American Express Company DEF 14A 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
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 ¨
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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 13, 2009
TABLE OF CONTENTS
March 13, 2009
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 2009 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 27, 2009, at the Companys Service Center in Greensboro, North Carolina, and invite you to attend in person. Directions to the Companys Greensboro Service Center are on page 61. 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 email@example.com or by writing to him at the Companys headquarters at 200 Vesey Street, New York, New York 10285.
The Company has arranged for a live audio webcast of the 2009 Annual Meeting to be accessible to the general public on the Internet at http://ir.americanexpress.com. (Information from such site is not incorporated by reference into this proxy statement.) 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 27, 2009
The Companys Proxy Statement and 2008 Annual Report to Shareholders are available at www.proxyvote.com.
We are pleased this year once again to take advantage of the Securities and Exchange Commission (SEC) rule that permits companies to furnish proxy materials to shareholders over the Internet. On or about March 16, 2009, 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 2008 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 2008 Annual Report, which we intend to start mailing on or about March 16, 2009.
You may vote all common shares that you owned as of February 27, 2009, which is the record date for the Annual Meeting. On February 27, 2009, we had 1,159,636,176 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. 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 completing 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 22, 2009, for shares held in employee plans, and through 11:59 p.m. Eastern Time on Sunday, April 26, 2009, 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 valid 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 BuyDIRECT 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 22, 2009. 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 ratification of the appointment of our independent registered public accounting firm and the advisory (non-binding) vote approving executive compensation are routine items. The shareholder proposals are not routine items.
Broker Vote. If you hold your shares in a bank or brokerage account, you should be aware that if you fail to instruct your bank or broker how to vote within 10 days of the Meeting, the bank or broker is permitted to vote your shares in its discretion on your behalf on routine items. While banks and brokers have historically cast their votes on routine items in support of management in the absence of instructions from their clients, many 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 and 3, the routine matters in this proxy statement, you should complete and return your voting instruction form before April 17, 2009.
Votes Required for the Election of Directors and Approval of the Proposals. To elect Directors and adopt the other proposals, the following votes are required:
There are no cumulative voting rights.
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 2008 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 2008 Annual Report and proxy statement, he or she may contact the Companys Secretary. If you are receiving multiple copies of our 2008 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, 470 West Ave., Stamford, CT 06902, to help us distribute and solicit proxies. We will pay them $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 each 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 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 NYSE.
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 26, 2009, 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 fields 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.
Voting for Directors. In a non-contested election, the vote required to elect a Director by the shareholders is the affirmative vote of a majority of the votes cast in favor of or against a nominee. In any such election of Directors, any incumbent Director who receives a greater number of votes against his or her election than votes for such election shall immediately submit his or her resignation to the Board. The Board of Directors, excluding such Director, shall decide whether or not to accept such resignation and shall promptly disclose and explain its decision in a Form 8-K filed with the Securities and Exchange Commission within 90 days after the results of the election are certified. 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 against 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 against votes.
In a contested election, the Director nominees who receive the plurality of votes cast are elected as 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, 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.
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. Executive sessions relating to general topics, 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 2008, the Board held four executive sessions of non-management Directors, one of which included independent Directors only.
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 2008, 10 of the Director nominees were present at the Annual Meeting of Shareholders.
During 2008, 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 2008.
The following table lists our four Committees, the Directors who currently serve on them and the number of Committee meetings held in 2008.
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 each of the members of the Audit Committee meets the requirements for being an audit committee financial expert 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 applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountants communications with the audit committee concerning independence, 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 2008 Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2008 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 and Walter. Mr. Popoff served as a member of the Compensation Committee until his retirement as a Director in April 2008. None of the current members or Mr. Popoff is a former or current officer or employee of the Company or any of its subsidiaries. None of the current members or Mr. Popoff 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 fields 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 59. 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 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, and, as a result of that review, in 2006, the Committee recommended that the Directors receive the compensation described below. The Committee reviews Director compensation approximately every two years. In 2008, the Committee determined not to make any changes.
The following table provides information on the Companys compensation of non-management Directors for 2008. In addition, the Company reimburses Directors for out-of-pocket expenses attendant to Board membership.
Upon his or her re-election to the Board on April 28, 2008, each non-management Director was credited with 3,400 SEUs, having a date of grant fair value of $162,826, based on the price of Company common shares on such date. We have reported in this column (i) the grant date fair value of these SEU awards, which was recognized as an expense by the Company in its financial statements in 2008, reduced by (ii) the decline in the value of these awards during 2008. This decline in value was recognized as a reversal of expense by the Company in its financial statements in 2008. Because they retired from the Board, Messrs. Jordan and Popoff did not receive an SEU award in 2008.
