 162(m) of the Code, the Company will be entitled at that time to a deduction in the same amount. However, a participant may elect to recognize taxable ordinary income in the year the shares of restricted stock are granted in an amount equal to the excess of their fair market value at the grant date, determined without regard to certain restrictions, over the amount, if any, paid for the shares. In that event, subject to applicable provisions of the Code and regulations thereunder, including Section 162(m) of the Code, the Company will be entitled to a deduction in such year in the same amount. Any gain or loss realized by the participant upon the subsequent disposition of the shares will be taxed as short-term or long-term capital gain but will not result in any further deduction for the Company.
Other Awards. Although the Compensation Committee does not intend to use such authority at the present time, the 2007 Plan authorizes the grant of incentive stock options (ISOs) that meet the requirements of Section 422 of the Code, and stock appreciation rights. A participant who exercises an ISO does not recognize ordinary income at the time of exercise, and the Company is not entitled to a tax deduction. Upon the sale of shares obtained by exercising an ISO after the shares have been held more than one year, the excess of the sale price over the purchase price is taxed as long-term capital gain. If the shares are sold within one year of the date of exercise, the excess of the fair market value of the shares on the date of exercise (or sale proceeds if less) over the purchase price is taxed as ordinary income, and, subject to applicable provisions of the Code and regulations thereunder, including Section 162(m) of the Code, the Company is entitled to a tax deduction for this amount; any remaining gain is taxed as short-term capital gain, without a Company tax deduction. A participant who exercises a stock appreciation right recognizes taxable ordinary income in the year the stock appreciation right is exercised in an amount equal to the excess of the fair market value of the underlying shares on the exercise date over the exercise price. Subject to applicable provisions of the Code and regulations thereunder, including Section 162(m) of the Code, the Company is entitled to a tax deduction in an amount equal to the ordinary income recognized by the participant.
The discussion set forth above does not purport to be a complete analysis of all potential tax consequences relevant to: recipients of awards; particular circumstances; or all awards available under the 2007 Plan. It is based on U.S. federal income tax law and interpretational authorities as of the date of this proxy statement, which are subject to change at any time.
Accordingly, the Board of Directors recommends a vote FOR the following resolution:
RESOLVED, that the shareholders of the Company approve and adopt the American Express Company 2007 Incentive Compensation Plan, including the Million Dollar Cap provisions, effective immediately, and authorize the Company to issue awards in accordance with the 2007 Plan.
Item 4Shareholder Proposal Relating to Cumulative Voting for Directors
Mrs. Evelyn Y. Davis, Suite 215, Watergate Office Building, 2600 Virginia Avenue, N.W., Washington, D.C. 20037, record owner of 296 common shares, has advised us that she plans to introduce the following resolution:
RESOLVED: That the stockholders of American Express, assembled in Annual Meeting in person and by proxy, hereby request the Board of Directors to take the necessary steps to provide for cumulative voting in the election of directors, which means each stockholder shall be entitled to as many votes as shall equal the number of shares he or she owns multiplied by the number of directors to be elected, and he or she may cast all of such votes for a single candidate, or any two or more of them as he or she may see fit.
REASONS: Many states have mandatory cumulative voting, so do National Banks.
In addition, many corporations have adopted cumulative voting.
If you AGREE, please mark YOUR proxy FOR this resolution.
The Board of Directors recommends that you vote AGAINST this proposal for these reasons:
Cumulative voting is one of those issues that has the appearance of fairness, but in reality could serve the interests of special interest groups. It could make it possible for such a group to elect one or more Directors beholden to the groups narrow interests. This could lead to factionalism and discord within the Board and undermine its ability to work effectively on behalf of the interests of all of the shareholders. The present system of voting utilized by the Company and by most leading corporations prevents the stacking of votes behind potentially partisan directors. The present system thus promotes the election of a more effective Board in which each director represents the interests of all the shareholders.
Compensation Discussion and Analysis
The following contains a description and analysis of the compensation arrangements and decisions we made for 2006 for our executive officers named in the Summary Compensation Table that follows this section. We refer to such named executive officers as NEOs.
Our vision is to be the worlds most respected service brand. To achieve that vision, we must deliver financial performance consistent with that of top growth companies on-average and over-time. To do so, we must sustain and expand our customer base around the world and provide strong leadership to develop highly engaged, talented employees who can deliver superior customer service and fulfill our shareholder commitments. We also believe that having executives who are strong leaders will enable us to attract and retain the best talent, promote continued growth and demonstrate the Companys values customer commitment, quality, integrity, teamwork, respect for people, good citizenship, a will to win and personal accountability.
Our compensation program for NEOs is designed to attract, motivate and retain executives of exceptional ability and experience who are critical to the achievement of our vision. The program includes incentive compensation tied to our annual and longer-term financial and strategic objectives, thereby aligning the financial interests of our NEOs with those of our shareholders. This compensation philosophy is characterized by the following principal elements:
1. Measurable goals that promote the interests of our three key constituencies:
2. Competitive pay practices that establish appropriate performance incentives and total direct compensation opportunities, benchmarked against a sample of large companies with a strong brand marketing focus and companies in the payments and financial services industries. If the Company achieves or exceeds the financial ranges and other objectives for our shareholder, customer and employee constituencies, earned compensation would be expected to be in the third or fourth (i.e., top two) quartiles of the marketplace. If the Company achieves or exceeds the upper end of the financial ranges and other objectives for the constituencies, and outperforms our business competitors, earned compensation would be expected to be in the top quartile.
