American Express Company DEF 14A 2008
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)
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ANNUAL MEETING OF SHAREHOLDERS
March 11, 2008
TABLE OF CONTENTS
March 11, 2008
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 2008 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 28, 2008, at the Companys New York City headquarters and invite you to attend in person. Directions to the Companys New York City headquarters are on page 64. 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 webcast of the 2008 Annual Meeting to be accessible to the general public on the Internet at http://ir.americanexpress.com. A replay of the Meetings audio webcast will also be available at the same Web site address beginning later the same day.
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to Be
Held on April 28, 2008
The Companys proxy statement and 2007 Annual Report to Shareholders are available at www.proxyvote.com.
We are pleased this year to take advantage of a new Securities and Exchange Commission (SEC) rule that permits companies to furnish proxy materials to shareholders over the Internet. On or about March 14, 2008, we started mailing to certain of our shareholders a Notice of Internet Availability of Proxy Materials. This Notice contains instructions on how to access our proxy statement and 2007 Annual Report to Shareholders and vote online. By furnishing this Notice, we are lowering the costs and reducing the environmental impact of our Annual Meeting.
Shareholders who did not receive the Notice of Internet Availability of Proxy Materials will continue to receive a paper or electronic copy of our proxy statement and 2007 Annual Report, which we intend to start mailing on or about March 14, 2008.
You may vote all shares that you owned as of February 29, 2008, which is the record date for the Annual Meeting. On February 29, 2008, we had 1,157,739,894 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 are available through 11:59 p.m. Eastern Time on Wednesday, April 23, 2008, for shares held in employee plans, and through 11:59 p.m. Eastern Time on Sunday, April 27, 2008, 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 and following the recorded instructions. You will need the 12-digit Control Number included on your Notice of Internet Availability of Proxy Materials, on your proxy card or in the instructions that accompany your proxy materials, as applicable. 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. You will need the 12-digit Control Number included on your Notice of Internet Availability of Proxy Materials, on your proxy card or in the instructions that accompany your proxy materials, as applicable. 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. 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 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 RSP or the Employee Stock Ownership Plan of Amex Canada, Inc., your proxy includes shares that the relevant plan has credited to your account.
To allow sufficient time for the RSP and the Employee Stock Ownership Plan of Amex Canada, Inc. trustees to vote, the trustees must receive your voting instructions by 11:59 p.m. Eastern Time on Wednesday, April 23, 2008. If the trustees for the RSP 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.
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.
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 have been advised by the NYSE that the election of Directors, the management proposals to amend the Companys Certificate of Incorporation and the ratification of the appointment of our independent registered public accounting firm are routine items. The shareholder proposal is not a routine item.
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. While banks and brokers have historically cast their votes on routine items in support of management in the absence of instructions from their clients, some firms are now casting uninstructed votes in the same proportion as their clients instructed votes. Thus, if you want to assure that your shares are voted in accordance with your wishes on Items 1, 2, 3 and 4a through 4d, the seven routine matters in this proxy statement, you should complete and return your voting instruction form before April 18, 2008.
Votes Required for the Election of Directors and Approval of the Proposals. To elect Directors and adopt the other proposals, the following proportion of votes is required:
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 Notice of Internet Availability of Proxy Materials or one 2007 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 Notice of Internet Availability of Proxy Materials or a separate 2007 Annual Report and proxy statement, he or she may contact the Companys Secretary. If you are receiving multiple copies of our 2007 Annual Report and proxy statement or Notice of Internet Availability of Proxy Materials, 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 mail, telephone, facsimile or electronic transmission. We have hired Morrow & Co. LLC 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 Companys 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 January 28, 2008, the Board of Directors determined that 10 of the Companys 12 Director nominees are independent: Ms. Burns and Messrs. Akerson, Chernin, Leschly, Levin, McGinn, Miller, Reinemund, Walter and Williams. The other non-management Director nominee, Ms. Barshefsky, as well as Mr. Chenault, are not deemed 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 2007, 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 other independent Directors 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. As detailed below, we are asking shareholders to approve an amendment to the Companys Certificate of Incorporation to require a majority vote for the election of Directors in non-contested elections. If approved by shareholders, this amendment will apply to future elections of Directors.
Communicating with Directors. Communications to the Board or to individual members of the Board may be made by letter, e-mail or telephone and should be directed to the Companys Secretary, who will forward them to the intended recipients. 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 to, 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 2007, all of the then incumbent Directors were present at the Annual Meeting of Shareholders.
During 2007, the Board of Directors met 12 times. All of our Directors attended 75% or more of the meetings of the Board and Board Committees on which they served in 2007.
The following table lists our four Committees, the Directors who currently serve on them and the number of Committee meetings held in 2007.
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, Walter and Williams 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 auditors 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 auditors the Companys audited financial statements. The Audit Committee also has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T, relating to communication with audit committees. In addition, the Audit Committee has received from the independent auditors the written disclosures and letter required by Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees), as adopted by the Public Company Accounting Oversight Board in Rule 3600T, relating to independence discussions with audit committees, has discussed with the independent auditors their independence from the Company and its management, and has considered whether the independent auditors provision of non-audit services to the Company is compatible with maintaining the auditors independence.
The Audit Committee discussed with the Companys internal auditors and independent auditors 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 auditors, 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 2007 Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2007 for filing with the Securities and Exchange Commission.
Daniel F. Akerson, Chairman
Ursula M. Burns
Richard C. Levin
Robert D. Walter
Ronald A. Williams
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 current members of the Compensation Committee are Messrs. Chernin, 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 63. 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.
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 and corporate political contributions, 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 and, in January 2008, determined not to make any changes to Director compensation.
The following table provides information on the Companys compensation of non-management Directors for 2007. In addition, the Company reimburses Directors for out-of-pocket expenses attendant to Board membership.