As of December 31, 2008, the SEU balance in each Directors account was: Mr. Akerson 16,998; Ms. Barshefsky 30,716; Ms. Burns 23,456; Mr. Chernin 10,449; Mr. Jordan 74,344; Mr. Leschly 16,998; Mr. Levin 6,927; Mr. McGinn 16,998; Mr. Miller 24,474; Mr. Popoff 25,888; Mr. Reinemund 6,927; Mr. Walter 24,768; and Mr. Williams 10,604. 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 Companys Deferred Compensation Plan for Directors and Advisors and dividend equivalents thereon.
Deferred Compensation Plan for Directors and Advisors. 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 47, and/or (2) their SEU account. 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 2008 on amounts deferred under this plan in cash accounts for the following Directors in the amounts stated: Mr. Akerson $16,584; Mr. Chernin $1,930; Mr. Jordan $36,667; Mr. Leschly $20,181; Mr. Levin $1,149; Mr. Popoff $8,323 and Mr. Walter $2,243. Earnings in 2008 were considered to be above-market to the extent that the rate of interest exceeded 5.68%.
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 2008, the Company paid premiums for policies on the following Directors in the amounts stated: Mr. Akerson $25,574; Ms. Burns $18,942; Mr. Jordan $0; Mr. Leschly $35,742; Mr. Miller $24,925; Mr. Popoff $0 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.
Advisor Fees for Former Directors. Messrs. Jordan and Popoff serve the Company as Advisors to the Board following their retirement, and each received $75,000 for such service in 2008, which is included in this column.
OWNERSHIP OF OUR COMMON SHARES
The table below shows how many American Express common shares certain individuals and entities beneficially owned on February 27, 2009. 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 34; 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.
ELECTION OF DIRECTORS
Item 1Election of Directors
Our Board of Directors currently has 12 members. Each current Director is standing for re-election to hold office until the next Annual Meeting of Shareholders.
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 below unless you indicate on the proxy or voting instructions your vote against the nominee. 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 indicate below, in italics, the principal occupation of each nominee. Other information about them appears in regular type.
Managing Director, The Carlyle Group, a private equity firm, March 2003 to present. Director, Booz Allen Hamilton, Inc., Freescale Semiconductor, Inc., HCR Manor Care, Inc. and MultiPlan, Inc.
Senior International Partner, Wilmer Hale, 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 and Director, 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. Director, Boston Scientific Corporation, Xerox Corporation, the University of Rochester, National Academy Foundation, The National Center on Addiction and Substance Abuse at Columbia University, Massachusetts Institute of Technology, U.S. Olympic Committee and FIRST (For Inspiration and Recognition of Science and Technology).
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 and The Procter & Gamble Company. 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.
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, Verifone, Inc. and Via Systems, Inc.
Former President and Chief Executive Officer, AXA Financial, Inc., a U.S.-based financial services organization providing asset management, financial advisory and insurance services, May 2001 to present. Director, Korn/Ferry International, The Feinstein Institute for Medical Research and 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.
Dean of Business, Wake Forest University, a private, independent university, July 2008 to present. 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, Marriott International, Inc. and Exxon Mobil Corporation. Trustee, The Cooper Institute and United States Naval Academy Foundation.
Founder, Cardinal Health, Inc., a company that provides products and services supporting the health care industry. Executive Director, Cardinal Health, November 2007 to June 2008; Executive Chairman of the Board, April 2006 to November 2007; Chairman and Chief Executive Officer, 1979 to April 2006. Director, Nordstrom, Inc., YUM! Brands, Inc. and 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, February 2006 to October 2006; President, May 2002 to February 2006. Member, The Business Council. 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.
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Item 2Ratification of the Appointment of Independent Registered Public Accounting Firm
On January 26, 2009, the Audit Committee of the Board of Directors appointed PricewaterhouseCoopers LLP as our independent registered public accounting firm for the year beginning January 1, 2009.
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 for 2009. 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 LLP 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 $20.1 million for 2008 and $16.4 million for 2007.
The aggregate fees billed or to be billed for each of the last two fiscal years for assurance and related services that were reasonably related to the performance of the audit or review of the Companys financial statements were $1.9 million for 2008 and $2.2 million for 2007. 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 $51,000 for 2008 and $63,000 for 2007.
All Other Fees
There were no fees billed or to be billed for 2008 and 2007 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. All such services provided by our independent registered public accounting firm have been pre-approved. 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 2009 is ratified and approved.
Compensation Discussion and Analysis
The following section contains a description and analysis of the 2008 compensation arrangements and decisions we made 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 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. Our long-term goal is to deliver superior financial performance to shareholders, consistent with our announced on-average and over-time financial targets of 12-15% earnings per share (EPS) growth, revenue growth of at least 8% and return on equity (ROE) of 33-36%. Given the economic and business environment in 2008, and in particular during the latter half of the year, we do not expect to be in a position to achieve those objectives until conditions improve. Our priorities in this environment are to stay liquid, stay profitable and make selective investments that strengthen our competitive position over the longer term.