3. An emphasis on long-term incentive compensation, reflecting our commitment to meet or exceed our objectives, including enhancing shareholder value, over the moderate and long term, and to retain a highly talented and experienced senior executive team to lead the Company successfully in a rapidly changing industry and economic environment.
The discussion below elaborates on these elements, illustrates how they have operated in practice in determining the compensation of our NEOs and describes certain of the material compensation processes, policies and practices that we have adopted.
Role of the Compensation and Benefits Committee
The Compensation Committee has overall responsibility for the compensation of our NEOs. The Compensation Committees charter, which sets forth its responsibilities and authority, may be accessed by clicking on the Corporate Governance link found on our Investor Relations Web site at http://ir.americanexpress.com. (Information from such site is not incorporated by reference into this report.) You may also obtain a paper copy of the Compensation Committees charter by writing to our Secretary at the Companys headquarters. The Compensation Committee met seven times in 2006.
In 2006, the Compensation Committee considered advice and information from Mercer Human Resource Consulting (Mercer) in determining the amount and form of compensation for NEOs. This work included establishing an updated comparison group of companies, providing relevant market data and alternatives to consider for chief executive officer (CEO) compensation and assisting in the preparation of total compensation tally sheets. In addition to those NEO-related work areas, Mercer assisted in a review of change-in-control practices and other matters relating to executive and management compensation, and attended Compensation Committee and related meetings. Mercer also provided advice to the Company on matters relating to broad-based employee U.S. healthcare and benefits programs and related employee communications.
During 2006, the Compensation Committee also considered advice and information from the Towers Perrin consulting firm, which reviewed and recommended modifications to our U.S. retirement savings programs, including our broad-based qualified plans and our nonqualified supplemental retirement plan, which we amended in January 2007 to incorporate our executive deferred compensation program. These plans cover the NEOs as well as other eligible U.S. employees.
The Compensation Committee also considered the advice of Frederic W. Cook & Co., Inc. (Cook), which reviewed aspects of our current compensation program and helped develop the features of the 2007 Incentive Compensation Plan that is being submitted to shareholders for approval in this proxy statement. (See Item 3 Proposal to Approve the American Express Company 2007 Incentive Compensation Plan beginning on page 17.)
In January 2007, the Compensation Committee decided to rely primarily on Cook for future advice to the Committee regarding NEO and other specified executive compensation matters. To avoid the appearance of a possible conflict concerning such advice, the Company will not use Cook for other compensation or benefits matters unless directed to do so by the Compensation Committee. The Company expects to continue to use the services of Mercer, Towers Perrin and other consultants, as may be appropriate given their expertise, in connection with compensation and benefits advice other than for CEO compensation.
Except with respect to the CEO, whose performance assessment and compensation are reviewed and determined solely by the Compensation Committee, the Compensation Committee considers input from management in making determinations regarding our executive compensation program and the individual compensation of executive officers and certain other executives. As part of our annual planning process, management develops and recommends employee participation and award guidelines for our key incentive compensation programs and presents them to the Compensation Committee for approval. Based on a
performance assessment of the achievement of shareholder, customer and employee goals as well as an assessment of personal leadership, the CEO recommends cash and equity incentive awards for each executive officer. Each year, the CEO presents to the Compensation Committee his goal and leadership ratings for each executive officer, and reviews key strengths, development actions and succession plans with the Compensation Committee and full Board.
After taking into account input from management and its advisors, the Compensation Committee determines what changes, if any, should be made to the executive compensation program for the year, and sets the compensation awards for each NEO. The Compensation Committee annually reviews tally sheets reflecting each NEOs outstanding compensation awards, as well as projected value and payouts under our retirement, savings and other plans under various scenarios, including retirement, termination of employment and change-in-control of the Company.
Our overall management performance assessment processes cover both organizational and individual results each year. Organizational performance provides a basis for setting overall levels of compensation, including available annual incentive award pools. Individual performance provides a basis for differentiating compensation among participants. The Company and the Compensation Committee exercise significant discretion in assessing performance, rather than relying on formulaic designs that may not adequately take into consideration other relevant performance objectives or actual results.
CEO performance objectives are reviewed and approved by the Compensation Committee early each year, after discussions with the Board of Directors. The CEOs performance assessment is based on Company and individual performance, and is determined by the Compensation Committee with input from the other outside Directors.
For each of the other NEOs, the CEO assigns two equally weighted performance ratings. One is based on the performance ratings of the Company as a whole and of the business units or staff groups for which the NEO is responsible (Goal Rating), and the other is based on the executives leadership behaviors in achieving the Goal Rating (Leadership Rating). Goal and Leadership Ratings are also assigned to each management employee below the NEO level in a similar way.
We assess organizational and individual performance by reviewing our business results against goals for our three key constituencies, weighted as shown below. These results provide important lagging and leading indicators of our current and future success.
The weight we give to the last two aspects of performance reflects the importance we place on our commitment to superior customer service and the corresponding need to have top talent in our organization.
We assign an annual overall performance rating for each business unit or staff group and the Company as a whole based primarily on the assessment of the results for these three components. These organizational ratings, as applicable for the NEOs responsibilities, drive his or her Goal Rating.