This column consists of (i) the expense recognized by the Company in its financial statements in 2007 in accordance with Statement of Financial Accounting Standards No. 123(R) (SFAS 123R) with respect to the
SEU awards granted in April 2007 and the dividend equivalents credited on the SEU award balance of each Director, reduced by (ii) the decline in value during 2007 of each Directors SEU award balance, limited to the appreciation in such balance included in this table in last years proxy statement.
As of December 31, 2007, the SEU balance in each Directors account was: Mr. Akerson 13,293; Ms. Barshefsky 23,959; Ms. Burns 16,785; Mr. Chernin 6,871; Mr. Jordan 70,877; Mr. Leschly 13,293; Mr. Levin 3,418; Mr. McGinn 13,293; Mr. Miller 17,941; Mr. Popoff 23,337; Mr. Reinemund 3,418; Mr. Walter 20,911; and Mr. Williams 4,183. 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, Popoff and Williams 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 53, 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 2007 on amounts deferred under this plan in cash accounts for the following Directors in the amounts stated: Mr. Akerson $80,610; Mr. Chernin $6,062; Mr. Jordan $187,645; Mr. Leschly $99,719; Mr. Levin $1,669; Mr. Popoff $40,746; and Mr. Walter $6,905. Earnings in 2007 were considered to be above-market to the extent that the rate of interest exceeded 5.89%.
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 2007, the Company paid premiums for policies on the following Directors in the amounts stated: Mr. Akerson $25,574; Ms. Burns $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 29, 2008. These individuals and entities include: (1) owners of more than 5% of our outstanding common shares; (2) our current Directors; (3) the executive officers named in the Summary Compensation Table on page 39 and (4) all current Directors and 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 14 members. Except for Messrs. Jordan and Popoff, who have reached the mandatory retirement age of 72, each current Director is standing for re-election to hold office until the next Annual Meeting of Shareholders. Effective with the April 2008 retirement of Messrs. Jordan and Popoff, the Board of Directors will have 12 members. Messrs. Jordan and Popoff have agreed to serve as advisors to the Board following their retirement.
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.
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. These individuals intend to vote for the election of each of the 12 nominees unless you indicate on the proxy 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. Director, Manor Care, Inc., MultiPlan, Inc., and Freescale Semiconductor, Inc. Trustee, United States Naval Academy Foundation.
Senior International Partner, WilmerHale, 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. Trustee, Howard Hughes Medical Institute.
President, Xerox Corporation, a global company engaged in manufacturing, servicing and financing a complete range of document equipment and services, April 2007 to present; Senior Vice President and President, Business Group Operations, January 2003 to April 2007; 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, Xerox Corporation, National Association of Manufacturers, the University of Rochester, National Academy Foundation and The National Center on Addiction and Substance Abuse at Columbia University.
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.
Founder and Partner, Care Capital LLC, a private equity firm, May 2000 to present. Director, The A.P. Moller-Maersk Group. Member, the Emory University Business School Deans Advisory Council. Adjunct Professor, Copenhagen Business School.
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 worldwide provider of financial protection and wealth management services, May 2001 to present. President and Chief Executive Officer, August 1997 to May 2001. Director, Korn/Ferry International and The Feinstein Institute for Medical Research. Chairman of the Board of Directors of Phoenix House, Chairman of the Partnership for New York Citys Security and Risk Management Task Force and Trustee of the New York City Police Foundation. Senior Advisor to National Grid Corp.
Retired Chairman of the Board, PepsiCo, Inc., a company that produces beverages and convenient foods, May 2007 to present; Executive Chairman of the Board, October 2006 to May 2007; Chairman and Chief Executive Officer, May 2001 to October 2006. Director, Johnson & Johnson, Marriott International, Inc. and Exxon Mobil Corporation. Trustee, The Cooper Institute and United States Naval Academy Foundation.
Founder and Executive Director, Cardinal Health, Inc., a company that provides products and services supporting the health care industry, November 2007 to present; Executive Chairman of the Board, April 2006 to November 2007; Chairman and Chief Executive Officer, 1979 to April 2006. Director, Battelle Memorial Institute. Member, The Business Council.
Chairman and Chief Executive Officer, 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. Trustee, The Conference Board and Connecticut Science Center. Member of Deans Advisory Council and Alfred P. Sloan Management Society at the Massachusetts Institute of Technology. Member, The Business Council and The Business Roundtable.
Item 2Ratification of the Appointment of Independent Registered Public Accounting Firm
On January 28, 2008, the Audit Committee of the Board of Directors appointed PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year beginning January 1, 2008.
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 LLP 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 appointment of PricewaterhouseCoopers LLP. 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 $16.4 million for 2007 and $13.9 million for 2006.
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 $2.2 million for 2007 and $1.7 million for 2006. 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 $63,000 for 2007 and $204,000 for 2006.
All Other Fees
There were no fees billed or to be billed for 2007 and 2006 for products and services other than those reported in the three prior categories.
Policy on Pre-Approval of Services Provided by Independent Registered Public Accounting Firm
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the engagement of the Companys independent registered public accounting firm 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 accounting firm 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 accounting firm 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 accounting firm, to audit the accounts of the Company and its subsidiaries for 2008 is ratified and approved.
Item 3Management Proposal to Amend the Certificate of Incorporation to Require a Majority Vote for the Election of Directors in Non-contested Elections
The Board of Directors has authorized, and recommends that shareholders approve, the amendment to the Companys Certificate of Incorporation set forth below, which will require a majority vote for the election of Directors in non-contested elections.
If shareholders approve the proposed amendment, a new paragraph will be added to Section 6 of the Companys Certificate of Incorporation that will read as follows:
Except in a contested election, the vote required for the election of a director by the shareholders shall be the affirmative vote of a majority of the votes cast in favor of or against a nominee at a meeting by the holders of shares entitled to vote on such election. In a contested election, directors shall be elected by a plurality of the votes so cast. An election shall be deemed contested if there are more nominees than positions on the Board of Directors to be filled at the meeting of shareholders as of the fourteenth (14th) day prior to the date on which the corporation files its definitive proxy statement with the Securities and Exchange Commission. The corporations subsequent amendment or supplement of the definitive proxy statement shall not affect the status of the election.
