JPMORGAN CHASE & CO DEF 14A 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
JPMORGAN CHASE & CO.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
JPMorgan Chase & Co.
270 Park Avenue
New York, New York 10017-2070
March 31, 2009
Dear fellow shareholder:
We are pleased to invite you to the annual meeting of shareholders to be held on May 19, 2009, at our offices at One Chase Manhattan Plaza in New York City. As we have done in the past, in addition to considering the matters described in the proxy statement, we will review major developments since our last shareholders meeting.
We hope that you will attend the meeting in person, but even if you are planning to come, we strongly encourage you to designate the proxies named on the proxy card to vote your shares. This will ensure that your common stock is represented at the meeting. The proxy statement explains more about proxy voting. Please read it carefully. We look forward to your participation.
Chairman and Chief Executive Officer
Notice of 2009 Annual Meeting
of Shareholders and Proxy Statement
Matters to be voted on:
By order of the Board of Directors
Anthony J. Horan
March 31, 2009
Please vote promptly.
If you attend the meeting in person, you will be asked to present photo identification, such as a drivers license. See Attending the annual meeting on page 39.
Please note, if you hold your common stock in street name and if you do not provide voting instructions, your shares will not be voted on any proposal on which your broker does not have discretionary authority to vote. Brokers do not have discretionary authority to vote on the shareholder proposals.
We are pleased to be using the Securities and Exchange Commission rule that allows companies to furnish proxy materials to their shareholders over the Internet. In accordance with this rule, we sent shareholders of record at the close of business on March 20, 2009, a Notice of Internet Availability of Proxy Materials on or about March 31, 2009. The notice contains instructions on how to access our Proxy Statement and Annual Report for the year ended December 31, 2008, via the Internet and how to vote online. Instructions on how to receive a printed copy of our proxy materials is included in the notice, as well as in the attached Proxy Statement.
Important Notice Regarding the Availability of Proxy Materials for the 2009 Annual Meeting of Shareholders to be held on May 19, 2009. Our 2009 Proxy Statement and Annual Report for the year ended December 31, 2008, are available free of charge on our Web site at http://investor.shareholder.com/jpmorganchase/annual.cfm.
Your vote is very important. For this reason, the Board of Directors of JPMorgan Chase & Co. (JPMorgan Chase or the Firm) is requesting that you allow your common stock to be represented at the annual meeting by the proxies named on the proxy card. This proxy statement is being sent or made available to you in connection with this request and has been prepared for the Board by our management. The proxy statement is being sent and made available to our shareholders on or about March 31, 2009.
Proposal 1 Election of directors
Our Board of Directors has nominated 11 directors for election at this annual meeting to hold office until the next annual meeting and the election of their successors. All of the nominees are currently directors. Each has agreed to be named in this proxy statement and to serve if elected. All of the nominees are expected to attend the 2009 annual meeting. All of the nominees for election at the 2008 annual meeting attended the meeting on May 20, 2008.
Robert I. Lipp, who served as a director of the Firm or a predecessor institution since 2003, retired from the Board and as Senior Advisor of the Firm in September 2008.
Although we know of no reason why any of the nominees would not be able to serve, if any nominee is unavailable for election, the proxies intend to vote your common stock for any substitute nominee proposed by the Board of Directors. The Board may also choose to reduce the number of directors to be elected, as permitted by our By-laws.
Information about the nominees
Unless stated otherwise, all of the nominees have been continuously employed by their present employers for more than five years. The age indicated in each nominees biography is as of May 19, 2009, and all other biographical information is as of the date of this proxy statement. Our directors are involved in various charitable and community activities and we have listed a number of these below.
Predecessor institutions of JPMorgan Chase include Bank One Corporation, J.P. Morgan & Co. Incorporated and The Chase Manhattan Corporation.
Crandall C. Bowles, 61, Chairman of Springs Industries, Inc., home furnishings. Director since 2006.
Mrs. Bowles has been Chairman of Springs Industries, Inc. since 1998 and a member of its board since 1978. From 1998 until 2006, she was also Chief Executive Officer of Springs Industries, Inc. Subsequent to a spinoff and merger in 2006, she was Co-Chairman and Co-CEO of Springs Global Participacoes S.A., a textile home furnishings company, until July 2007. She is also a member of the board of directors of Deere & Company and Sara Lee Corporation. Mrs. Bowles is a graduate of Wellesley College and earned an MBA from Columbia University. She serves on the boards of the Carolina Thread Trail and the Maya Angelou Research Center on Minority Health. She is a member of The Business Council, the Committee of 200, and the South Carolina Climate, Energy and Commerce Advisory Committee.
Stephen B. Burke, 50, President of Comcast Cable Communications, Inc., cable television. Director since 2003.
Mr. Burke joined Comcast Cable as President in 1998. Prior to 1998, he was with The Walt Disney Company from 1986. Mr. Burke is a graduate of Colgate University and received an MBA from Harvard Business School. He had been a director of Bank One Corporation from 2003 until 2004. He is Chairman of The Childrens Hospital of Philadelphia.
David M. Cote, 56, Chairman and Chief Executive Officer of Honeywell International Inc., diversified technology and manufacturing. Director since 2007.
Mr. Cote has been Chairman and Chief Executive Officer of Honeywell International Inc. since July 2002. He joined Honeywell as President and Chief Executive Officer in February 2002. Prior to joining Honeywell, he served as Chairman, President and Chief Executive Officer of TRW Inc., which he joined in 1999. Mr. Cote is a graduate of the University of New Hampshire, where he earned a bachelors degree in business administration. He received an honorary Juris Doctor degree from Pepperdine University in 2001.
James S. Crown, 55, President of Henry Crown and Company, diversified investments. Director since 1991.
Mr. Crown joined Henry Crown and Company in 1985 as Vice President and became President in 2003. He earned a B.A. in 1976 from Hampshire College and received his law degree in 1980 from Stanford University Law School. He had been a director of Bank One Corporation from 1991 until 2004. Mr. Crown is also a director of General Dynamics Corporation and Sara Lee Corporation. He is Chairman of the Board of Trustees for the University of Chicago and a trustee of the Museum of Science and Industry and the Orchestral Association.