We also assess individual performance in the area of leadership, which we believe to be integral to the sustained success of the Company and adherence to the Companys values listed above. Each NEOs Leadership
Rating reflects the CEOs evaluation of his or her performance, which includes feedback from peers and employees, as appropriate, with regard to eight leadership dimensions, such as developing winning strategies, driving innovation and change, and focusing on the customer and client.
Mix of Compensation Components
The mix of salary, annual incentive, restricted stock, letter of intent, stock option and portfolio grant awards that an NEO or other senior executive receives as total direct compensation is recommended each year by the CEO to the Compensation Committee based on job responsibilities, competitive market considerations and performance and talent assessments. As a result, the weighting of each component will likely vary year to year for the executive. Consistent with our performance orientation, we believe most of the weight in the mix should be on the annual and long-term compensation components that are tied to our financial and shareholder objectives, making salary a small percentage of total direct compensation. We also believe in the use of awards that require vesting or future performance to earn value because they encourage a longer term view of the Company as well as the retention of highly talented executives. The compensation mix for the CEO is determined by the Compensation Committee each year, based on generally the same considerations as for the other NEOs.
In 2006, the Compensation Committee referred primarily to the 24 companies identified below for purposes of benchmarking the compensation of our NEOs, as recommended by Mercer. The group consists of large, U.S.-based multi-national companies from the S&P 500 Index with a strong brand marketing focus and companies in the payments and financial services industries. The companies in the sample are intended to represent our competitors for business and talent, and have median revenue comparable to our 2005 revenue. The Compensation Committee compares the companies executive compensation programs as a whole, and also compares the pay of individual executives if the jobs are sufficiently similar to make the comparison meaningful. The Compensation Committee uses the market data to ensure that NEO compensation as a whole is appropriately competitive, given our performance. The Compensation Committee also considers the shareholder return performance of these companies compared to our own in determining CEO compensation. The Compensation Committee periodically reviews this list of companies, and in 2006 removed certain financial institutions from the list primarily to reflect the Companys current business lines after the spin-off of Ameriprise Financial in 2005.
Elements of Total Direct Compensation
Annual Incentive Awards (AIAs)
In January 2007, the Compensation Committee certified that we achieved the 2006 performance levels that generated the highest maximum deductible AIA compensation levels. In determining actual AIA payouts, the Compensation Committee used its discretion to set award payouts below (i.e., negative discretion) or at the maximum deductible value for each of the NEOs. The AIA awards were paid to the NEOs in January and February 2007 in cash or as a combination of cash and RSAs or LOIs that vest after three years, subject to continuous employment and an average annual ROE of 10% or more during the vesting period. The amounts paid in cash are shown in the Summary Compensation Table found on page 39. The following amounts were paid in the form of RSAs or LOIs for retention and future incentive purposes and are not reported in the 2006 Summary Compensation Table in accordance with SEC rules, but are expected to be expensed over vesting periods and therefore included in such Tables in future years: for Mr. Chenault, $2,999,996; for Mr. Crittenden, $1,849,969; for Mr. Gilligan, $1,799,998; and for Mr. Kelly, $1,999,997. In addition, in recognition of 2006 results and as an incentive for future performance, the Compensation Committee granted to Mr. Chenault an LOI with a grant value of $2,999,996, which will vest after three years, subject to continuous employment and the Companys achieving a 10% or more average annual ROE over the period. The RSAs and LOIs, which were awarded as payment in recognition of 2006 performance, were structured to provide an additional mechanism for executive retention and to comply with the Million Dollar Cap provisions.
The principal factors that the Compensation Committee considered in assessing our 2006 performance were:
We met or exceeded each of our long-term financial objectives (described above). Net revenue growth was 13%; EPS growth from continuing operations, which reflects our spin-off of Ameriprise Financial, Inc. in September 2005, was 18%; and ROE was 34.7%, which was approximately in the middle of our recently raised range for this objective.
Our total shareholder return, which we sometimes refer to as TSR, was 19.1%, compared with 15.8% for the S&P 500 Index, and 19.2% for the S&P Financial Index. Total shareholder return is return due to share price appreciation and dividends, assuming dividend reinvestment.
We generated over $1 billion in reengineering benefits for the sixth consecutive year, which gave us the flexibility to make additional business-building investments and to effectively address various challenges, such as credit conditions in Taiwan and a higher provision for our rewards costs.
We made improvements in our overall control and compliance framework as measured by the internal control and compliance rating assigned to each major business and staff group, the adoption of industry-wide standards for data protection and privacy and the results of internal audits.
We met or exceeded several key metrics in our 2006 operating plan. Worldwide spending on our charge and credit cards (billed business) grew 16%, cards-in-force grew 10%, average cardmember spend growth was 7% and cardmember loans grew 31% on an owned (i.e., GAAP) basis and 17% on a managed basis (i.e., includes owned and securitized loans).
We continued to execute against our U.S. Global Network Services strategy with strong growth in billed business and cards-in-force generated by our U.S. partners.
We continued to effectively support the value proposition behind our premium discount rate notwithstanding continuing competitive and regulatory pressures, which resulted in a decline in the average discount rate for the year of only 0.01%, even as we continued to undertake selected repricing initiatives and volume-related pricing adjustments and the spending mix on our cards continued to shift toward everyday spend merchants.
Our performance relative to that of our peers continued to be strong. We grew our share of spending on plastic in the United States and our key international markets, outpacing the growth experienced by the industry. In addition, our loan growth also outpaced that of our peers. We improved spend velocity, which is the ratio of spend volumes to loan balances and reflects the efficiency with which we use our capital.