The New York Business Corporation Law (NY BCL) provides that directors are elected by a plurality of the votes cast unless a companys certificate of incorporation specifies a different voting standard. Under plurality voting, the Director nominees who receive the highest number of for votes are elected, up to the number of Directors to be elected, even if the nominee receives more withheld votes than for votes on his or her election. Currently, the Companys Restated Certificate of Incorporation (Certificate of Incorporation) does not provide for a different voting standard, though the Company has adopted as policy a form of majority voting for non-contested Director elections. Our Directors continue to be elected by a plurality vote, but our corporate governance principles require that a Director nominee who receives a greater number of withheld votes than for votes submit his or her resignation to the Board for its consideration.
Reasons for and Effect of the Proposal
Last year, to further strengthen this majority voting approach, the Board of Directors committed to seek shareholder approval at this Annual Meeting to amend our Certificate of Incorporation to establish majority voting for Directors in non-contested elections. The Board of Directors believes that this proposal strengthens the director nomination process and enhances director accountability.
Under the proposed amendment, each vote will be specifically counted for or against a Director nominees election. The affirmative vote of a majority of the total number of votes cast for or against a Director nominee will be required for election. Shareholders will also be entitled to abstain with respect to the election of a Director. In accordance with New York law, abstentions and broker non-votes, if any, will have no effect in determining whether the required affirmative majority vote has been obtained.
In a contested election, Directors shall continue to be elected by a plurality of the votes cast. An election shall be deemed contested if there are more nominees than positions on the Board of Directors to be filled at the meeting of shareholders as of the 14th day before the date on which the Company files its definitive proxy statement with the SEC.
Under New York law, shareholders must approve the proposed amendment to the Companys Certificate of Incorporation. If approved, the amendment will become effective upon the filing with the New York Department of State of a certificate of amendment of the Companys Certificate of Incorporation. The Company would make such a filing promptly after the Annual Meeting.
Under New York law, an incumbent director who is not re-elected remains in office until his or her successor is elected and qualified, continuing as a holdover director until his or her position is filled by a subsequent shareholder vote or his or her earlier resignation or removal by a shareholder vote. To address this situation, upon shareholder approval of the proposed amendment and the filing of the certificate of amendment, the Board of Directors will amend the Companys by-laws to require an incumbent Director who does not receive the requisite majority vote for his or her re-election immediately to tender his or her resignation to the Board. The Board of Directors, excluding such Director, shall then decide whether or not to accept such resignation and shall promptly disclose and explain its decision in a Form 8-K filed with the SEC within 90 days after the results of the election are certified. In acting on the tendered resignation, the Board shall consider all factors that it may deem relevant.
Under the NY BCL, the vote required for this proposal is the affirmative vote of a majority of the outstanding shares entitled to vote. Abstentions and broker non-votes, if any, are not affirmative votes, and will therefore have the same effect as a vote against the proposal.
The Board of Directors recommends a vote FOR the amendment to the Companys Certificate of Incorporation set forth above.
Items 4a-dManagement Proposals to Amend the Certificate of Incorporation to Eliminate Statutory Supermajority Voting for the Following Actions:
The Board of Directors has authorized, and recommends that shareholders approve, the four separate amendments to the Companys Certificate of Incorporation set forth below. Together, these amendments, if approved by shareholders, will lower the statutory supermajority voting provisions now applicable to the Company under the default provisions of the NY BCL from the current requirement of two-thirds of the outstanding shares to the lowest possible threshold for these actions under the NY BCL, which is a majority of the outstanding shares.
If shareholders approve one or more of the proposed amendments, a new paragraph will be added to Section 6 of the Companys Certificate of Incorporation that will read as follows:
At a meeting of shareholders following all requisite approvals under the New York Business Corporation Law (NY BCL), and subject to any rights granted to any holders of the corporations preferred shares that may be issued from time to time, the affirmative vote of a majority of the votes of all outstanding shares entitled to vote thereon shall be required to take any of the following actions:
In accordance with the NY BCL, different voting standards for shareholder approval apply to the Company, depending on the action being voted on. Currently:
1. Many voting items of the Company are subject to approval by a majority of the votes cast in accordance with the NY BCL, including the shareholder ratification of the appointment of the Companys independent registered public accounting firm each year, adoption of Company shareholder proposals, approval of employee stock options plans and, if Item 3 above is approved at this Annual Meeting, election of Directors in non-contested elections.
2. Approval by a majority of all outstanding shares entitled to vote is required for some actions, such as to approve certain amendments of the Companys Certificate of Incorporation.
3. Approval by two-thirds of all outstanding shares entitled to vote on the matter is required to effect each of the following actions:
Reasons for and Effect of the Proposals
Under the NY BCL, the two-thirds voting standard for certain items applies to all corporations, like the Company, that were incorporated prior to 1998, unless their certificate of incorporation is amended to reduce the standard to a majority of the shares entitled to vote on the matter. The Board of Directors recognizes that many stockholders now view this type of supermajority vote requirement as a limitation on the ability of a majority of stockholders to effect certain corporate actions, since the two-thirds vote provisions could make it more difficult to achieve the required vote for these actions.
The Company has no current plans to effect any of these actions. Approving the amendments at this time will make it easier in the future for the Company to secure shareholder approval for these actions, should we wish to do so. It is important to understand that lowering the voting thresholds for these actions is not the same as actually taking the underlying substantive actions. You are not being asked to vote at this time to approve any actions of the type described in the amendments. At this time, you are only being asked to lower the voting thresholds associated with subsequent shareholder approval of these actions, should any of these actions later become the subject of future consideration by the Companys shareholders.