We have also long believed that we must focus on the Service Profit Chain. This focus starts with engaged employees delivering superior customer service, and satisfied customers leading to superior financial results for shareholders. Having executives who are strong leaders will enable us to attract and retain the best talent to achieve these goals, promote 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 characterized by the following principal elements:
1. Measurable goals that promote the Service Profit Chain by focusing on the interests of our three key constituencies shareholders, customers and employees.
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 relevant sample of large companies with a strong brand marketing focus and companies in the payments and financial services industries.
3. An emphasis on long-term incentive compensation, reflecting our commitment to (i) meet or exceed our objectives, including enhancing shareholder value, over the intermediate and long term, and (ii) 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 and Benefits Committee (the Committee) has, among other duties, overall responsibility for the compensation of our NEOs. The 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. You may also obtain a paper copy of the Committees charter by writing to our Secretary at the Companys headquarters. The Committee met nine times in 2008. The Committee routinely meets in executive session without management being present.
The Committee has 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 has included confirming an updated comparison group of companies, collecting and providing relevant market data, including proprietary data and data and analyses provided by Mercer and other consultants, and developing alternatives to consider for chief executive officer (CEO) compensation.
In connection with its work for the Committee, Cook attended Committee and related meetings with management. Cook provides these services to the Committee, and it also provides services to the Nominating and Governance Committee of the Board with respect to Director compensation. Under the terms of its agreement with the Committee, Cook does not provide any other services to the Company, unless the Committee approves such services in support of the Committees objectives. In 2008, no such other services were provided. The
Company uses other compensation and benefits consultants 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 Committee, the Committee considers input from management in making determinations regarding our executive compensation program and the individual compensation of executive officers and certain other executives. Based on performance assessments including results against our Service Profit Chain goals, leadership and relative responsibilities and contributions, the CEO recommends annual and long-term compensation for each executive officer other than himself. Each year, the CEO presents to the Committee his goal and leadership ratings for each executive officer, and reviews key strengths, development actions and succession plans with the Committee and full Board. After taking into account input from management and Cook, the Committee determines in its judgment what changes, if any, should be made to the executive compensation program for the coming year, and determines the compensation awards for each NEO.
The 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 Committee uses the data 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, and to assist it in confirming that the Companys compensation programs align the interests of the NEO with that of the Companys shareholders. In 2008, the information in the tally sheets demonstrated a very substantial decline in the value of outstanding long-term incentive awards held by our NEOs, as major economies, including the United States, went into recession and shareholder value declined.
Annual Performance Assessment Framework
Our 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 Committee exercises significant discretion in assessing performance, rather than solely relying on formulaic designs that may not adequately take into consideration other relevant performance objectives or actual results.
Early each year the CEO develops financial, strategic and organizational objectives for himself. These performance objectives are reviewed and approved by the Committee. The CEOs performance assessment is based on Company and individual performance, and is determined by the 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 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 customer and employee goals reflects the importance we place on our Service Profit Chain focus, which we believe fosters the long-term strength of the business. The use of these non-financial metrics also helps to reduce the potential for excessive risk-taking that may be fostered by incentives that depend exclusively on performance against numerical financial targets.
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.
Market Comparisons and Benchmarking Framework
The Committee reviews market data for NEO jobs primarily found in the list of companies established each year, consisting of U.S.-based multinational 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 Committee generally 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. For 2008, the companies used for this comparison are listed below. As the year developed, however, destabilization in the financial services industry, of which we are a part, caused the benchmark data to become significantly less meaningful.
For 2009, the Committee intends to review the criteria used to establish the list of companies. We expect to add and delete companies to ensure that market references remain appropriate.
Determining Compensation and Mix of Compensation Components
The Committee uses its judgment and discretion in making compensation decisions, using 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 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 to the evolving business environment and to attract, develop and retain exceptional talent.
Each year the CEO recommends to the Committee the mix of salary, annual incentive and long-term incentive awards that he believes an NEO should receive 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 but is always 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 Service Profit Chain objectives. 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 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 Committee takes into account internal equity, including 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 comparator companies.
Elements of Total Direct Compensation
The base salary for each NEO reflects his or her position, responsibilities and contributions relative to other executives and available market data. Salaries are typically reviewed, but not necessarily changed, in January of each year as part of our performance and compensation review process, as well as at other times to recognize a promotion or change in job responsibilities or market positioning.
Annual Incentive Awards (AIAs)
The AIA amounts paid to our NEOs are primarily at the discretion of the Committee based on an assessment of the NEOs performance against pre-determined quantitative and qualitative Company, business unit and individual goals, subject to a framework designed to comply with IRS Million Dollar Cap requirements (see page 31). AIAs are most commonly paid in cash but are occasionally paid in a combination of cash and equity, particularly at more senior executive levels, as determined by the Committee.