We continued to identify and invest in new and expanded growth opportunities, including corporate middle market and international premium lending.
We saw gains in each of the dimensions measured in our annual employee survey, against already high historical results, including employee development and leader effectiveness dimensions. We continued to perform at or above most external top quartile survey benchmarks. We strengthened our leadership talent and program, and we retained our customer-facing employees and high performing employees at a higher rate than external benchmarks or practices. We also made gains against our goal to be an employer of choice, with recognition in numerous global and local publications.
Long-Term Incentive Awards (LTIAs)
In addition to the AIA performance grant awards issued to executive officers, we also make awards of LTIAs under the 1998 Plan. LTIAs consist of nonqualified stock options (NQSOs), RSAs, LOIs and portfolio grant (PG) awards. PGs are incentive awards valued based on three-year performance, and may be paid in the form of cash, RSAs, LOIs or a combination thereof. The largest component of LTIAs is equity incentive compensation because it creates a strong commonality of interest between our executives and our shareholders i.e., whether our share price increases or decreases. Equity and stock ownership guidelines align the interests of our executives and shareholders in the short, medium and long term. The NQSO is the primary award type for this alignment of interests, but an RSA or LOI may be more appropriate in payment of compensation that has already been earned or in special retention situations. The focus of NQSOs, RSAs and LOIs on share price appreciation is balanced by PGs that instead focus on our announced financial targets, as well as our relative total shareholder return. In addition, the three-year performance period of PGs emphasizes sustained performance rather than annual performance under the AIA program. Taken together, we believe our LTIAs provide a balanced incentive for executives to achieve the full range of important medium- and longer-term results and to pursue a career with the Company.
The Compensation Committee considers individual performance assessments, executive retention, market data, unvested and outstanding LTIAs and other factors to determine the size and types of LTIAs for each NEO. Although many of our executives (including the NEOs) have developed significant ownership stakes in the Company, we believe new LTIAs increase the alignment of executive and shareholder interests. Executives understand that higher performance may earn larger new LTIA grants, and higher multi-year performance will likely increase the value of their LTIAs and ownership stakes.
To pay competitive total direct compensation, we could use annual cash instead of LTIAs, but we believe that using LTIAs is a more effective way to ensure that the compensation received by executives appropriately reflects multi-year results for shareholders and encourages executives to stay with the Company.
Stock Option Awards
Restricted Stock Awards and Letters of Intent
Portfolio Grant Awards (PGs)
In January 2006, the Compensation Committee granted new Portfolio Grant-XVII awards for the NEOs for the 2006-2008 performance period as reported in the Grants of Plan-Based Awards table on page 42. These awards were designed to meet the Million Dollar Cap tax requirements, and generate various levels of maximum deductible values based on the financial criteria shown in the table below. The target level of maximum values is shown under the caption Estimated Future Payouts Under Non-Equity Incentive Plan AwardsTarget in the Grants of Plan-Based Awards table. Actual payout values will be determined by the Compensation Committee in its discretion, subject to the earned deductible values.
Our Policy Regarding the Timing of Equity Award Grants
Since 2002, the Compensation Committee has made annual tranche grants of NQSOs, RSAs and LOIs to executive officers and other employees eligible to receive equity awards at its regularly scheduled meeting on the fourth Monday of each January after the close of the performance year and in conjunction with annual performance assessments and the determination of salary adjustments, annual incentive or bonus awards and PG payouts. (Prior to January 2002, the Compensation Committee made annual tranche grants in February of each year following the close of the performance year.) The January grant date coincided with the date on which the Company had also historically issued financial results for the quarter and full year then most recently ended, which took place in the early afternoon on such day. Although the Compensation Committee made its decisions regarding the number of NQSO, RSA and LOI shares to be awarded to each executive officer prior to the public release of financial results later that day, and the size of such awards to executive officers was based, in part, on the Companys results for the year most recently ended, the Compensation Committee made its decisions without regard to the effects that the release of the Companys financial results might have had on its share price. Moreover, the exercise price of the options awarded was not known until after the close of regular trading on the NYSE on the day the Compensation Committee met and the earnings announcement was made, as the exercise price per share for NQSO awards was the average of the high and low trading prices of the Companys shares on the date of grant.
Given the widespread public attention to equity award granting practices over the past year, the Company determined to review its historical practices. As a result of this review, the Compensation Committee adopted certain modifications to the Companys equity award policy and practices beginning with the long-term incentive
awards granted in January 2007. In this regard, the Compensation Committee granted NQSOs, RSAs and LOIs at a meeting held on January 25, 2007, which was three business days after the public issuance of the Companys financial results. The Compensation Committee expects that in future years it will continue the practice of holding a meeting three business days after the public issuance of the Companys annual financial results in order to make annual tranche grants of LTIAs.
In addition to the annual tranche grants of stock options, RSAs and LOIs that are made in January of each year, such equity awards (and PGs) may be granted at other times during the year to new hires and employees receiving a promotion and in other special circumstances. Our policy is that only the Compensation Committee may make such off-cycle grants to persons subject to the reporting requirements of Section 16 under the Securities Exchange Act of 1934 (Section 16 Officers). The Compensation Committee has delegated the authority to the CEO and the Executive Vice President Human Resources acting jointly, to make off-cycle grants to non-Section 16 Officers, subject to guidelines established by the Compensation Committee. Under our policy, the Compensation Committee and such authorized officers may make off-cycle grants of equity awards (and PGs) only at meetings held on the last business day of February, April, May, July, August, October and November of each year, with the grant date of such awards being the date of the meeting.