Assuming that sufficient favorable votes are received at this meeting on these proposals, and the Company subsequently amends its Certificate of Incorporation to reflect these amendments by lowering the voting thresholds, the Company would still be required to solicit the approval of a majority of the outstanding shares entitled to vote in order to implement any of these types of actions.
Under the NY BCL, the vote required for each change requested in items 4a through 4d is the affirmative vote of two-thirds of the outstanding shares entitled to vote. Abstentions and broker non-votes, if any, are not affirmative votes, and will therefore have the same effect as a vote against a proposal.
Items 4a through 4d all relate to the effort to eliminate the statutory supermajority voting standards applicable to the Company, but each item involves a different subject. Therefore, to avoid confusion by bundling these items together, we are setting out each separate matter intended to be acted upon, so that shareholders are able to express their views on each amendment separately. Because each of the proposals is separate and distinct, the approval of any proposal is not conditioned on the approval of any other proposal. The Company will only amend its Certificate of Incorporation for a proposal if that particular proposal receives the requisite favorable vote of two-thirds of the outstanding shares entitled to vote. Those amendments that are not approved by shareholders will not be reflected in the Companys Certificate of Incorporation.
If approved, an amendment will become effective upon the filing with the New York Department of State of a certificate of amendment of the Companys Certificate of Incorporation. The Company would make such a filing promptly after the Annual Meeting.
The Board of Directors recommends a vote FOR each of the four amendments to the Companys Certificate of Incorporation set forth above.
Item 5Shareholder 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 300 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.
Last year, the owners of 253,871,933 shares, representing approximately 28.1% of shares voting, voted FOR this proposal.
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 factions 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 section contains a description and analysis of the compensation arrangements and decisions we made for 2007 for our executive officers named in the Summary Compensation Table that follows this section. We refer to such named executive officers as NEOs. The section also describes certain of the compensation policies and practices that we have adopted and implemented at the Company.
Our Companys 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 include appropriate performance incentives and total direct compensation opportunities, which are informed by a review of the compensation practices and pay levels of a sample of large companies with a strong brand marketing focus and companies in the payments and financial services industries. Subject to the judgment and discretion of the Compensation Committee, 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 competitors, earned compensation would be expected to be in the top quartile. These market positioning directions may vary by executive or in a given year based on our financial and operating results, as well as talent development and retention objectives.
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.
Role of the Compensation and Benefits Committee; Use of Compensation Consultants
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 proxy statement.) 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 12 times in 2007. The Compensation Committee periodically meets in executive session without management being present.
Beginning in February 2007, the Compensation Committee engaged Frederic W. Cook & Co., Inc. (Cook) and considered advice and information from such firm in determining the amount and form of compensation for NEOs. This work included confirming an updated comparison group of companies, collecting and providing relevant market data (including proprietary data and data provided by Mercer (US) Inc. (Mercer) and other consultants), developing alternatives to consider for chief executive officer (CEO) compensation, including advice and consultation in connection with the special grant of stock options for the CEO (as described below), and providing advice with respect to grants of stock options and restricted stock awards to certain NEOs in connection with their promotions during 2007 (also as described below).
In connection with its work for the Compensation Committee, Cook attended Compensation Committee and related meetings with management. Cook provides these services to the Compensation Committee, and it also provides services to the Nominating and Governance Committee of the Board with respect to Director compensation. In addition, Cook provided advice in connection with the design of the Companys 2007 Incentive Compensation Plan, which was adopted by our shareholders at our 2007 Annual Meeting. Cook will not provide any other services to the Company under the terms of its agreement with the Compensation Committee, unless the Committee approves such services in support of the Committees objectives.
During 2007, as approved by the Compensation Committee, Mercer provided services and information to the Company in connection with the collection of market data with respect to the compensation of NEOs and other management positions, the preparation of tally sheets and the collection of information and preparation of tables summarizing payments to the NEOs upon change-in-control, retirement and other termination of employment scenarios. Cook provided guidance to Mercer with respect to the NEO market data and the tally sheets provided to the Compensation Committee.
We use other compensation and benefits consultants (e.g., Towers Perrin and Hewitt) to provide market practice data, actuarial services and/or advice relating to broad management employee programs in which executive officers may participate.
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 performance assessments of the achievement of shareholder, customer and employee goals, personal leadership and relative responsibilities and contributions, the CEO recommends annual and long-term compensation 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 Cook, the Compensation Committee determines in its judgment what changes, if any, should be made to the executive compensation program for the coming 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 assuming various scenarios, including retirement, termination of employment and change-in-control of the Company. The Compensation Committee uses the information in the tally sheets as an informational tool to remain apprised of the amount of capital that an NEO has accumulated or may receive in certain circumstances under our compensation programs. In 2007, the information in the tally sheets did not significantly influence the Compensation Committees decisions for individual compensation or the design or continuing appropriateness of compensation or benefit programs.
Our overall management performance assessment processes cover both organizational and individual results each year. Organizational performance provides a general basis for setting overall levels of compensation. Individual performance provides a basis for differentiating compensation among participants. The Compensation Committee exercises 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.
Early each year the CEO prepares and develops a written set of financial, strategic and organizational objectives. These performance objectives are reviewed and approved by the Compensation Committee. The CEOs performance assessment is based on Company and individual performance, and is determined by the Compensation Committee after reviewing, among other things, the CEOs written self-assessment of his and the Companys performance against the objectives set forth earlier in the year, as well as after receiving 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).
We assess organizational and individual performance by reviewing 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 achieving an industry-leading competitive position and the corresponding need to have a highly engaged, talented workforce.
We also assess individual performance in the area of leadership, which we believe to be integral to the sustained success of the Company. 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.