Long-Term Incentive Awards (LTIAs)
In addition to the AIAs, we also make awards of LTIAs. LTIAs consist of nonqualified stock options (NQSOs), restricted stock awards (RSAs), restricted stock units (RSUs) and portfolio grant (PG) awards. PGs are cash-based incentive awards valued based on multi-year performance, and may be paid in the form of cash, RSAs, RSUs or a combination thereof. The focus of NQSOs, RSAs and RSUs on share price appreciation is balanced by PGs that instead focus primarily on financial targets, as well as our relative total shareholder return. 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.
Committee Assessment of 2008 Performance and Determination of CEO and NEO Pay
Some of the factors that the Committee considered in assessing our 2008 performance and determining compensation levels in our programs were:
Summary of Actions Regarding Annual CEO Compensation
Summary of January 2009 Decisions
The following is a summary of actions undertaken by the Committee in January 2009 with respect to the annual direct compensation awarded to the Companys CEO for 2008. Direct compensation consists of base salary, AIAs and LTIAs. We believe that such information is helpful in understanding the outcomes of the decisions made by the Committee in January 2009, when it reviewed the CEOs and the Companys 2008 performance to establish values and awards for the various compensation components awarded in the annual compensation process. The results of these decisions are presented in the table below. Certain of this information is presented voluntarily to provide insight into how the Committee conceptualizes the total value of the CEOs direct compensation in respect of 2008 and 2007 performance.
The table below differs from the Summary Compensation Table required by the SEC, which can be found on page 34, and is not a substitute for that table. One major difference is that the stock and option awards columns in the Summary Compensation Table represent the expense recognized for financial statement reporting purposes with respect to equity awards granted in the years shown and prior years. The RSA and NQSO values in the table below represent a planning estimate, based on information available to the Committee at the time of their decision, of the grant date fair value of annual compensation awards granted in January for the prior years performance. (The table does not include the Special Grant of NQSOs made to Mr. Chenault in January 2008 (as described on page 24), as such grant was not awarded under the annual compensation framework used by the Committee). Another difference is that the Summary Compensation Table includes the PG payout, which was based on a grant decision made in prior years, while the table below shows the expected payout value of a newly-granted PG award. Also, the Summary Compensation Table includes compensation amounts based on the change in pension value and nonqualified deferred compensation earnings, as well as other items of compensation, including perquisites and other personal benefits. The table below excludes amounts attributable to these items because the Committee considers these programs in the context of its assessment of the overall benefit design and not as an element of its annual compensation decisions.
In light of the extraordinary economic circumstances of the past year, Mr. Chenault notified the Committee that he would decline an annual incentive award, given the overall business and economic environment. Although the Committee determined that the Companys performance in the context of the Service Profit Chain, and Mr. Chenaults individual performance including his leadership and accomplishments, would have merited him an annual incentive award, it determined to follow Mr. Chenaults recommendation.
Annual Direct Compensation Awarded to Mr. Chenault for 2008 and 2007 Performance
Each NQSO is cumulatively exercisable in four equal annual installments, starting with the first anniversary of the applicable grant date, and each has a ten-year term. For 2009, the NQSO had an exercise price of $16.71 per share, and for 2008, the NQSO had an exercise price of $49.13 per share, in each case the AXP closing stock price on the grant date.
Portfolio Grant 2006-2008 PayoutThe table below sets forth (i) the performance levels established in early 2006 for PG06-08 (also known as PG-XVII) that would generate a target level of maximum deductible value for the 2006-2008 performance period and (ii) the actual results achieved by the Company during such performance period as certified by the Committee in January 2009:
The Committee used negative discretion to set actual payouts below the maximum deductible values generated by these results. In determining the actual payout, the Committee considered overall financial results and strategic accomplishments over the three-year performance period, including the impact of the rapidly deteriorating global economic environment in 2008, and applied qualitative judgment to award a final payout of 150% of the target awards set at the time of grant in early 2006, as compared to a final payout of 230% the prior year. The PG06-08 awards were paid out in cash in February 2009. Mr. Chenaults total earned award was $6,112,500, which was 150% of his target award of $4,075,000. This cash payment was higher than the previous years PG payout, despite a lower percentage payout as compared to last years 230%, because: 1) Mr. Chenaults target award increased from the prior year and 2) this years award was made in cash, and last years award was made partially in cash ($500,000) and partially in an RSA awarded in January 2008 with a grant date value of $3,524,979 (this RSA was subject to continued employment and a 2008 ROE of 15% or more, and vested in January 2009). The Committee decided to pay this years award entirely in cash to reflect the desired mix of pay components. The Committee was limited in the portion of last years award that could be paid in cash by the terms of the 1998 Incentive Compensation Plan (the 1998 Plan), the plan under which the PG covering 2005-2007 was awarded, which limited the aggregate amount of cash incentive compensation (including AIA and PG payouts) that could be paid to an employee in a given year. That limit did not apply this year.