In addition to changes in the timing of equity awards, the Compensation Committee modified the methodology used to determine the exercise price of option grants (and the number of shares to deliver dollar RSA or LOI values). The exercise price is now equal to the closing price reported for our stock on the NYSE on the grant date, rather than the average of the high and low prices on the grant date as discussed above. This change was consistent with the new executive compensation disclosure rules adopted by the SEC in 2006.
Stock Ownership Policy
Our stock ownership policy requires approximately 135 senior executives, including the NEOs, to have a substantial ownership stake in Company shares, which we believe helps to foster a focus on long-term growth and further links their interests with those of our shareholders. The policy has these key features:
To further encourage a focus on the long term, we prohibit employees from engaging in hedging and other derivative transactions (other than the exercise of employee stock options) with respect to our stock.
Policy Regarding Recoupment of Incentive Compensation
To protect the shareholders interests, we have a policy pursuant to which we will, to the extent practicable, seek to recover performance-based compensation from any executive officer and certain other members of senior management in those circumstances where (i) the payment of such compensation was based on the achievement of financial results that were subsequently the subject of a restatement, (ii) in the Boards view the employee engaged in fraud or misconduct that caused or partially caused the need for the restatement, and (iii) a smaller or no payment would have been made to the employee based upon the restated financial results.
To help protect our competitive position, we have a detrimental conduct policy, covering approximately 550 executives (including the NEOs). Each covered executive is required to sign an agreement that requires him or her, among other provisions, to forfeit the proceeds from some or all of his or her compensation received
under the 1998 Plan, including RSAs (and dividends paid), NQSOs, LOIs (and dividend equivalents paid), PGs and, in the case of executive officers and certain other senior employees, all of his or her AIAs that were received up to two years prior to employment termination if he or she engages in conduct that is detrimental to the Company following employment termination. Detrimental conduct includes, for example, working for certain competitors, soliciting our customers or employees, or disclosing our confidential information. The detrimental conduct policy is in addition to the obligations arising under our Code of Conduct.
Elements of Post-Employment and Other Compensation
We do not have employment contracts or severance agreements with any NEO. We provide severance benefits on uniform terms and conditions under our Senior Executive Severance Policy, which applies to approximately 135 executives including the NEOs. Because we do not use employment agreements, we believe that the Senior Executive Severance Policy helps us remain competitive in the marketplace for executive talent and implement severance arrangements consistently. In addition, we believe that the Policy enables our executives to consider corporate transactions that are in the best interests of the shareholders without undue concern over whether the transactions may jeopardize their own employment and financial situation.
Benefits are available under the Policy in the event of a termination of employment as a result of a reduction in work force, position elimination, office closing, job relocation beyond a certain distance, performance, mutually agreed resignation, or certain terminations within two years following a change-in-control of the Company.
The amount of separation pay for NEOs is two years of annual compensation (base salary and most recent AIA). Separation pay is generally paid in bi-weekly installments, except that payment is made in a lump sum in the event of certain terminations within two years following a change-in-control of the Company, as described below. During the separation pay period, NEOs may continue to be covered under certain of our welfare and benefit plans, and payment of any required employee contribution is deducted from the separation pay in accordance with the employees previously elected benefit coverage.
In order to receive benefits under the Senior Executive Severance Policy, an employee must sign an agreement that includes provisions relating to, for example, non-competition, non-solicitation of customers and employees, confidentiality and non-disparagement. The agreement also includes a full release of claims.
NEOs earn retirement benefits under the American Express Incentive Savings Plan (the ISP), the American Express Retirement Plan (the Retirement Plan), the American Express Supplemental Retirement Plan and the Deferred Compensation Programs. Taken together, these programs are intended to provide competitive retirement income that is linked to company performance and longer service. This section describes current program provisions, as well as changes generally effective on or about July 1, 2007.
Incentive Savings Plan
The ISP is a broad-based, U.S. tax-qualified savings plan (commonly referred to as a 401(k) plan) providing for employer and employee contributions. In connection with various modifications to our overall retirement program, the ISP will be renamed the American Express Retirement Savings Plan as of July 1, 2007. Participants choose to invest their account balances from an array of investment options as selected by plan fiduciaries from time to time. Participants may also choose to invest a portion of their account balances in a Company stock fund, subject to a 10% cap effective on or about July 1, 2007. The ISP provides for lump sum distributions after termination of service or upon disability. However, loans are also permitted, as are in-service distributions under certain circumstances (such as in the event of a hardship or upon attainment of age 59 1/2). The contributions available under the ISP are described below (along with a description of vesting).
On a before-tax basis, employees, including the NEOs, can contribute up to the lesser of: (i) 80% of plan compensation; or (ii) the limit prescribed by the Internal Revenue Service, which for 2006 was $15,000 and for 2007 is $15,500. Participants who are, or will be, age 50 during the year will also be permitted to contribute additional catch-up contributions of up to $5,000 (for the 2006 and 2007 years). After-tax contributions of up to
10% of plan compensation are also allowed, as long as the total of before-tax and after-tax contributions does not exceed 80% of plan compensation. At present, plan compensation is defined as base salary. Effective on or about June 23, 2007, plan compensation generally will be defined as base salary plus, among other items, bonuses. For senior executives the bonus included is limited to up to one times base salary. Plan compensation is subject to limits under the Internal Revenue Code of $220,000 for 2006 or $225,000 for 2007.