Determining Compensation and Mix of Compensation Components
The Compensation Committee uses its judgment and discretion in making compensation decisions, utilizing the framework described above, as well as a consideration of, among other things, the individuals career with the Company, current compensation arrangements, internal equity and long-term potential to increase shareholder value. The Compensation Committee does not use rigid formulae to determine compensation awards or payouts (except in the context of having a maximum deductible compensation value to comply with tax regulations). This approach is incorporated into our compensation programs and assessment process to respond and adapt to the evolving business environment and to attract, develop and retain exceptional talent.
Each year the CEO recommends to the Compensation Committee the mix of salary, annual incentive, restricted stock, restricted stock units, stock option and portfolio grant awards that an NEO receives as total direct compensation based on job responsibilities and performance and talent assessments, while being informed by available market data. As a result, the weighting of each component can vary year to year. 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 and/or future performance to earn value because they encourage a longer term view of the Companys results and the retention of highly talented executives.
For NEOs other than the CEO, the Compensation Committee, after receiving recommendations from the CEO, determines pay levels that reflect individual contributions, relative roles and responsibilities and leadership succession. With respect to the differences in the compensation levels between the CEO and the other NEOs, and among the other NEOs, the Compensation Committee took into account the differences in the roles regarding leadership and responsibility for the overall performance and strategic vision of the Company, as well as individual contributions and available market data for comparable positions in peer companies.
During 2007, the Compensation Committee reviewed market data for NEO jobs primarily found in the 22 companies identified below. The group consists of both 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 include our competitors for business and talent, as well as strong brand companies, and median gross revenue of the sample is comparable to our revenue. The Compensation Committee uses the market data as a guide in creating a general framework for overall levels of compensation and establishing what an appropriate level of total direct compensation would be for a given performance rating, recognizing that the available data can be lagging in nature and reflect each companys individual circumstances and jobs. The Compensation Committee also considers the earnings per share growth, revenue growth, return on equity and shareholder return performance of these companies compared to our own in assessing CEO performance and determining CEO compensation.
The Compensation Committee periodically reviews this list of companies, and in 2007 removed Morgan Stanley from the list because of the spin-off of its credit card business, Discover Financial Services, and First Data Corporation because it is no longer a publicly-traded company.
Compensation Committee Assessment of 2007 Performance
The principal factors that the Compensation Committee considered in assessing our 2007 performance and determining compensation levels in our programs were:
Elements of Total Direct Compensation
Annual Incentive Awards (AIAs)
In determining actual AIA payouts for 2007 performance, the Compensation Committee used its discretion to set award payouts at or below (i.e., negative discretion) the maximum deductible value for each of the NEOs. The AIA awards were paid to the NEOs in January and February 2008 in cash or as a combination of cash and RSAs or RSUs that vest after three years, subject to continuous employment and an average annual ROE of 15% or more during the vesting period. The amounts paid in cash are shown under Bonus in the Summary Compensation Table found on page 39. The amounts paid in the form of RSAs or RSUs for retention and future incentive purposes are reported in footnote 2 to the Summary Compensation Table, which may be found on page 39.
Long-Term Incentive Awards (LTIAs)
In addition to the AIA performance grant awards issued to executive officers, we also make awards of LTIAs. LTIAs were awarded under the 1998 Plan through April 23, 2007, and thereafter, under the 2007 Plan. LTIAs consist of nonqualified stock options (NQSOs), RSAs, RSUs and portfolio grant (PG) awards. PGs are cash-based incentive awards valued based on three-year performance, and may be paid in the form of cash, RSAs, RSUs 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., a common interest in our share price and TSR. The NQSO is the primary award type for this alignment of interests, but an RSA or RSU may be more appropriate in payment of compensation that has already been earned or in special retention situations. The focus of NQSOs, RSAs and RSUs 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, complementing the annual performance focus 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 Company and individual performance assessments, executive retention, available market data, unvested and outstanding LTIAs and other factors to determine the size and types of LTIAs for each NEO. With our emphasis on long-term, at-risk incentives, many of our executives (including the NEOs) have developed significant ownership stakes in the Company, and 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 additional performance-based annual cash incentives 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
An NQSO for 95,000 shares was granted to Mr. Henry on October 31, 2007 in connection with his promotion to Chief Financial Officer of the Company.
The NQSOs comprising the Special Grant will not become exercisable prior to January 1, 2014 (except as discussed below) and will vest only if the Company meets the four performance metrics described below during the six-year period from January 1, 2008 through December 31, 2013 (the Performance Period). If none of the metrics is satisfied during the Performance Period, Mr. Chenault would forfeit all stock options under the Special Grant.
Each of the metrics has a 25% weighting. In this regard, of the 2,750,000 shares eligible to vest under the Special Grant (including the grant which was made in January 2008), Mr. Chenault may earn up to 687,500 shares (i.e., one-quarter of the total) depending on the level of performance achieved for the subject metric. For purposes of determining the number of shares that vest and become exercisable, each metric will be evaluated independently from the others, i.e., the vesting of shares with respect to a metric could occur regardless of whether vesting occurs with respect to any other metric.
The four metrics are as follows:
The Compensation Committee tied the performance levels required to be achieved for the vesting of shares to our on-average, over-time financial objectives described above on page 20. In addition, the Compensation Committee elected to tie the vesting of certain of the shares to total shareholder return to reflect the importance of achieving strong relative performance during the Performance Period as well as absolute performance.
The Compensation Committee structured the vesting of shares to create incentives to meet the high end of our financial targets by providing for full vesting of the Special Grant only if performance meets or exceeds the high end of the range established for each of the respective performance metrics. At the same time, the Compensation Committee recognized that even meeting the low end of our financial targets, on average, over the next six years would mean that under Mr. Chenaults leadership, we would have met our performance targets, on average, for a period exceeding ten years. In this regard, the Compensation Committee recognized that historically, very few companies have attained this level of sustained performance, and that, as a result, such an achievement should merit partial vesting of the Special Grant.