January 2008 NQSO Awards
Certain LTIA awards granted in 2008 to Mr. Chenault were made as part of the Committees assessment of his 2007 performance, and to provide additional incentive and reward for continuing a high level of performance. This included Mr. Chenaults January 2008 annual tranche NQSOs, which remained at the same level as those granted to him in January 2007 (625,000 shares), and had an exercise price of $49.13 per share.
In addition to his annual tranche grant, the Committee approved a special NQSO grant in January 2008, consisting of options to purchase 1,375,000 shares of the Companys common stock at an exercise price of $49.13 per share. As previously disclosed, the special NQSO grant was the second of two special grants made to Mr. Chenault to provide additional incentive and reward for a continuing high level of performance. At its meeting on November 30, 2007, the Committee also granted to Mr. Chenault an NQSO to purchase 1,375,000 shares at an exercise price of $58.98 per share, thereby making a total of 2,750,000 shares of the Companys common stock subject to the grants (collectively, the Special Grant). The Committee determined the size of the Special Grant after considering the value of Mr. Chenaults outstanding LTIAs.
The NQSOs comprising the Special Grant will generally not become exercisable prior to January 1, 2014 and will vest only if the Company meets performance levels with respect to (i) growth in diluted earnings per share from continuing operations, (ii) revenue growth, (iii) average annual return on common equity and (iv) annual total shareholder return as compared with annual total shareholder return of the S&P 500 Index, in each case during the six-year period from January 1, 2008 through December 31, 2013 (the Performance Period). If none of the performance metrics is satisfied during the Performance Period, Mr. Chenault will not vest in any NQSOs under the Special Grant. Given Company performance to date, we do not expect any NQSOs under the Special Grant to vest. Additional information regarding the Special Grant, including the target levels of performance required for vesting under each of the metrics, may be found on pages 27-29 of our proxy statement, dated March 11, 2008, which was filed with the SEC on March 14, 2008.
Summary of Actions Regarding Annual NEO Compensation (below CEO)
2008 Base SalariesBase salaries for 2008 for each of the NEOs remained at the same levels as those in place at the end of 2007 after a review of competitive market data and individual contributions. Salary information for the NEOs can be found in the Summary Compensation Table on page 34.
2009 Base SalariesIn an effort to reduce costs in light of the ongoing extraordinarily difficult business environment, in February 2009 Mr. Chenault recommended and the Committee agreed to reduce the 2009 base salaries for the NEOs by 10% effective March 30, 2009. This action presently is intended to be in place only for the balance of 2009, and the Committee will determine appropriate future action with a consideration of economic and market conditions in the months ahead.
Annual Incentive Awards
In January 2008, the Committee established a grid for each NEO that specified maximum AIA values that would be deductible for each financial performance level during 2008 under IRS Million Dollar Cap requirements. The highest maximum deductible value would be generated by the Companys achievement of the combination of either:
In determining actual AIA payouts for 2008 performance, the 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 Committee determined that the Companys performance and the individual performance of the NEOs below CEO merited each of them a cash AIA in respect of 2008 performance, although in each case it was a smaller award than the total AIA awarded in respect of 2007 performance, which included cash and RSA or RSU value. This determination took into account each NEOs business unit performance against its shareholder, customer and employee goals, and also took into consideration talent and retention considerations. The table below shows components of the AIA values awarded to Messrs. Gilligan, Kelly, Henry and Squeri in respect of 2008 and 2007 performance:
As shown above, for 2008, the Committee decided to pay AIAs that were awarded to the NEOs in February 2009 entirely in cash, to reflect the desired mix of pay components. The amounts paid in cash are shown under Bonus in the Summary Compensation Table found on page 34. For 2007, 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 on page 39 of our proxy statement dated March 11, 2008, which was filed with the SEC on March 14, 2008.
Long-Term Incentive Awards
January 2008 NQSO AwardsIn January 2008, the Committee approved annual tranche NQSOs for the NEOs. Mr. Squeris annual tranche NQSO award of 130,000 shares remained at the same level as that granted to him in January 2007. The annual tranche NQSO levels for each of Messrs. Kelly, Gilligan and Henry of 200,000 shares, 190,000 shares and 150,000 shares, respectively, reflected increases over the grants made to them in January 2007, in light of their strong performance and promotion into their current roles during 2007.
Information regarding each of the NQSO grants made to the NEOs during 2008 (including Mr. Chenault) can be found in the Grants of Plan-Based Awards table on page 38. In accordance with SEC rules, the Option Awards column of the Summary Compensation Table reports for each NEO the total expense recognized by the Company in 2008, 2007 and 2006, as applicable, for his outstanding NQSOs (including the ratable expense for all NQSOs awarded during the applicable year) that have not been fully expensed prior to 2008, 2007 or 2006, as the case may be.