At present, the Company generally matches 100% of before-tax employee contributions up to 3% of plan compensation for eligible employees in the regular benefit level (including the NEOs). Effective on or about June 23, 2007, the Company will generally match 100% of before-tax employee contributions up to 5% of plan compensation for eligible employees in the regular benefit level (including the NEOs). All employee and matching contributions to the ISP are currently fully-vested upon contribution. Matching contributions made after June 23, 2007 for most employees hired on or after April 1, 2007 will generally vest on the third anniversary of each eligible employees service with the Company or upon retirement on or after age 65, disability or death.
The Company may also contribute an annual discretionary profit-sharing amount for eligible employees (including the NEOs) based on the Companys performance. The target profit-sharing amount for employees in the regular benefit level (including the NEOs) is 3% of plan compensation. As a result of the Companys strong performance in 2006, the Board approved a profit-sharing contribution of 3.75% of plan compensation for eligible employees (including the NEOs). For 2007, the range for such annual discretionary profit-sharing contribution is 0-5%. Prior to the 2007 plan year, profit-sharing contributions vested on the fifth anniversary of each eligible employees service with the Company or upon retirement on or after age 65, disability or death. Profit-sharing contributions for the 2007 plan year and beyond will vest on the third anniversary of each eligible employees service with the Company or upon retirement on or after age 65, upon disability or death. An eligible employee who is employed on July 1, 2007, will generally vest in all past and future profit-sharing contributions on the third anniversary of his or her service with the Company or upon retirement on or after age 65, upon disability or death.
Effective on or about June 23, 2007, for employees who are employed by American Express prior to April 1, 2007, the Company will automatically contribute at the end of each quarter an additional conversion contribution of up to 8% of quarterly plan compensation for eligible employees in the regular benefit level (including the NEOs). The actual percentage of such conversion contributions for individual participants is based on their projected age and service as of December 31, 2008. The amount of the conversion contributions for the NEOs is as follows: Messrs. Chenault and Gilligan and Ms. Parent: 6.0%, and Mr. Kelly: 3.75%. Company conversion contributions will generally vest on the third anniversary of each eligible employees service with the Company or upon retirement on or after age 65, upon disability or death.
Effective until about June 23, 2007, the Company automatically contributes 1% of base salary to the American Express Company Stock Fund for each eligible employee (including the NEOs). This contribution is fully vested when made.
Effective on or about June 23, 2007, contributions will be made to the ISP for eligible participants who become disabled while actively employed by the Company.
The Retirement Plan is a broad-based, U.S. tax-qualified cash balance pension plan. The Retirement Plan is more fully described under Retirement Plan Benefits on page 47.
Supplemental Retirement Plan
U.S. tax law limits the amount of benefits that we can provide under our tax-qualified plans. We maintain the Supplemental Retirement Plan (the SRP), which is an unfunded, nonqualified arrangement, intended to provide NEOs and other highly compensated employees with the same benefits that they would have received under the ISP and the Retirement Plan if those limits did not apply and if certain other items of compensation were includable in calculation of benefits under our tax-qualified plans. Generally, participation in the SRP is limited to highly compensated employees who have compensation in excess of tax-qualified plan limitations. Each SRP participant has a Retirement Plan-related account for benefits that cannot be provided under the Retirement Plan and an ISP-related account for benefits that cannot be provided under the Incentive Savings
Plan. SRP Retirement Plan-related account benefits are more fully described under Retirement Plan Benefits on page 48, and SRP ISP-related account benefits are more fully described under Nonqualified Deferred Compensation on page 49.
Deferred Compensation Programs
As part of planning for retirement or other long-term financial needs, we also provide the NEOs and certain other U.S.-based senior-level employees with an annual opportunity to defer receipt of a portion of their base salary, annual incentive award or PG award payout under deferred compensation programs, subject to an annual deferral maximum of one times base salary. Annual deferred compensation programs are unfunded, nonqualified arrangements, and benefits are subject to continuous employment, ROE performance and other requirements and limits, which are more fully described under Nonqualified Deferred Compensation beginning on page 49.
We have adopted change-in-control (CIC) policies that are designed to help us attract key employees, preserve employee morale and productivity, and encourage retention in the face of the potential disruptive impact of an actual or potential CIC of the Company. In addition, the CIC policies ensure that the interests of our executives will be materially consistent with the interests of our shareholders when considering corporate transactions. Certain of the provisions under these policies result from a CIC in and of itself (single trigger provisions), while other provisions under these policies result from both a CIC and a subsequent termination of the employment of the NEO (double trigger provisions).
Under our plans and policies, a CIC generally means any of the following occurs:
(1) any individual, entity or group acquires 25% or more of our outstanding common shares or otherwise acquires 25% or more of the combined voting power of the outstanding securities entitled to vote in the election of directors, subject, in each case, to certain exceptions;
(2) a majority of our directors are replaced in specific circumstances;
(3) a merger, reorganization, consolidation or other similar transaction (each a Business Combination) involving our company is consummated other than (a) a Business Combination that would result in the voting securities of the Company outstanding immediately prior to the Business Combination continuing to represent at least 50% of the voting power of the securities of the Company outstanding immediately after such Business Combination, (b) a Business Combination in which no person is or becomes the beneficial owner of securities of the company representing 25% or more of the combined voting power of the Companys then-outstanding securities or (c) a Business Combination that results in a majority of the Companys Board of Directors retaining their director positions after such Business Combination;
(4) a sale of all or substantially all of the assets of the Company (subject to certain exceptions similar to those described in (3) above); or
(5) a shareholder-approved liquidation or dissolution of the Company.