If Mr. Chenault retires from the Company prior to December 31, 2011, none of the stock options constituting the Special Grant will vest, and Mr. Chenault will forfeit all stock options under the Special Grant. If Mr. Chenault retires from the Company after December 31, 2011, but prior to December 31, 2013, Mr. Chenault will be eligible to retain a pro rated portion of the Special Grant as determined by his date of retirement during the Performance Period; provided, however, that such retained stock options will vest and become exercisable only to the extent the Company meets the metrics described above for the full six-year Performance Period (regardless of retirement date).
Information regarding each of the NQSO grants made to the NEOs during 2007 (including the portion of the Special Grant made to Mr. Chenault in November 2007) can be found in the Grants of Plan-Based Awards table on page 42. In accordance with the rules of the SEC, the Option Awards column of the Summary Compensation Table reports for each NEO the total expense recognized by the Company in 2007 and 2006, as applicable, for his or her outstanding NQSOs (including the ratable expense for all NQSOs awarded during the applicable year) that have not been fully expensed prior to 2007 or 2006, as the case may be.
Restricted Stock Awards and Restricted Stock Units
In accordance with SEC rules, the Stock Awards column of the Summary Compensation Table reports for each NEO the total 2007 expense recognized by the Company for his or her outstanding RSAs and RSUs (including the ratable expense for January and July 2007 RSA or RSU awards) that have not been fully expensed prior to 2007. The RSAs and RSUs, which were awarded as payment in recognition of 2006 and 2004-2006 performance and in recognition of Messrs. Kellys and Gilligans promotions, were structured to provide an additional mechanism for executive retention and to comply with the Million Dollar Cap provisions.
Portfolio Grant Awards (PGs)
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 performance components that are used to determine the value of the PG award so that each of the four components will drive the value of 25% of the awards notional target value. In addition, the Compensation Committee modified the index against which total shareholder return will be measured so that results will be compared with that of the S&P 500 Index (rather than the S&P Financial Index). The Compensation Committee made these changes in order to simplify the program and increase the focus on financial performance.
The Compensation Committee used negative discretion to set actual payouts below the maximum deductible values generated by these financial results, reflecting the Compensation Committees assessment of the Companys overall financial performance and strategic accomplishments over the
period. This discretion resulted in each participating executives receiving an award equal to 230% of the target awards set at the time of grant in early 2005, except for Louise Parent who received an award of 312.5% of target in recognition of her contributions during the performance period, in particular her contributions to the private antitrust action with Visa. The PG-XVI awards were paid out in cash in February 2008. Mr. Chenaults total earned award was for $4,024,979, of which $500,000 was paid in cash in February 2008 (and is shown in the Summary Compensation Table) and $3,524,979 was awarded in January 2008 in the form of an RSA that will vest after one year subject to his continuous employment and a 2008 ROE of 15% or more. In accordance with SEC rules, the cash portion of the PG-XVI payout is reported in the Summary Compensation Table.
In January 2007, the Compensation Committee granted new Portfolio Grant 2007-2009 awards for the NEOs for the 2007-2009 performance period as reported in the Grants of Plan-Based Awards table on page 42. The maximum deductible values for particular levels of performance are 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
Under the Companys policy regarding the timing of equity award grants, the Compensation Committee makes annual tranche grants of NQSOs, RSAs and RSUs, as well as new PG awards, in January of each year at a meeting held three business days after the Companys issuance of annual financial results for the then-recently completed fiscal year. In this regard, the Compensation Committee granted NQSOs, RSAs and RSUs at a meeting held on January 25, 2007, and more recently, at a meeting held on January 31, 2008.
In addition to the annual tranche grants, LTIAs (including 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 PresidentHuman Resources, acting jointly, to make off-cycle grants to certain 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.
It is also our policy that the exercise price of option grants be equal to the closing price reported for our stock on the NYSE on the grant date. The methodology used to determine the number of shares for a given dollar value of RSAs or RSUs to be awarded is also based on the closing price of our stock on the grant date.
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 medium and long-term growth and further links their interests with those of our shareholders. The policy requires participants to
own Company shares with a target value of a multiple of their base salary, ranging from one times base salary for certain participants to ten times for our CEO. The other NEOs have a target value equal to three or four times their base salary. 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 540 executives (including the NEOs). Each covered executive is required to sign an agreement that requires him or her, among other provisions, to forfeit the pre-tax proceeds from some or all of his or her compensation received under the 1998 Plan and the 2007 Plan, including RSAs (and dividends paid), NQSOs, RSUs (and dividend equivalents paid), PGs awarded under either plan and, in the case of executive officers, 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. Pursuant to this policy, during 2007 we received amounts in connection with the resignation of our former Chief Financial Officer, Gary L. Crittenden, after he commenced employment with one of our competitors.
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 and Plan, which applies to approximately 135 executives including the NEOs. Because we do not use employment agreements, we believe that the Policy, together with our ongoing programs, 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. The Compensation Committee does, however, review the Policy from time to time to confirm that the Policy is consistent with prevailing market practices and the Committees view regarding executive severance.
Benefits are available under the Senior Executive Severance 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 compensation, 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 Retirement Savings Plan (the RSP) and the American Express Supplemental Retirement Plan (the SRP). The NEOs also continue to earn interest credits on outstanding account balances under the American Express Retirement Plan (although such plan was frozen during 2007 and no new contributions are accruing under such plan) and under prior deferred compensation programs. Taken together, these programs are intended to provide competitive retirement income that is linked to company performance and longer service.
Retirement Savings Plan
The RSP is a broad-based, U.S. tax-qualified savings plan (commonly referred to as a 401(k) plan) providing for employer and employee contributions. On a before-tax basis, eligible employees, including the NEOs, can generally contribute an amount up to the limit prescribed by the Internal Revenue Service, which for 2008 is $15,500. Participants who are, or will be, at least age 50 during the year will also be permitted to contribute additional catch-up contributions of up to $5,000 (for 2008).