James Dimon, 53, Chairman and Chief Executive Officer of JPMorgan Chase. Director since 2000.
Mr. Dimon became Chairman of the Board on December 31, 2006, and has been Chief Executive Officer and President since December 31, 2005. He had been President and Chief Operating Officer since JPMorgan Chases merger with Bank One Corporation in July 2004. At Bank One he had been Chairman and Chief Executive Officer since March 2000. Mr. Dimon is a graduate of Tufts University and received an MBA from Harvard Business School. He is a director of The College Fund/UNCF and serves on the Board of Directors of The Federal Reserve Bank of New York, The National Center on Addiction and Substance Abuse, Harvard Business School and Catalyst. He is on the Board of Trustees of New York University School of Medicine.
Ellen V. Futter, 59, President and Trustee of the American Museum of Natural History. Director since 1997.
Ms. Futter became President of the American Museum of Natural History in November 1993, prior to which she had been President of Barnard College since 1981. She graduated from Barnard College in 1971 and earned a J.D. from Columbia Law School in 1974. She had been a director of J.P. Morgan & Co. Incorporated from 1997 until 2000. Ms. Futter is also a director of Consolidated Edison, Inc. She is a member of the Board of Overseers and Managers of Memorial Sloan-Kettering Cancer Center, a Fellow of the American Academy of Arts and Sciences and a member of the Council on Foreign Relations.
William H. Gray, III, 67, Chairman of the Amani Group, consulting and advisory. Director since 1992.
Mr. Gray has been Chairman of the Amani Group since August 2004. Mr. Gray was President and Chief Executive Officer of The College Fund/UNCF (educational assistance) from 1991 until he retired in 2004. He was a member of the United States House of Representatives from 1979 to 1991. Mr. Gray earned a B.A. degree from Franklin & Marshall College and received a masters degree in divinity from Drew Theological Seminary and a masters degree in church history from Princeton Theological Seminary. He had been a director of The Chase Manhattan Corporation from 1992 until 2000. Mr. Gray is also a director of Dell Computer Corporation, Pfizer Inc., Prudential Financial, Inc. and Visteon Corporation.
Laban P. Jackson, Jr., 66, Chairman and Chief Executive Officer of Clear Creek Properties, Inc., real estate development. Director since 1993.
Mr. Jackson has been Chairman of Clear Creek Properties since 1989. Mr. Jackson is a graduate of the United States Military Academy. He had been a director of Bank One Corporation from 1993 until 2004. Mr. Jackson is also a director of Markey Cancer Foundation.
David C. Novak, 56, Chairman and Chief Executive Officer of Yum! Brands, Inc., franchised restaurants. Director since 2001.
Prior to becoming Chairman in January 2001 and Chief Executive Officer in January 2000, Mr. Novak was Vice Chairman and President of Tricon Global Restaurants, Inc. (now known as Yum! Brands, Inc.) from June 1997 until January 2000; Group President and Chief Executive Officer, KFC and Pizza Hut, North America, subsidiaries of PepsiCo, from August 1996 until June 1997; and President, KFC North America, a subsidiary of PepsiCo, from 1994 until 1996. He received a B.A. degree from the University of Missouri. He had been a director of Bank One Corporation from 2001 until 2004. Mr. Novak is also a director of Yum! Brands Foundation and a director of the Friends of the United Nations World Food Program.
Lee R. Raymond, 70, Retired Chairman and Chief Executive Officer of Exxon Mobil Corporation, oil and gas. Director since 1987.
Mr. Raymond was Chairman of the Board and Chief Executive Officer of Exxon Mobil from 1999 until he retired in December 2005. He had been Chairman of the Board and Chief Executive Officer of Exxon Corporation from 1993 until its merger with Mobil Oil Corporation in 1999, having begun his career in 1963 with Exxon. Mr. Raymond graduated from the University of Wisconsin with a bachelor degree in chemical engineering in 1960 and received a Ph.D. in the same discipline from the University of Minnesota in 1963. He was a director of J.P. Morgan & Co. Incorporated from 1987 until 2000. He is a member of the National Petroleum Council, a member of the Board of Trustees of the American Enterprise Institute, a trustee of the Wisconsin Alumni Research Foundation, a member of the Presidents Export Council, a Trustee of the Mayo Clinic, and a member of the Innovations in Medicine Leadership Council of UT Southwestern Medical Center.
William C. Weldon, 60, Chairman and Chief Executive Officer of Johnson & Johnson, health care products. Director since 2005.
Prior to becoming Chairman and Chief Executive Officer of Johnson & Johnson in 2002, Mr. Weldon served as Vice Chairman from 2001 and Worldwide Chairman, Pharmaceuticals Group from 1998 until 2001. Mr. Weldon served in a number of other senior executive positions since joining Johnson & Johnson in 1971. He is a graduate of Quinnipiac University. Mr. Weldon is Chairman of the CEO Roundtable on Cancer, a member of The Business Council and a member of the Sullivan Commission on Diversity in the Health Professions Workforce. Mr. Weldon also serves on the Liberty Science Center Chairmans Advisory Council and as a member of the Board of Trustees for Quinnipiac University. He previously served as Chairman of the Pharmaceutical Research and Manufacturers of America (PhRMA).
JPMorgan Chase is governed by a Board of Directors and various committees of the Board that meet throughout the year. Directors discharge their responsibilities at Board and committee meetings and also through telephone contact and other communications with the Chairman and Chief Executive Officer (CEO), management and others regarding matters of concern and interest to the Firm.
Governance is a continuing focus at JPMorgan Chase, starting with the Board of Directors and extending throughout the Firm. In this section we describe some of our key governance practices. In addition to the practices discussed below, we solicit periodic feedback from our shareholders on governance and executive compensation matters and on shareholder proposals, and engage in discussion with many of the proponents of shareholder proposals.