We provide limited types of perquisites and other personal benefits to our NEOs which we believe are reasonable and consistent with our overall compensation program to better enable the Company to attract and retain superior employees for key positions, and for security and competitive reasons. We have adopted a policy that identifies the comprehensive list of perquisites and other personal benefits available to our executive officers (including the NEOs). Other than as specifically identified in the policy, executive officers of the Company are not entitled to any other perquisite or personal benefit except as may be otherwise approved by the Chair of the Compensation Committee.
The approved perquisites and personal benefits include, in the case of one NEO assigned overseas (Mr. Gilligan), certain housing and living expenses and tax reimbursements that arise from the assignment. These amounts are a significant component of the total compensation reported in the Summary Compensation Table. Mr. Gilligan receives the majority of such benefits under our international assignment policy, which is applicable to all employees serving on international assignment and is designed to minimize any financial detriment or gain to the employee from the assignment. The value of the perquisites and benefits received by Mr. Gilligan under this policy reflect, among other things, his job level in the Company and the location of his international assignment (London).
We have also adopted a security policy that requires Mr. Chenault to use Company-owned aircraft and automobiles for business and personal travel. The incremental cost of his use of our aircraft and automobiles for personal travel, as well as other security measures, are included as perquisites in the Summary Compensation Table below. We also provide a local transportation allowance to our NEOs other than Ms. Parent, and a cash allowance to all NEOs in lieu of other competitive perquisites.
Death, Disability and Retirement
Upon the death or disability of an NEO (or other participant), unvested NQSOs, RSAs and LOIs fully vest, and the NQSOs remain outstanding and exercisable for up to five years, subject to the original expiration date. In
addition, each outstanding PG award vests and pays out pro rata based on service, and if the NEO is at least 60 years old and has been employed by us for ten or more years (including actual and deemed service), all or a portion of the balance of the PG award vests and is paid.
NEOs (and other participants) who are between 55 and 59 years old and who are credited with 10 or more years of employment service with us (including actual and deemed service) are eligible to retire. For these retirement-eligible NEOs, upon employment termination, unvested RSAs and LOIs that have been outstanding for more than two years will fully or partially vest, PG awards that have been outstanding for more than one year will vest pro rata, and 50% of unvested stock option shares granted in or after January 2005 that have been outstanding more than one year will vest according to the original vesting schedule. If the NEO is at least 60 years old with ten or more years of service (including actual and deemed service), an additional portion of his or her unvested NQSOs, RSAs, LOIs and PG awards that would otherwise be forfeited will also vest immediately or according to the original vesting schedule. Retired NEOs may exercise available NQSOs through the end of the original term of the options.
IRS Million Dollar Cap
U.S. tax law limits the annual tax deduction on compensation we pay to the NEOs to $1,000,000 unless the compensation is performance-based (as determined under the Code and related regulations). In general, compensation is performance-based only if payment is contingent upon attainment of pre-established objective performance goals that are set by the Compensation Committee. The Compensation Committee may use its discretion to set actual compensation of our executive officers below the maximum deductible amount calculated by application of the objective performance criteria. It is our general policy to structure compensation programs that allow us to fully deduct the compensation, and we have taken steps to qualify compensation under the 1998 Plan (and the proposed 2007 Incentive Compensation Plan) for full deductibility as performance-based compensation. The Compensation Committee may make payments that are not fully deductible to ensure competitive levels of total compensation for our executive officers or, in its judgment, may make payments that are otherwise necessary or appropriate to achieve our compensation objectives. We expect to be entitled to deduct all 2006 AIA and LTIA compensation, except for awards granted before an executive officer became an NEO.
Recent Changes in the Executive Compensation Program
In January 2007, in connection with the grant of PG 2007-2009 awards to executive officers for the 2007-2009 performance period, the Compensation Committee modified the weightings assigned to the four performance components that are used to determine the value of the PG award, as well as the index against which total shareholder return is measured. For PG 2007-2009 awards and expected subsequent PGs, each of the four components will drive the value of 25% of the awards notional target value. In addition, our total shareholder return will be compared with that of the S&P 500 Index, not the S&P Financial Index as in the past. The Compensation Committee made these changes in order to simplify the program and increase the focus on financial performance. The Compensation Committee changed the total shareholder return index to reflect changes in the Companys business lines after the spin-off of Ameriprise Financial, Inc. in 2005.
In addition to the changes to the PG program, the Compensation Committee adopted changes to our retirement plans and deferred compensation programs, which are discussed on pages 47-51.
Summary of Recent Actions Regarding CEO Compensation
The following is a summary of certain actions recently undertaken by the Compensation Committee with respect to the compensation of the Companys CEO (some of which are discussed elsewhere in this Compensation Discussion and Analysis and this proxy statement).
In January 2007, among other actions, the Compensation Committee granted the compensation shown in the table below to Mr. Chenault to recognize 2006 performance and provide incentives for future performance.