We 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). Matching contributions made for employees hired prior to April 1, 2007 fully vest upon contribution. Matching contributions made 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.
We may also contribute an annual discretionary profit-sharing amount for eligible employees (including the NEOs) based on our annual performance. The range for such annual discretionary profit-sharing contributions is 0-5%. As a result of our strong performance in 2007, the Board approved a profit-sharing contribution of 4.25% of plan compensation for eligible employees (including the NEOs). Profit-sharing contributions for the 2007 plan year and beyond generally vest on the third anniversary of each eligible employees service with the Company.
For our employees who commenced their employment prior to April 1, 2007, we also 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, Gilligan and Henry and Ms. Parent: 6.0% and Mr. Kelly: 3.75%. Company conversion contributions generally vest on the third anniversary of each eligible employees service with the Company.
The Retirement Plan is a broad-based, U.S. tax-qualified cash balance pension plan. In January 2007, we amended the Retirement Plan, effective on or about June 23, 2007, to discontinue future benefit accruals (other than crediting interest to outstanding account balances) as of such date. The Retirement Plan is more fully described under Retirement Plan Benefits on page 49.
Supplemental Retirement Plan
U.S. tax law limits the amount of benefits that we can provide under our tax-qualified plans. We maintain the SRP, which is an unfunded, nonqualified arrangement, intended to provide NEOs and other affected employees with the same benefits that they would have received under the RSP (and previously under 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 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 RSP-related account for benefits that cannot be provided under the Retirement Savings Plan.
Beginning with 2008, as part of planning for retirement and other long-term financial needs, NEOs and certain other U.S. based senior level employees are provided with an annual opportunity to defer receipt of a portion of their base salary, annual incentive award and PG award payout under the SRP, subject to an annual deferral maximum of one times base salary. The amounts deferred will be credited to SRP deferral-benefits accounts, which are subject to continuous employment, ROE performance and other requirements and limits.
SRP Retirement Plan-related account benefits are more fully described under Retirement Plan Benefits on page 49, and SRP RSP-related account benefits are more fully described under Nonqualified Deferred Compensation on page 51.
Prior Deferred Compensation Programs
For 2007 and prior years, we provided the NEOs with an annual opportunity to defer receipt of a portion of their base salary, annual incentive award and PG award payout under deferred compensation programs, subject to an annual total deferral maximum of one times base salary. These 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 51.
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 or participant (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.
Perquisites and Related Tax Reimbursements
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 Company-owned aircraft and automobiles for personal travel, as well as other security measures, is 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.
Effective January 1, 2008, after discussion with the Compensation Committee, we have eliminated tax reimbursements relating to perquisites except for those tax reimbursements and tax gross-ups relating to international assignments and relocations, because we view these situations as being for the benefit of the Company.
Death, Disability and Retirement
Upon the death or disability of an NEO (or other participant), unvested NQSOs, RSAs, RSUs and retirement benefits 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 most 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 RSUs 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, RSUs 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 certain NEOs to $1,000,000 unless the compensation is performance-based (as determined under the Code and related regulations). It has been our general policy to attempt to structure AIA and LTIA compensation as qualified performance-based compensation in order to allow us to fully deduct the compensation. However, 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 AIA and LTIA compensation, except for certain awards granted before an executive became an executive officer; however, interpretations of and changes to applicable tax laws may affect the deductibility of such compensation.
Summary of Actions Regarding Annual CEO Compensation
The following is a summary of certain actions undertaken by the Compensation Committee in January 2008 and January 2007 with respect to the annual direct compensation awarded to the Companys CEO (some of which are discussed elsewhere in this Compensation Discussion and Analysis and this proxy statement). Direct compensation consists of base salary, AIAs and LTIAs. We believe that such information is helpful in understanding the outcomes of the decisions taken by the Compensation Committee in January 2008, when it reviewed the CEOs and the Companys 2007 performance to establish values and awards for the various compensation components awarded in the annual compensation process. These outcomes are not necessarily reflected in the Summary Compensation Table as a result of timing and other differences in connection with the reporting of information under SEC rules, but nonetheless provide insight into how the Compensation Committee conceptualizes the total value of the CEOs direct compensation in respect of 2007 and 2006 performance. The summary below does not include information relating to the Special Grant of NQSOs made to the CEO, as such grant was not awarded under the annual compensation framework utilized by the Compensation Committee.
For January 2008: An RSU for 122,124 shares was awarded as partial payment of Mr. Chenaults AIA in recognition of 2007 performance, and will vest after three years of continuous employment, subject to achievement of a 15% or more average annual ROE for the period. The RSU had an actual grant value of $5,999,952, which was based on a closing price on the date of grant of $49.13 per share, and is designed to meet the tax deductibility requirements of the Million Dollar Cap.
For January 2007: Two RSUs for 51,930 shares each were awarded as payment in recognition of 2006 performance, and will vest after three years of continuous employment, subject to achievement of a 10% or more average annual ROE for the period. Each had an actual grant value of $2,999,996, which was based on a closing price on the date of grant of $57.77 per share, and is designed to meet the tax deductibility requirements of the Million Dollar Cap.
For January 2008: For PG 2008-2010, the Compensation Committee assumed a potential future payout of 2.1 times the target value of $4,761,000 discounted at a rate of 5% per year. The assumption used by the Compensation Committee regarding potential future payout to value the PG 2008-2010 award reflects the assumption that we are using to accrue expense for PG 2007-2009 awards.
For January 2007: For PG 2007-2009, the Compensation Committee is assuming a potential future payout of 2.1 times the target value of $2,500,000 discounted at a rate of 5%. In order to create a more meaningful comparison between the estimated payout values of PG 2008-2010 and PG 2007-2009, the Compensation Committee updated the payout and discount rate assumptions that it utilized in January 2007 when granting PG 2007-2009 to reflect actual experience during 2007.