Majority voting for directors In 2007, the Board amended the Firms By-laws to provide a majority voting standard for election of directors in uncontested elections (resignation by any incumbent director who is not re-elected) and plurality voting in any election that is contested.
Presiding Director In December 2006, the Board established the position of Presiding Director. The Presiding Director presides at executive sessions of non-management directors and at Board meetings at which the Chairman is not present, and has the authority to call meetings of non-management directors. The Presiding Director facilitates communication between the Chairman and CEO and the non-management directors, as appropriate, and performs such other functions as the Board directs. The Presiding Director position rotates semi-annually, with the chair of the Compensation & Management Development Committee (Compensation Committee) serving from January through June, and the chair of the Corporate Governance & Nominating Committee (Governance Committee) serving from July through December.
Non-management director meetings Non-management directors generally meet in executive session as part of each regularly scheduled Board meeting, with discussion led by the Presiding Director.
Corporate Governance Principles of the Board The Board of Directors first adopted Corporate Governance Principles in 1997, and has revised them periodically since then to reflect evolving best practices and regulatory requirements, including the New York Stock Exchange (NYSE) corporate governance listing standards. The Corporate Governance Principles of the Board (Corporate Governance Principles) establish a framework for the governance of the Firm. The Corporate Governance Principles can be found on our Web site at www.jpmorganchase.com under Governance.
Code of Conduct and Code of Ethics for Finance Professionals JPMorgan Chase has a Code of Conduct that sets forth the guiding principles and rules of behavior by which we operate our company and conduct our daily business with our customers, vendors and shareholders and with our fellow employees. The Code of Conduct applies to all directors and employees of the Firm. In addition, the Firm has a Code of Ethics for Finance Professionals that applies to the Chairman and CEO, Chief Financial Officer (CFO) and Chief Accounting Officer of the Firm and to all other professionals serving in a finance, accounting, corporate treasury, tax or investor relations role. The purpose of the Code of Ethics for Finance Professionals is to promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of the Firms financial books and records and the preparation of its financial statements. The Code of Conduct and Code of Ethics for Financial Professionals can be found on our Web site at www.jpmorganchase.com under Governance.
Political contributions and legislative lobbying The Board-approved policy regarding political contributions and legislative lobbying activities, the JPMorgan Chase & Co. Political Contributions Statement, is posted on our Web site at www.jpmorganchase.com under Governance. The Firm also posts on its Web site an annual report of contributions made by its Political Action Committees.
Bonus recoupment The Boards policy on bonus recoupment in the event of a restatement of financial results is stated within the Corporate Governance Principles which are available on our corporate Web site. The Firm also has other recoupment policies as described at page 19.
Policy on director nomination process The Boards Governance Committee is responsible for evaluating and recommending to the Board proposed nominees for election to the Board of Directors. As part of its process, the Governance Committee will consider director candidates recommended for consideration by members of the Board, by management and by shareholders. Shareholders wishing to recommend to the Governance Committee a candidate for director should write to the Secretary at: JPMorgan Chase & Co., Office of the Secretary, 270 Park Avenue, New York, New York 10017.
It is the policy of the Governance Committee that candidates recommended by shareholders will be considered in the same manner as other candidates and there are no additional procedures a shareholder must undertake in order for the Committee to consider such shareholder recommendations. As stated in the Corporate Governance Principles, the Board wishes to balance in general the needs for professional knowledge, business expertise, varied industry knowledge, financial expertise, and CEO-level business management experience. The Board also strives to ensure diversity of representation among its members. The Governance Committee also takes into account criteria applicable to Board committees.
Board communications Shareholders and interested parties who wish to contact any Board members or committee chairs, the Presiding Director, or the non-management directors as a group, may mail correspondence to: JPMorgan Chase & Co., Attention (name of Board member(s)), Office of the Secretary, 270 Park Avenue, New York, New York 10017.
Documents available The Corporate Governance Principles, Code of Conduct and Code of Ethics for Finance Professionals, as well as the charters of our principal Board committees, can be found on our Web site at www.jpmorganchase.com under Governance. These documents will also be made available to any shareholder who requests them by writing to the Secretary at: JPMorgan Chase & Co., Office of the Secretary, 270 Park Avenue, New York, New York 10017.
Pursuant to the corporate governance listing standards of the NYSE, a majority of the Board of Directors (and each member of the Audit, Compensation and Governance Committees) must be independent. The Board of Directors may determine a director to be independent if the director has no disqualifying relationship as defined in the NYSE corporate governance rules and if the Board has affirmatively determined that the director has no material relationship with JPMorgan Chase, either directly or as a partner, shareholder, officer or employee of an organization that has a relationship with JPMorgan Chase. In connection with the assessment of director independence, the relationships set forth in Appendix A are deemed immaterial unless the Board otherwise determines. Criteria respecting director independence may also be found in the Corporate Governance Principles on our Web site at www.jpmorganchase.com under Governance.
The Board of Directors reviewed the relationships between the Firm and each director and determined that in accordance with the NYSE corporate governance listing standards and the Firms independence standards, each non-management director (Crandall C. Bowles, Stephen B. Burke, David M. Cote, James S. Crown, Ellen V. Futter, William H. Gray, III, Laban P. Jackson, Jr., David C. Novak, Lee R. Raymond and William C. Weldon) has only immaterial relationships with JPMorgan Chase and accordingly each is an independent director under these standards. There are additional objective tests for independence in the NYSE rules and each of the named directors meets these objective tests for independence as well. Under the NYSE rules, a director employed by the Firm cannot be deemed to be an independent director, and consequently, James Dimon is not and Robert I. Lipp was not an independent director of JPMorgan Chase.