January 2008 RSA/RSU AwardsIn January 2008, the Committee granted three RSAs and one RSU to NEOs below CEO for 2007 performance (in addition to cash AIA payments) and as an incentive for future performance, which are reported in the Grants of Plan-Based Awards table on page 38. These awards vest after three years, subject to continued employment and a 15% or more average annual ROE during the vesting period.
Information regarding each of the RSA and RSU grants made to the NEOs during 2008 (including Mr. Chenault) can be found in the Grants of Plan-Based Awards Table on page 38. In accordance with SEC rules, the Stock Awards column of the Summary Compensation Table reports for each NEO the total expense recognized by the Company in 2008, 2007 and 2006, as applicable, for his outstanding RSAs and RSUs (including the ratable expense for all RSAs or RSUs awarded during the applicable year) that have not been fully expensed prior to 2008, 2007 or 2006, as the case may be. The RSAs and RSUs, which were awarded as payment in recognition of 2005-2007 performance, were structured to provide additional executive retention and to comply with the Million Dollar Cap provisions.
PG 2006-08 PayoutIn January 2009, the Committee determined the payout percentage for PG 06-08 awards to NEOs to be 150% of target value. See page 24 for information regarding results used in determining PG 2006-2008 Payouts.
PG 2008-2010 Awards In January 2008, the Committee granted new PG 08-10 awards to the NEOs for the 2008-2010 performance period as reported in the Grants of Plan-Based Awards table on page 38. The maximum deductible values for particular levels of performance are shown under the caption Estimated Future Payouts Under Non-Equity Incentive Plan Awards in the Grants of Plan-Based Awards table. Actual payout values will be determined by the Committee exercising its negative discretion.
Compensation Governance Policies
Our Policy Regarding the Timing of Equity Award Grants
Under the Companys policy regarding the timing of equity award grants, the 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 Committee granted NQSOs, RSAs and RSUs at a meeting held on January 31, 2008, and more recently, at a meeting held on January 29, 2009.
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 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 Committee has delegated the authority to the CEO and the Executive Vice President-Human Resources, acting jointly, to make off-cycle grants to certain non-Section 16 Officers, subject to guidelines established by the Committee. Under our policy, the Committee and such authorized officers may make and approve off-cycle grants of equity awards (and PGs) only on the last trading day of February, April, May, July, August, October and November of each year, as well as the annual tranche grant date each year, as described above, with the grant date of such awards being the date of the approval.
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. Generally, the methodology used to determine the number of shares for a given dollar value of NQSOs, 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 140 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 has these key features:
To further encourage a focus on the long term, we prohibit employees from engaging in hedging and other derivative transactions (other than the exercise of employee stock options) with respect to our stock.
Policies Regarding Recoupment of Incentive Compensation
To protect the shareholders interests, we have Policies 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. These Policies have been superseded in certain respects as a result of the Companys participation in the United States Department of the Treasurys Troubled Asset Relief Program Capital Purchase Program (the CPP), which contains numerous provisions relating to executive compensation matters. For a discussion of certain of the effects of our participation in the CPP on compensation matters, see pages 31-32.
To help protect our competitive position, we have a detrimental conduct policy, covering approximately 530 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 Incentive Compensation Plan (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 during the first year following employment termination. Detrimental conduct includes, for example, working for certain competitors, soliciting our customers or employees, or disclosing our confidential information. The detrimental conduct policy is in addition to the obligations arising under our Code of Conduct.
Elements of Post-Employment and Other Compensation
We provide severance benefits on uniform terms and conditions under our Senior Executive Severance Policy and Plan, which applies to approximately 140 executives including the NEOs. 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 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.
Our policy regarding the provision of severance benefits has been superseded in certain respects as a result of the Companys participation in the CPP. For a discussion of certain of the effects of our participation in the CPP on compensation matters, see pages 31-32.
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 2009 is $16,500. 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 $5,500 for 2009.
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, generally 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 performance in 2008, the Board approved a profit-sharing contribution of 2.25% of plan compensation for eligible employees in the regular benefit level (including the NEOs). Profit-sharing contributions 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, in light of freezing the Retirement Plan, we generally 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: 6.0% and Messrs. Kelly and Squeri: 3.75%. Company conversion contributions generally vest on the third anniversary of each eligible employees service with the Company.
In February 2009, we announced to employees that we will temporarily suspend Company contributions to the RSP effective March 30, 2009. This includes suspending both Company matching contributions for all employees, as well as conversion contributions for all employees other than those who are retirement eligible (those participants who will attain age 55 with ten years of service as of December 31, 2009). Messrs. Chenault and Henry are retirement eligible and will continue to receive conversion contributions.