As discussed above, the target values for the PG awards represent a notional amount that is leveraged by the results on our average annual EPS, average annual revenue, average annual ROE and three-year total shareholder return relative to the S&P 500 Index, each weighted 25%, during the performance period covered by the applicable PG.
We made the following assumptions regarding the NQSOs granted to Mr. Chenault in January 2008 and January 2007:
Each NQSO is for 625,000 shares, is cumulatively exercisable in four equal annual installments, starting with the first anniversary of the applicable grant date and each has a 10-year term. For 2008, the NQSO had an actual exercise price of $49.13, and for 2007, the NQSO had an actual exercise price of $57.77.
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, 2007. 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). As required by SEC rules, we also show certain data for our former Chief Financial Officer, who resigned from the Company effective February 23, 2007.
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
The calculation of incremental cost for personal use of Company aircraft is based on the variable cost to the Company of operating the aircraft and includes fuel costs, trip-related maintenance, the cost of trip-related crew hotels and meals, maintenance costs, landing and ground handling fees, in-flight catering and telephone usage and other variable costs. The calculation does not include fixed costs that would have been incurred regardless of whether there was any personal use of the aircraft (e.g., aircraft purchase costs and depreciation, flight crew salaries and benefits, insurance costs, costs of maintenance not related to trips and service contracts).
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 the NQSO, RSA and RSU awards granted to each of our NEOs in 2007 under the 1998 Plan or the 2007 Plan. There can be no assurance that the Grant Date Fair Value of 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 PG07-09, January or February 2010).
In addition to his PG07-09 award granted as part of our annual long-term incentive award program, Mr. Henry was granted a second award, in recognition of his promotion to CFO.
Restricted Stock Awards and Restricted Stock Units. Four of the NEOs and Mr. Crittenden were granted RSAs or RSUs in 2007.
For Mr. Chenault: Two RSUs for 51,930 shares each (granted to recognize performance for 2006 and as an incentive for future performance) vest after three years subject to the achievement of average annual ROE of 10% or more during the vesting period, and 35,818 shares (granted to recognize performance over the 2004-2006 period and as an incentive for future performance) vested in January 2008.
For Messrs. Kelly and Gilligan: RSAs for 34,620 shares and 31,158 shares granted to the two executives, respectively (for 2006 performance and as an incentive for future performance), vest three years from the grant date subject to the achievement of average annual ROE of 10% or more during the vesting period. RSAs for 90,000 shares and 85,000 shares granted to Messrs. Kelly and Gilligan, respectively (in recognition of their previously-referenced promotions and as a retention incentive), vest 20% on each of the third, fourth and fifth anniversaries of the grant date, and the remaining 40% on the sixth anniversary of the grant date, subject to the achievement of average annual ROE of 15% or more during the applicable vesting periods.
For Mr. Henry: An RSU for 6,875 shares (granted as part of his annual long-term incentive awards prior to his promotion to CFO) vests in equal annual installments on each of the first, second, third and fourth anniversaries of the grant date.
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 RSUs, in each case in the same amount that we pay cash dividends on our common shares.
Stock Options. We granted NQSOs as part of our annual long-term incentive award program, for mid-year promotions and for other special circumstances. The NQSOs have a ten-year term. Except as specified otherwise below, 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 53-59. Four of the NEOs were granted off-cycle NQSOs in 2007.
For Mr. Chenault: A special performance-based NQSO award for 1,375,000 shares was granted to provide additional incentive and reward for continuing a high level of performance. The terms of the award, including the performance-based conditions on which the NQSO will vest, are described on pages 27-29.
For Messrs. Kelly and Gilligan: NQSOs for 475,000 shares and 450,000 shares granted to the two executives, respectively (in recognition of their previously-referenced promotions and to strengthen retention incentives), vest 25% on each of the third and fourth anniversaries of the grant date, and the remaining 50% on the fifth anniversary of the grant date.
For Mr. Henry: An NQSO for 95,000 shares (granted in recognition of his promotion to CFO) vests in equal annual installments on each of the first, second, third and fourth anniversaries of the grant date.
For Mr. Henrys PG07-09 award granted as part of his annual long-term incentive awards before his promotion to CFO (the first of the two rows of PG07-09 data shown for him), the amounts shown under these columns reflect the potential payouts under the standard PG07-09 performance and payout guidelines applicable to executives below the executive officer level.
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 and Black-Scholes values listed below and the Monte Carlo values (described on page 45) are consistent with the assumptions that we used to report stock option valuations and expense in our 2007 Annual Report on Form 10-K.
Assumptions for Valuing January 2007, July 2007 and October 2007 grants:
Assumptions for Valuing Special Performance-Based Grant Made to Mr. Chenault in November 2007. Refer to pages 27-29 for a detailed description of this Special Performance-Based Grant.
The Black-Scholes option pricing model was used to determine the grant date fair value for the components with performance metrics based on Average EPS Growth, Average Revenue Growth and Average Return on Equity. The assumptions for valuing these three components of the grant are as follows:
The Monte Carlo Valuation option pricing model was used to determine the grant date fair value for the component with a performance metric based on Total Shareholder Return. The Monte Carlo Valuation method simulates stock prices based at the vesting date of 6.08 years after the grant date with a remaining expected life of 1.92 years. The assumptions for valuing this component of the grant are as follows:
Outstanding Equity Awards at Fiscal Year-End 2007
The following table shows the number of shares covered by exercisable and unexercisable NQSOs and unvested RSAs and RSUs granted under the 1998 Plan or the 2007 Plan, held by our NEOs on December 31, 2007. Mr. Crittendens outstanding awards were canceled effective upon his resignation on February 23, 2007.