In making its determinations concerning director independence, the Board considered the following transactions between the Firm and each director, the directors immediate family members and any such persons principal business affiliations: extensions of credit made by bank subsidiaries of the Firm; financial products and services provided by subsidiaries of the Firm; business transactions for property or services contracted for by subsidiaries of the Firm; and charitable contributions made by the Firm, directly or through its Foundation, to any non-profit organization of which a director is employed as an officer. In particular, the Board considered: for directors Futter and Jackson, extensions of credit provided to them; for directors Bowles, Burke, Cote, Crown, Futter, Jackson, Novak, Raymond and Weldon, credit cards issued to them and their immediate family members; for director Bowles, extensions of credit and other financial services provided to Springs Industries, Inc. and its subsidiaries, and to The Springs Company; for director Burke, extensions of credit and other financial services provided to Comcast Corporation and its subsidiaries; for director Cote, extensions of credit and other financial services provided to Honeywell International Inc. and its subsidiaries; for director Crown, extensions of credit and other financial services provided to Henry Crown and Company and other Crown family owned entities; for director Futter, extensions of credit and other financial services provided to the American Museum of Natural History; for director Novak, extensions of credit and other financial services provided to Yum! Brands, Inc. and its subsidiaries; and for director Weldon, extensions of credit and other financial services provided to Johnson & Johnson and its subsidiaries. The Board also considered the following business relationships: for director Cote, purchases of building safety and security equipment and maintenance services from Honeywell International Inc.; for director Crown, leases of office space and a lease of retail space from subsidiaries of companies in which Mr. Crown and members of his immediate family have indirect ownership interests; for director Weldon, an acquisition by the Firms private equity division of a business of a subsidiary of Johnson & Johnson; and for directors Burke, Crown, Futter and Gray, charitable contributions to charitable organizations where those directors served as an officer or trustee.
Committees of the Board
The Board has five principal committees. The charter of each committee can be found on our Web site at www.jpmorganchase.com under Governance. Each member of the Audit Committee, the Compensation Committee and the Governance Committee has been determined by the Board to be independent for purposes of the NYSE corporate governance listing standards and within the meaning of regulations of the Securities and Exchange Commission (SEC).
Audit Committee provides oversight of the independent registered public accounting firms qualifications and independence; the performance of the internal audit function and that of the independent registered public accounting firm; and managements responsibilities to assure that there is in place an effective system of controls reasonably designed to safeguard the assets and income of the Firm, assure the integrity of the Firms financial statements, and maintain compliance with the Firms ethical standards, policies, plans and procedures, and with laws and regulations. The Board of Directors has determined that Mrs. Bowles and Mr. Jackson are audit committee financial experts as defined by the SEC.
Compensation & Management Development Committee reviews and approves the Firms compensation and benefit programs; ensures the competitiveness of these programs; and advises the Board on the development of and succession for key executives. Information on the Committees processes and procedures for consideration of executive compensation are addressed in the Compensation Discussion and Analysis at page 9.
Corporate Governance & Nominating Committee exercises general oversight with respect to the governance of the Board of Directors, including reviewing the qualifications of nominees for election to the Board and making recommendations to the Board regarding director compensation.
Public Responsibility Committee reviews and considers the Firms position and practices on charitable contributions, community development, legislation, protection of the environment, shareholder proposals involving issues of public interest and public responsibility and other similar issues as to which JPMorgan Chase relates to the community at large, and provides guidance to management and the Board as appropriate.
Risk Policy Committee provides oversight of the CEOs and senior managements responsibilities to assess and manage the Firms credit risk, market risk, interest rate risk, investment risk, liquidity risk, reputational risk, and fiduciary risk.
Director meeting attendance
The following table summarizes the membership of the Board and each of its committees, and the number of times each met during 2008:
During 2008, the Board met 18 times; each director attended 75% or more of the total meetings of the Board and the committees on which he or she served.
Annual compensation The Board believes it is desirable that a significant portion of director compensation be linked to the Firms common stock, and the Boards total compensation includes approximately one-third cash and two-thirds stock-based compensation. In 2008, each non-management director received an annual cash retainer of $75,000 and an annual grant, made when annual employee incentive compensation was paid, of deferred stock units valued at $170,000 on the date of grant. The director retainer and annual grant amounts have not changed since 2003.
Each deferred stock unit represents the right to receive one share of the Firms common stock and dividend equivalents payable in deferred stock units for any dividends paid. Deferred stock units have no voting rights. In January of the year immediately following a directors termination of service, deferred stock units are distributed in shares of the Firms common stock in either a lump sum or in annual installments for up to 15 years as elected by the director.
Each director who is a member of the Audit Committee receives an additional annual cash retainer of $10,000. Each chair of a board committee receives an additional fee of $15,000 per year. Directors who are officers of the Firm do not receive any fees for their service as directors.
The following table summarizes annual compensation for non-management directors.
Stock ownership guidelines As stated in the Corporate Governance Principles, directors pledge that, for as long as they serve, they will retain all shares of the Firms common stock purchased on the open market or received pursuant to their service as a board member.
Deferred compensation Each year non-management directors may elect to defer all or part of their cash compensation. A directors right to receive future payments under any deferred compensation arrangement is an unsecured claim against JPMorgan Chases general assets. Cash amounts may be deferred into various investment equivalents, including deferred stock units. Upon retirement, compensation deferred into stock units will be distributed in stock; all other deferred cash compensation will be distributed in cash. Deferred compensation will be distributed in either a lump sum or in annual installments for up to 15 years as elected by the director commencing in January of the year following the directors retirement from the Board.
Reimbursements and insurance The Firm reimburses directors for their expenses in connection with their board service. We also pay the premiums on directors and officers liability insurance policies and on travel accident insurance policies covering directors as well as employees of the Firm.