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 44.
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, we provided NEOs and certain other U.S. paid senior level employees 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 are 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 44. SRP RSP-related account benefits, SRP Deferral account benefits and benefits under prior deferral programs are more fully described under Nonqualified Deferred Compensation on page 46.
Change in Control Policies
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.
Set forth below are the consequences if there is a covered termination of the employment of an NEO within two years following a CIC. A covered termination is an involuntary actual or constructive termination of employment. An NEO or other participant would be deemed to have a constructive termination of employment if we reduce base salary, materially reduce the total value of annual incentive and long-term incentive award opportunities, relocate the NEOs workplace beyond a certain distance or assign the employee duties materially inconsistent with prior duties.
Our policies regarding payments upon a CIC are affected by the Companys participation in the CPP. For a discussion of certain of the effects of our participation in the CPP on compensation matters, see pages 31-32.
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 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 reflects, among other things, his job level in the Company and the location of his international assignment (London).
We have maintained a security policy that requires the Companys CEO 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 Mr. Squeri, and a cash allowance to all NEOs in lieu of other competitive perquisites.
Effective January 1, 2008, we eliminated tax reimbursements relating to perquisites for NEOs 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 ten 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 NQSO 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 their original term.
IRS Million Dollar Cap/CPP Limitation on Deductibility
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 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. For the 2008 tax year, we expect under the U.S. tax law limits 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.
Pursuant to the terms and conditions of the CPP, during the period in which the Treasury Department holds our preferred shares and warrants, the annual tax deduction on compensation that we pay to the NEOs will be limited to $500,000 per NEO beginning with amounts paid in 2009 regardless of whether compensation is performance-based. We continue to expect that our NEOs compensation will be significantly in excess of $500,000 per year. The Committee weighed the CPPs further limitation on deductibility against the benefits to the Company of its participation in the CPP and its competitively compensating its executive officers and concluded that given the unprecedented economic and business environment, participation in the CPP and the importance of retaining management outweighed the expected foregone tax deductions during the Treasury Departments holding period. See below for a description of the impact of our participation in CPP.
Certain Implications of Our Participation in CPP
In January 2009 we participated in the CPP by issuing preferred stock and warrants to the U.S. Department of the Treasury (the Treasury Department). Like other participants in the program, we agreed, as a condition of our participation, to comply with certain provisions relating to executive compensation matters, which were contained in the Emergency Economic Stabilization Act of 2008 (EESA) and rules promulgated by the Treasury Department. As a result, we adopted a policy regarding certain of our compensation programs to ensure
compliance with the EESA provisions. Pursuant to the American Recovery and Reinvestment Act of 2009 (ARRA), which was enacted in mid-February, the executive compensation provisions of EESA were amended to expand their scope, as well as the matters that they address. ARRA also contained additional provisions regarding executive compensation that were not originally included in EESA. Below is a brief summary of certain of the executive compensation provisions of EESA, as amended by ARRA. It is expected that the Treasury Department will promulgate rules to provide clarity and specificity regarding these provisions to guide CPP participants in their compliance with such provisions. The Committee anticipates making appropriate modifications to our overall compensation framework and certain compensation plans in response to the statutory requirements of EESA and emerging regulatory requirements, while at the same time attempting to maintain the overall objectives of structuring our compensation plans to attract and retain the best talent and promote the Companys growth.
Restriction on Incentive Compensation
The ARRA provides that for so long as the Treasury Department holds the preferred shares of a participant in the CPP, the CPP participant will be prohibited from paying or accruing any bonus, retention award or incentive compensation to an NEO and at least the next 20 most highly compensated employees unless such bonus, retention award or incentive compensation (i) is in the form of long-term restricted stock that does not fully vest during the period in which the Treasury Department holds the CPP participants preferred shares and (ii) has a value in an amount that is not greater than one-third of the total amount of annual compensation of the applicable NEO or other employee receiving such long-term restricted stock. This provision does not prohibit bonus payments required to be paid under arrangements in place prior to the passage of the ARRA, as such arrangements are determined by the Treasury Department.
Like other participants in the CPP, we agreed to expand the standards under which we may recoup performance-based compensation from our NEOs. Accordingly, to the extent that any bonus, retention award or incentive compensation paid to any NEO during the period in which the Treasury Department holds our preferred shares was based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate, the Company is required to recover such compensation from the affected NEO or other employee. This standard is applicable regardless of whether the material inaccuracy is triggered by an accounting restatement, and covers not only material inaccuracies relating to financial reporting, but also material inaccuracies relating to other performance metrics used to award bonuses and other incentive compensation. Additionally, this standard is applicable regardless of whether the NEO personally engaged in the conduct that caused or gave rise to the material inaccuracy. (The ARRA has amended this provision to include the NEOs and the Companys next 20 most highly compensated employees.)