Report of the Compensation and Benefits Committee
The Compensation and Benefits Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussions, the Committee recommended to the Board of Directors, and the Board approved, that the Compensation Discussion and Analysis be included in this Proxy Statement.
COMPENSATION AND BENEFITS COMMITTEE
Jan Leschly, Chairman
Richard A. McGinn
Edward D. Miller
Frank P. Popoff
Robert D. Walter
Summary Compensation Table
The following table summarizes the compensation of our named executive officers (NEOs) for the fiscal year ended December 31, 2006. Our NEOs are our Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executive officers as determined by their total compensation in the table below (excluding the amount in the column captioned Change in Pension Value and Nonqualified Deferred Compensation Earnings in accordance with SEC rules).
All Other Compensation Table
The table below shows the components of the amounts included for each NEO under the All Other Compensation column in the Summary Compensation Table.
Perquisites and Other Personal Benefits
In addition to the perquisites and other benefits described in the table and footnotes above, our NEOs also receive occasional secretarial support with respect to personal matters and may, on occasion, use the Companys tickets for sporting and entertainment events for personal rather than business purposes. We incur no incremental cost for the provision of such additional benefits.
Grants of Plan-Based Awards
The following table provides information on stock options, restricted stock awards and letters of intent granted to each of our NEOs in 2006 under the 1998 Plan. There can be no assurance that the Grant Date Fair Value of Stock and Option Awards will ever be realized by the NEOs.
To receive his or her payout under a PG award, an executive officer generally must be employed by the Company through the vesting and payment date of the award, which has historically occurred in the January or February following the completion of the performance period (in the case of PG-XVII, January or February 2009).
Restricted Stock Awards and Letters of Intent. Each of the NEOs was granted RSAs or LOIs in 2006.
For Mr. Chenault: RSAs for 57,842 shares (granted to recognize performance for 2005 and as an incentive for future performance) vest after three years subject to the achievement of average annual ROE of 8% or more during the vesting period, and 36,055 shares (granted to recognize performance over the 2003-2005 period and as an incentive for future performance) vested in January 2007. The LOI (awarded to recognize performance for 2005 and as an incentive for future performance) vests after three years subject to the achievement of average annual ROE of 8% or more during the vesting period.
For Mr. Crittenden: RSAs for 28,554 shares (granted to recognize 2005 performance and as an incentive for future performance) were to vest three years from grant date subject to the achievement of average annual ROE of 8% or more during the vesting period, and 9,640 shares (granted to recognize 2005 performance and as an incentive for future
performance) vested 50% on January 23, 2007 and were to vest 50% on January 22, 2008, subject to the Companys achieving an average annual ROE of 8% or more for the 2006-2007 period. The unvested awards were canceled effective February 23, 2007 upon his resignation.
For Messrs. Gilligan and Kelly: All RSAs (granted for 2005 performance and as an incentive for future performance) vest three years from grant date subject to the achievement of average annual ROE of 8% or more during the vesting period.
For Ms. Parent: RSAs for 9,640 shares (granted to recognize 2005 performance and as an incentive for future performance) vested 50% on January 23, 2007 and will vest 50% on January 22, 2008, subject to the Companys achieving an average annual ROE of 8% or more for the 2006-2007 period.
The vesting of each of the above awards is also subject in each case to the NEOs continuous employment with the Company. We pay cash dividends on the RSAs and make dividend equivalent payments on the LOIs, in each case in the same amount that we pay cash dividends on our common shares.
Stock Options. We granted the NQSOs as part of our annual long-term incentive award program. The NQSOs have a ten-year term. Holders may exercise up to 25% of their NQSOs after one year, 50% after two years, 75% after three years and 100% after four years, subject to continuous employment. Prior to the exercise of an NQSO, the holder has no rights as a shareholder with respect to the shares subject to such NQSO. All outstanding NQSOs may also become exercisable upon death, disability termination, retirement or a CIC of the Company as we describe on pages 51-57.
Stock Options. These amounts show hypothetical values at grant under a variation of the Black-Scholes option pricing model. This model is a complicated mathematical formula that makes assumptions about stock option features. A number of these assumptions do not apply to the options we grant to our executive officers and other employees. In particular, the model assumes that holders can exercise stock options immediately and freely transfer them. For these reasons, we caution that the values we show in the table are theoretical and may not reflect the amounts that option holders will realize. Whether and to what extent an option holder realizes value will depend on what our share price will be relative to the exercise price. The assumptions listed below and Black-Scholes values are consistent with the assumptions that we used to report stock option valuations and expense in our 2006 Annual Report on Form 10-K.
Assumptions for Valuing January 2006 Grants:
Outstanding Equity Awards at Fiscal Year-End 2006
The following table shows the number of shares covered by exercisable and unexercisable NQSOs and unvested RSAs and LOIs granted under the 1998 Plan, held by our NEOs on December 31, 2006. Mr. Crittendens outstanding awards were canceled effective upon his resignation on February 23, 2007.
Notes relating to Option Awards
Notes relating to Stock Awards
Option Exercises and Stock Vested in 2006
The following table contains information about exercises of NQSOs by the NEOs and shares acquired by the NEOs upon the vesting of RSAs, in each case during 2006.
Retirement Plan Benefits
The table below shows the present value of accumulated benefits payable to each of the NEOs and the years of service credited to each such NEO, under each of the American Express Retirement Plan and the American Express Supplemental Retirement Plan, determined using interest rate and mortality rate assumptions consistent with those used in our financial statements.