2008 Director compensation table The following table shows the compensation expensed for each director in 2008.
Security ownership of directors and executive officers
The following table shows the number of shares of common stock and common stock equivalents beneficially owned as of February 28, 2009, including shares that could have been acquired within 60 days of that date through the exercise of stock options or stock appreciation rights (SARs), together with additional underlying stock units as described in note 3 to the table, by each director, the executive officers named in the Summary compensation table, and all directors and executive officers as a group. Unless otherwise indicated, each of the named individuals and each member of the group has sole voting power and sole investment power with respect to shares owned. The number of shares beneficially owned, as that term is defined by Rule 13d-3 under the Securities Exchange Act of 1934, by all directors and executive officers as a group totals approximately 1% of our outstanding common stock as of February 28, 2009; each director and named executive officer individually owns less than 1% of our outstanding common stock.
In this section we will review our compensation practices, the Firms performance for 2008, and the compensation of our Named Executive Officers and certain other members of our Operating Committee. We recognize that many people are concerned about compensation practices across the financial services industry, and we think some of those concerns are quite legitimate. There is considerable public discussion regarding appropriate approaches to compensation, including efforts to ensure that compensation policies and practices are consistent with effective risk management. We support this objective and believe that our current disciplined practices reflect responsible compensation, effective risk management and accountability to shareholders. We continually review our practices.
Although JPMorgan Chase differentiated itself from other large financial services firms by its performance during the difficult conditions of 2008, the overall financial performance of the Firm was disappointing on an absolute basis. As discussed below, our CEO, Mr. Dimon received no cash bonus, no restricted stock and no SARs. For our Operating Committee as a whole, aggregate incentive compensation paid annually in cash and RSUs declined 72% from 2007.
Our compensation practices are responsible. We have long adhered to practices that are designed to reward long-term performance, not just revenues, and are aimed at aligning employee and shareholder interests. Before the U.S. Treasurys TARP program was conceived, we used a multi-year approach to compensation, considered risk management as part of our performance evaluations, had a bonus recoupment policy beyond that required under Sarbanes-Oxley, and did not use golden parachutes or many other perquisites. We have always paid a significant percentage of our incentive compensation in deferred stock (50% or more for our most senior management group) and require this group, as described on page 19, to hold 75% of their stock until retirement. The senior management group cannot hedge their holdings of JPMorgan Chase common stock, and after retirement executives typically continue to have substantial holdings of company stock through RSUs that vest over a period of years, shares received from option exercises that must be held for at least five years from the grant date of options awarded in 2005 and later, and options that depend on the share price for their value.
Compensation is determined by weighing multiple criteria based on business judgment. Compensation of our most senior executives reflects their experience and scope of responsibility for leading lines of business or key functions. The overall level of compensation also reflects the actual and potential impact of the person and his or her position on the Firms results. Where available, we use market competitive data to inform, not override, our focus on pay for performance. Compensation for the most senior management consists primarily of fixed salary and an annual variable component that we refer to as incentive compensation. In determining the variable component, we consider multiple quantitative and qualitative criteria and rely on business judgment to determine appropriate compensation to recognize the contribution and potential of our leaders. We do not use formulaic approaches tied to total shareholder return or other narrow measures. We believe such approaches do not capture the complexity of the objectives of senior management, can cause too limited a focus on actions that will affect the performance measurement, and have the potential to create undue risk from actions designed to maximize payouts under whatever formula may be chosen.
Variable compensation is part of our on-going compensation program, not a perquisite for senior officers and investment bankers. It is an important element of compensation for employees across the Firm, including retail branch and credit card personnel, technology experts, and compliance and support professionals.
Compensation practices are consistent with effective risk management. The Compensation Committee has reviewed with the Firms Chief Risk Officer the risks that the Firm faces and elements of our organizational structure, management practices and compensation programs that would discourage unnecessary or excessive risk-taking. In this regard, risk management is an integral part of the Firms culture: the Chief Risk Officer is a direct report to the CEO, employee appraisals take into consideration sound risk management, compliance sits outside of the business to ensure separation of management and oversight, and front office managers cannot exert undue influence over the incentive pools of operations groups. We also believe that it is consistent with effective risk management that variable compensation awards are discretionary, not formulaic, and are based on the performance of the individual, the relevant line of business and the Firm as a whole. Performance is also based on profits and risk-adjusted returns that add to the long-term value of the franchise, rather than just revenues. Members of the Firms Executive Committee are also subject to a 75% share retention policy as described at page 19.
We will modify compensation practices as required by TARP and the Capital Purchase Program. JPMorgan Chase is a participant in the Capital Purchase Program established by the U.S. Treasury (Treasury) under the Treasurys Troubled Asset Relief Program. Although the Firm did not seek the Treasurys investment, we recognized the importance of supporting the uniform application of the Capital Purchase Program to promote stability and confidence in the financial markets and supported the governments goal of obtaining the participation of all major banks. The funds we received strengthened our already strong capital base.
As a participant in the Capital Purchase Program, we are subject to the executive compensation provisions of the Emergency Economic Stabilization Act of 2008 (EESA), as amended by The American Recovery and Reinvestment Act of 2009. These provisions require affected financial institutions to meet certain standards for executive compensation and corporate governance, some of which require the establishment of standards by the Secretary of the Treasury. In general, these provisions are applicable during, or relate to, the period that the Treasury holds an investment in the financial institution and include certain limits on compensation, including limits that exclude incentives for senior executive officers to take unnecessary and excessive risks that threaten the value of the financial institution; provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer or certain other officers based on statements of earnings, revenues, gains, or other criteria that are later proven to be materially inaccurate; a prohibition of certain payments (golden parachute payments) to its senior executive officers or certain other officers; and a limit on deduction for federal income tax purposes to $500,000 annually for each senior executive officer during the applicable period. We will comply with all applicable provisions of EESA and applicable regulations.
EESA also requires that participants in the Capital Purchase Program permit shareholders to have a separate advisory vote to approve the compensation of executives, as disclosed pursuant to the rules of the SEC, including the Compensation Discussion and Analysis, the compensation tables and related material. We have included this as Proposal 3 at page 29.
Compensation of the Named Executive Officers
In determining the compensation of the Named Executive Officers and of other members of the Operating Committee, the Compensation Committee considered the performance of the Firm as a whole and of each line of business as well as individual executive performance.
