JP Morgan Chase 2005 Annual Report Download - page 102

Notes to consolidated financial statements
JPMorgan Chase & Co.
100 JPMorgan Chase & Co. /2005 Annual Report
Defined contribution plans
JPMorgan Chase offers several defined contribution plans in the U.S. and
certain non-U.S. locations.The most significant of these plans is the 401(k)
Savings Plan, which covers substantially all U.S. employees.The 401(k)
Savings Plan allows employees to make pre-tax contributions to tax-deferred
investment portfolios. The JPMorgan Chase Common Stock Fund within the
401(k) Savings Plan is a nonleveraged employee stock ownership plan. The
Firm matches eligible employee contributions up to a certain percentage of
benefits-eligible compensation per pay period, subject to plan and legal limits.
Employees begin to receive matching contributions after completing a specified
service requirement and are immediately vested in such company contributions.
The Firm’s defined contribution plans are administered in accordance with
applicable local laws and regulations. Compensation expense related to
these plans totaled $392 million in 2005, $317 million in 2004 and $240
million in 2003.
Note 7 – Employee stock-based incentives
Effective January 1, 2003, JPMorgan Chase adopted SFAS 123 using the
prospective transition method. SFAS 123 requires all stock-based compensation
awards, including stock options and stock-settled stock appreciation rights
(“SARs”), to be accounted for at fair value. The Firm currently uses the Black-
Scholes valuation model to estimate the fair value of stock options and SARs.
Stock options that were outstanding as of December 31, 2002, continue
to be accounted for under APB 25 using the intrinsic value method. Under
this method, no expense is recognized for stock options or SARs granted at
the stock price on grant date, since such options have no intrinsic value.
Compensation expense for restricted stock and restricted stock units (“RSUs”)
is measured based upon the number of shares granted and the stock price at
the grant date. Compensation expense is recognized in earnings over the
required service period.
In connection with the Merger in 2004, JPMorgan Chase converted all out-
standing Bank One employee stock-based awards at the merger date, and
those awards became exercisable for or based upon JPMorgan Chase common
stock. The number of awards converted, and the exercise prices of those
awards, was adjusted to take into account the Merger exchange ratio of 1.32.
On December 16, 2004, the FASB issued SFAS 123R, which revises SFAS 123
and supersedes APB 25. In March 2005, the SEC issued SAB 107, which
provides interpretive guidance on SFAS 123R. Accounting and reporting under
SFAS 123R is generally similar to the SFAS 123 approach. However, SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options and SARs, to be recognized in the income statement based
upon their fair values. Pro forma disclosure is no longer an alternative. SFAS
123R permits adoption using one of two methods — modified prospective
or modified retrospective. In April 2005, the U.S. Securities and Exchange
Commission approved a new rule that, for public companies, delayed the
effective date of SFAS 123R to no later than January 1, 2006. The Firm adopted
SFAS 123R on January 1, 2006, under the modified prospective method.
Key employee stock-based awards
In 2005, JPMorgan Chase granted long-term stock-based awards under the
1996 Long-Term Incentive Plan as amended (“the 1996 Plan”) until May
2005 and under the 2005 Long-Term Incentive Plan (“the 2005 Plan”)
thereafter to certain key employees.These two plans, plus prior Firm plans
and plans assumed as the result of acquisitions, constitute the Firm’s plans
(“LTI Plans”). The 2005 Plan was adopted by the Board of Directors on
March 15, 2005, and became effective on May 17, 2005, after approval by
shareholders at the annual meeting. The 2005 Plan replaces three existing
stock compensation plans—the 1996 Plan and two non-shareholder
approved plans—all of which expired in May 2005. Under the terms of the
2005 Plan, 275 million shares of common stock are available for issuance
during its five-year term. The 2005 Plan is the only active plan under which
the Firm is currently granting stock-based incentive awards.
In 2005, 15.5 million SARs settled only in shares and 1.7 million nonqualified
stock options were granted. Under the LTI Plans, stock options and SARs are
granted with an exercise price equal to JPMorgan Chase’s common stock
price on the grant date. Generally, options and SARs cannot be exercised until
at least one year after the grant date and become exercisable over various
periods as determined at the time of the grant. These awards generally expire
10 years after the grant date.
In December 2005, the Firm accelerated the vesting of approximately 41 million
unvested, out-of-the-money employee stock options granted in 2001 under
the Growth and Performance Incentive Program (“GPIP”), which were scheduled
to vest in January 2007. These options were not modified other than to
accelerate vesting. The related expense was approximately $145 million, and
was recognized as compensation expense in the fourth quarter of 2005. The
Firm believes that at the time the options were accelerated they had limited
economic value since the exercise price of the accelerated options was
$51.22 and the closing price of the Firm’s common stock on the effective
date of the acceleration was $39.69.
Estimated future benefit payments
The following table presents benefit payments expected to be paid, which include the effect of expected future service, for the years indicated. The postretirement
medical and life insurance payments are net of expected retiree contributions.
Non- Other postretirement
Year ended December 31, U.S. pension U.S. pension benefits before
(in millions) benefits benefits Medicare Part D subsidy Medicare Part D subsidy
2006 $ 558 $ 67 $ 124 $ 14
2007 550 70 127 15
2008 565 74 127 16
2009 584 77 128 17
2010 600 81 129 19
Years 2011–2015 3,266 396 633 111