Severance and Golden Parachutes
Under the terms of the CPP, for so long as the Treasury Department holds a CPPs participants preferred shares, it is prohibited from making any payment to a NEO and any of the next five most highly-compensated employees for departure from the Company for any reason, except for payments for services performed or benefits accrued.
Under the terms governing our participation in the CPP, the Committee is required to review the incentive compensation arrangements for the Companys senior executive officers to ensure that these arrangements do not encourage unnecessary and excessive risks that threaten the value of the Company. In January 2009, the Committee met with the Companys Chief Risk Officer to review the Companys Enterprise Risk framework (which is periodically reviewed with the Boards Audit Committee) and to discuss short-term and long-term risks that might impact business results. Within that context, the Committee reviewed the Companys incentive compensation arrangements and identified features that would discourage senior executive officers from taking risks that are unnecessary or excessive. These features included incentive awards that spanned different timeframes (annual, mid-term and long-term) and depended on performance against a variety of financial and non-financial metrics, including compliance and control, as well as policies related to stock ownership, net share holding requirements and recoupment of awards, and broad Committee discretion to determine awards. The Committees certification that it has reviewed the senior executive officers incentive compensation arrangements in light of business risks may be found on the following page. ARRA requires that the Committee meet twice annually regarding risk review so long as Treasurys preferred shares are outstanding.
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.
The Compensation and Benefits Committee certifies that it has reviewed with the Chief Risk Officer the NEO incentive compensation arrangements and has made reasonable efforts to ensure that such arrangements do not encourage NEOs to take unnecessary and excessive risks that threaten the value of the financial institution.
COMPENSATION AND BENEFITS COMMITTEE
Jan Leschly, Chairman
Richard A. McGinn
Edward D. Miller
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, 2008. 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).
The Summary Compensation Table presents compensation information in a standardized format pursuant to SEC rules, which, among other things, require us to report the expense that we recognize each year in our financial statements in respect of NQSOs, RSAs and RSUs that were granted to each NEO over a multi-year period.
Executives do not realize the value of equity-based awards until the awards mature and/or are exercised. The actual value that an NEO will realize from such awards is determined by future Company performance and share price, and may be significantly lower than the amounts indicated in the table, which represent the expense recognized in respect of such awards.
For example, the exercise prices for those options whose expense is reflected in the Summary Compensation Table range from $45.58 to $60.95. The closing price per share of our common stock on March 12, 2009 was $13.15. In addition, the amounts shown for Mr. Chenault under Option Awards include expense recognized in connection with the Special Grant, the vesting of which is subject to meeting various performance requirements. Given Company performance to date, we do not expect any option awards under the Special Grant to vest.
A summary of the Committee decisions on the annual direct compensation awarded to our Chief Executive Officer in respect of 2008 performance, including the Committees decision regarding his NQSO grant and its decision not to award him a cash bonus or any RSAs or RSUs, can be found on pages 22-24.
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
Grants of Plan-Based Awards
The following table provides information on the NQSO, RSA and RSU awards granted to each of our NEOs in 2008 under the 2007 Plan, as well as PG 08-10 awards. 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 PG08-10, January or February 2011).
Restricted Stock Awards and Restricted Stock Units. All of the NEOs were granted RSAs or RSUs in 2008.
For Mr. Chenault: An RSU for 122,124 shares (granted to recognize performance for 2007 and as an incentive for future performance) vests after three years subject to the achievement of average annual ROE of 15% or more during the vesting period, and an RSA of 71,748 shares (granted to recognize performance over the 2005-2007 period and as an incentive for future performance) vested in January 2009.
For Messrs. Gilligan, Kelly, Henry and Squeri, respectively, 21,758 RSAs, 22,898 RSAs, 14,634 RSUs and 10,177 RSAs (granted for 2007 performance and as an incentive for future performance) vest three years from the grant date, subject to the achievement of average annual ROE of 15% or more during the vesting period.
The vesting of each of the above awards is also subject in each case to the NEOs continuous employment with the Company. We pay cash dividends on the RSAs and make dividend equivalent payments on the 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 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 47-53.
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 page 24.
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 40) are consistent with the assumptions that we used to report stock option valuations and expense in our 2008 Annual Report on Form 10-K.
Assumptions for Valuing January 2008 grants:
Assumptions for Valuing Special Performance-Based Grant Made to Mr. Chenault in January 2008. Refer to page 24 for a 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 5.92 years after the grant date with a remaining expected life of 2.08 years. The assumptions for valuing this component of the grant are as follows:
Outstanding Equity Awards at Fiscal Year-End 2008
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, 2008.
Notes Relating to Option Awards
Notes Relating to Stock Awards
Option Exercises and Stock Vested in 2008
The following table contains information about exercises of NQSOs by the NEOs and shares acquired by the NEOs upon the vesting of RSAs, in each case during 2008.