The Firms management demonstrated extraordinary capability, dedication and stewardship in guiding the Firm through the difficult conditions of 2008, while positioning the Firm to benefit when the economy eventually recovers. Actions included executing the highly challenging acquisitions of The Bear Stearns Companies Inc. (Bear Stearns) and the banking business of Washington Mutual Bank (Washington Mutual), maintaining the Firms strong balance sheet and liquidity, managing risk, investing in business, people and systems, and continuing to maintain the highest standards for execution of our day-to-day business for clients. Two of the Firms businesses, Commercial Banking and Treasury & Securities Services, had record results in 2008, and the Firm was profitable overall in every quarter of 2008. Notwithstanding these accomplishments, however, the overall financial performance of the Firm was disappointing on an absolute basis, largely due to rapidly escalating credit costs and markdowns of certain leveraged lending and mortgage-related exposures.
The Compensation Committee also took note of the actions of the Treasury, including their investment in the Firm and in other financial institutions to promote stability and confidence in the financial system and help restore the countrys economy.
Under these challenging circumstances, the following compensation actions were taken:
In making its determinations, comparative compensation data was provided to the Compensation Committee by the Executive Compensation unit of Corporate Human Resources, but under current market circumstances the Compensation Committee did not consider available data to be relevant.
Compensation actions The following table shows annual salary in 2008 and annual incentive compensation awarded in January 2009 for 2008 performance, which reflects the Compensation Committees view of its annual compensation actions for 2008. The table also shows periodic equity awards granted in January 2009 that are separate from annual compensation. The SCT required by the SEC is at page 20.
Annual and periodic compensation
The above table is presented to show how the Compensation Committee viewed compensation actions, but it differs substantially from the SCT required by the SEC and is not a substitute for the information required by the SCT on page 20.
The SCT shows compensation information in a format required by the SEC. One major difference between the SCT and this 2008 table is that the Stock awards and Option awards columns in the SCT report the expense recognized for financial statement reporting purposes with respect to 2008 in accordance with SFAS 123R and applicable SEC rules. Thus, the SCT generally includes incentive compensation expense for prior compensation years. The above table includes equity grants made in January 2009 for the 2008 performance year, but excludes grants made in January 2008 or earlier for earlier performance years. Also, due to the Firms adoption of SFAS 123R on January 1, 2006, the accounting treatment of equity awards varies substantially among our Named Executive Officers, depending upon their eligibility for vesting of equity awards based on certain age and service requirements as described in note 2 to the SCT.
Periodic equity awards In January 2009, the Named Executive Officers (except the CEO) and other key officers of the Firm were granted equity awards in the form of SARs. We consider such awards to be separate from annual compensation. Awards were granted to recognize the key role of recipients in determining and executing the Firms objectives and to reinforce the partnerships that will help produce success for the Firm and its shareholders. SARs were awarded rather than RSUs to provide a compensation opportunity based solely on increases in the share price from the date of grant.
These SARs will become exercisable 20% per year over the five-year period from the date of grant. All shares obtained upon exercise must be held until the fifth year after grant and thereafter become subject to the Firms 75% retention requirement. Grants to members of the Operating Committee are subject to the new conditions described at page 11 for RSUs and SARs granted in January 2009.
Additional information on our compensation programs
Shareholders should expect the Firm to use its compensation resources wisely and resourcefully to build long-term value creation. We believe that our compensation philosophy and program approach are consistent with this expectation. The success of our compensation program should be measured by the long-term performance of JPMorgan Chase since the program is intended to reinforce strong and sustainable financial performance, operational discipline and shareholder value creation. The following section provides additional detail on our compensation programs.
JPMorgan Chase executive compensation practices
We define and communicate our objectives for long-term value creation.
Compensation is determined by weighing multiple criteria, including non-financial metrics.
Executive compensation is tied to long-term performance of the Firm.
Compensation practices are consistent with effective risk management.
There are no golden parachutes or special severance plans.
There are no special executive benefits.
Our clawback policies provide accountability.
Elements of executive compensation
The key components of our executive compensation program provide a holistic approach to deliver the appropriate level of total compensation. Annual compensation includes base salary and the cash portion of annual incentives. Long-term compensation includes the deferred equity portion of annual incentives and any periodic equity awards. A list of the compensation and benefits elements as they relate to senior executives of the Firm is found in the following table.
Philosophy and approach
Our long-term success as a premier financial services firm depends in large measure on the talents of our employees. Our compensation system plays a significant role in our ability to attract, retain and motivate the highest quality workforce. The principal underpinnings of that system are an acute focus on performance, shareholder alignment, a sensitivity to the relevant market place, and a long-term orientation. Based on our view of the current competitive landscape, this has never been as compelling or as important as it is right now.
Performance For senior level employees, a significant portion of compensation should be, and is, variable, and the Firm seeks real differentiation in compensation among our most senior employees based on their accomplishments.
As a general matter, in assessing performance, we consider:
The performance criteria we consider include a robust set of quantitative and qualitative factors focused on financial performance, management effectiveness, growth, people development and risk/control management. While specific factors will differ from business to business, function to function, and during different business cycles, among the most important factors that commonly apply are:
The Compensation Committee considers these factors in total. While we believe our approach is disciplined, it is not formulaic. We rely on our business judgment to determine the most appropriate compensation to recognize the contributions and potential of our leaders. In view of the wide variety and complexity of factors considered in connection with its evaluation of the Firm, business and individual executive performance, the Compensation Committee does not find it useful, and does not attempt, to rank or otherwise assign relative weight to these factors. Executive performance must be sustained at the highest levels over multiple time periods, and superior performance must be achieved across multiple factors to be considered outstanding. In considering the factors described above, individual members of the Compensation Committee and the Board of Directors may have given different weight to different factors.
Overview of 2008 performance The Firms business results are discussed in detail in the Annual Report, including the Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of the Annual Report. The Firm also reviews its business and priorities in an annual Investor Day, most recently held February 26, 2009. The Annual Report and presentation materials for the 2009 Investor Day may be found on our Web site at www.jpmorganchase.com under Investor Relations.
An overview of the performance for the Firm as a whole and for each line of business is at pages 16 and 17. A comparison of 2008 performance against results for previous years on certain key operating metrics is at page 42, Appendix B.
Overview of 2008 performance
JPMorgan Chase differentiated itself from other large financial services firms.
The Firm reported 2008 net income of $5.6 billion, compared with $15.4 billion in 2007. These results were disappointing in absolute terms, but in relative terms should be considered within the context of a number of benchmarks and achievements, including:
Total net income was a loss of $1.2 billion, driven by lower total net revenue, a higher provision for credit losses and higher noninterest expense. Total net revenue was down 33% from the prior year, reflecting, among other things, reduced market activity (investment banking); markdowns on mortgage-related exposures and on leveraged lending funded and unfunded commitments, partially offset by record performance in rates and currencies, credit trading, commodities and emerging markets (fixed income markets); and weak trading results, partially offset by strong client revenue across products, including prime services (equity markets). Notwithstanding the decline in financial results, the Investment Bank achieved the following:
Retail Financial Services
Total net income decreased 70% from the prior year, primarily reflecting a significant increase in the provision for credit losses, partially offset by positive mortgage servicing asset risk management results and the positive impact of the Washington Mutual transaction. 2008 highlights and accomplishments include:
Net income declined 73% from 2007, driven by a significantly higher provision for credit losses, partially offset by higher total net revenue. 2008 highlights and accomplishments include:
Net income in 2008 was a record and increased 27% from 2007, due to record total net revenue and the impact of the Washington Mutual transaction, partially offset by a higher provision for credit losses. 2008 highlights and accomplishments include:
Treasury & Securities Services
Net income was a record and increased 26% from 2007 driven by higher total net revenue, partially offset by higher noninterest expense. 2008 highlights and accomplishments include:
Net income declined 31% from 2007, driven by lower total net revenue offset partially by lower noninterest expense. 2008 highlights and accomplishments include:
Shareholder-alignment We believe that an ownership stake in the Firm best aligns our employees interests with those of our shareholders. Our compensation programs are designed to annually deliver a meaningful portion of total compensation in equity to employees who can have the greatest impact on the bottom line and to increase for our most senior employees the equity portion of their compensation to strengthen their alignment with shareholders. JPMorgan Chase pays a larger portion of our executive compensation in equity-based long-term incentives when compared to many companies in our comparison group. Employees whose incentive compensation is $20,000 receive 10% in the form of RSUs. The percentage awarded as RSUs increases as compensation increases. That enhanced alignment to shareholder interests is deliberate and focuses executive activities and decisions on those areas that increase shareholder value. We further believe that competitive, annual equity awards subject to multi-year vesting and termination/forfeiture provisions effectively emphasize the long-term view of our business and bolster the retention of our top talent.
Relevant market place We use comparison groups, or benchmarking, to understand market practices and trends, to evaluate the competitiveness of our programs and to assess the efficiency of these programs. Each of our lines of business operates under our overall compensation framework, but uses compensation programs appropriate to its competitive environment. Given the diversity of our businesses, our global operations and the complexity of the products and services we provide, our comparison group is also diverse, global and complex.
As a result, the Compensation Committee generally reviews actual compensation levels, generally from public data, for companies that either directly compete with us for business and/or talent or are global organizations with similar scope, size or other characteristics to JPMorgan Chase. Because we view our executive officers as highly talented executives capable of rotating among the leadership positions of our businesses and key functions, we also place importance on the internal pay relationships among members of our Operating Committee.
The Compensation Committee did not engage the services of a compensation consultant in 2008.
Below the level of our most senior officers, our businesses generally benchmark against direct business competitors, while functional areas benchmark against a blend of financial services and large, globally integrated businesses. We view benchmarking as important for an understanding of the market, but we use market factors to inform, not override, our focus on pay for performance.
The core comparison companies we generally consider are:
Additional comparison companies may be used for particular lines of business and in considering compensation of the CEO, CFO and functional staff.
Long-term orientation We strive for a long-term orientation both in the way we assess performance and in the way we structure compensation. The aim of our compensation programs and policies is to motivate all employees to attain strong and sustained performance, both on an absolute and relative basis. We achieve this through processes and tools that are clear, transparent and effective at driving behaviors that expand the depth and breadth of our positive impact on clients. Our goal is to significantly differentiate executive compensation through the annual compensation process and through periodic equity awards to appropriately recognize outstanding performance.
Certain features of our compensation programs are targeted to help us achieve individual objectives, and other elements help us achieve multiple objectives simultaneously. Our vesting periods for stock awards generally provide that one-half vests after two years and the balance vests after three years. As a result of these awards, employees share the same interest in the Firms long-term success as other shareholders, and we believe that such ownership is a positive factor in retaining key employees. We also use these features to focus executives across all lines of business on longer-term strategy and the overall results of the Firm, particularly at more senior levels where executives can have a greater influence on our long-term success.
In addition to the above, the Firm and Compensation Committee also rely on other governance practices summarized below in seeking appropriate decisions and shareholder aligned outcomes.
Authorities and responsibilities In addition to approving compensation for Operating Committee members, the Compensation Committee approves the formula, pool calculation and performance goals for the shareholder approved Key Executive Performance Plan (KEPP) as required by Section 162(m)(1) of the Internal Revenue Code, reviews line of business total incentive accruals versus performance throughout the year, approves final aggregate incentive funding, and approves total equity grants under the Firms long-term incentive plan and the terms and conditions for each type of award. The Compensation Committee has delegated authority to the Director Human Resources to administer and amend the compensation and benefits programs. The limitations on deductibility for executive compensation specified in Section 162(m)(1) of the Internal Revenue Code are superseded by limitations under the Capital Purchase Program during applicable periods. See the discussion of TARP and the Capital Purchase Program at page 10.
Compensation review processes Compensation of Operating Committee members depends not only on how they as individuals perform, but also on how the Firm as a whole performs. We assess their specific performance based on short-, medium- and longer-term objectives tailored to specific lines of business and functional areas.
Our disciplined compensation processes involve a series of reviews and assessments by successive levels of management within lines of business, the Operating Committee, the CEO, the Compensation Committee and the Board of Directors. The CEO presents his assessment of individual performance and a recommended set of compensation actions for the other Operating Committee members to the Compensation Committee for their consideration. The CEO does not make a recommendation regarding his own compensation, but did share with the Compensation Committee his sense of the negative impact that an award of a bonus to him might have on the Firm and its employees in light of the Firms 2008 performance and the current environment in which the Firm operates. The Compensation Committee discusses the CEOs compensation entirely in its independent executive session and seeks full Board ratification of its determinations. No member of the Operating Committee other than the CEO has a role in making a recommendation to the Compensation Committee as to the compensation of any member of the Operating Committee.
Bonus recoupment policies In 2006, we formalized a bonus recoupment policy to recover previous incentives paid to employees in the event those incentives were the result of conduct that leads to a material restatement of financial information. This policy can be found on our Web site at www.jpmorganchase.com under Governance. Commencing with awards granted in January 2009, our equity awards to all employees now provide that the Firm may cancel or require repayment of all or any portion of an award if we determine that it was based on materially inaccurate performance metrics or on any misrepresentation by the employee. While the Firm is a participant in the Capital Purchase Program, it also will require senior executive officers and the next 20 most highly compensated employees to reimburse the Firm for any bonus, retention award, or incentive compensation paid that was based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate.
Deductibility of executive compensation To maintain flexibility in compensating executive officers, the Compensation Committee does not require all compensation to be awarded in a tax-deductible manner, but it is their intent to do so to the fullest extent possible and consistent with overall corporate goals. To that end, shareholders re-approved KEPP in May 2008, which covers all executive officers, including the Named Executive Officers, and their annual cash incentive awards and RSUs are delivered under the plan. As a participant in the Capital Purchase Program, the Firm is subject to additional limitations on deductible compensation for federal tax purposes under Section 162(m)(5) of the Internal Revenue Code, including a reduction of the annual limit from $1,000,000 to $500,000 for the deduction of such expenses for certain senior executive officers and the elimination of the performance based exception.
Equity grant practices Equity grants are awarded as part of the annual compensation process, as periodic long-term awards and as part of employment offers for new hires. In each case, the grant price is the average of the high and the low prices of JPMorgan Chase common stock on the grant date. Grants made as part of the annual compensation process are generally awarded in January after earnings are released and generally in the form of RSUs. RSUs carry no voting rights; however, dividend equivalents are paid on units at the time actual dividends are paid on shares of JPMorgan Chase common stock. Stock options granted by Bank One in 2002 and earlier included a feature that provided for the issuance of restorative options that will remain in effect until expiration of the original option. The Firm no longer grants options with restoration rights. The Firm prohibits repricing of stock options and SARs.
Continued equity ownership Our policies require share ownership for directors and executive officers and encourage continued ownership for others. Senior executives are expected to establish and maintain a significant level of direct ownership. Mr. Dimon and other members of the Operating Committee and the Executive Committee are required to retain at least 75% of the shares they receive from equity-based awards, including options, after deduction for option exercise costs and taxes. In January 2008 and in January 2009, certain executives received more than 50% of their incentive compensation in the form of RSUs. The retention requirement will not apply to the excess over 50% when such RSUs vest. Executives are subject to these retention requirements during their service with the Firm; any exceptions are subject to approval by the General Counsel. Members of the Operating Committee and the Executive Committee are not permitted to sell short or to hedge the economic risk of their ownership of our shares.
Shareholdings of directors and executive officers are shown in the table at page 8.
Executive compensation tables
The following tables and related narratives present the compensation for our Named Executive Officers in the format specified by the SEC. For Mr. Dimon and for each of the other Named Executive Officers, all amounts listed under Stock awards and Option awards for 2008 reflect expense recognized in accordance with SFAS 123R for awards made in January 2008 and earlier (for performance years prior to 2008). Such amounts do not reflect awards made in January 2009.
I. Summary compensation table (SCT)
All other compensation
Incremental costs are determined as follows:
Aircraft: operating cost per flight hour for the aircraft type used, developed by an independent reference source, including fuel, fuel additives and lubricants; landing and parking fees; crew expenses; small supplies and catering; maintenance labor and parts; engine restoration costs; and a maintenance service plan.
Cars: annual lease valuation of the assigned car; annual insurance premiums; fuel expense; estimated annual maintenance; and annual driver compensation, including salary, overtime, benefits and bonus. The resulting total is allocated between personal and business use based on mileage.
In connection with the merger with Bank One Corporation, Mr. Dimon relocated from Chicago to New York. The Dimon family kept Chicago as their home while their children completed high school, moving to New York in 2007. The amounts listed as moving expenses relate to that move, and the amount listed under tax associated with moving expenses relates to the payment of those moving expenses. Both the payment of moving expenses and the tax reimbursement are in accordance with the Firms general policy on relocation expenses.
Other includes $1,098 for the cost of life insurance premiums paid by the Firm (for basic life insurance coverage equal to one times salary); $7,257 for the cost of residential security paid by the Firm; and $494 for the cost of non-business meals based on the estimated cost of comparable meals in local restaurants.
The following table shows grants of plan-based awards made in January 2008 and stock options issued to Messrs. Cavanagh and Scharf in 2008 as a result of restorative options granted to them.
III. Outstanding equity awards at fiscal year-end 2008
The following table shows the number of shares of the Firms common stock underlying (i) exercisable and unexercisable stock options and SARs and (ii) RSUs that have not yet vested held by the Firms Named Executive Officers on December 31, 2008.