JP Morgan Chase 2008 Annual Report Download - page 171

JPMorgan Chase & Co./ 2008 Annual Report 169
The weighted-average grant date per share fair value of stock options
and SARs granted during the years ended December 31, 2008, 2007
and 2006, was $10.36, $13.38 and $10.99, respectively. The total
intrinsic value of options exercised during the years ended December
31, 2008, 2007 and 2006 was $391 million, $937 million and $994
million, respectively.
Impact of adoption of SFAS 123R
During 2006, the incremental expense related to the Firm’s adoption
of SFAS 123R was $712 million. This amount represents an acceler-
ated noncash recognition of costs that would otherwise have been
incurred in future periods. Also, as a result of adopting SFAS 123R,
the Firm’s income from continuing operations (pretax) for the year
ended December 31, 2006, was lower by $712 million, and each of
income from continuing operations (after-tax) and net income for the
year ended December 31, 2006, was lower by $442 million, than if
the Firm had continued to account for stock-based incentives under
APB 25 and SFAS 123. Basic and diluted earnings per share from
continuing operations, as well as basic and diluted net income per
share, for the year ended December 31, 2006 were $.13 and $.12
lower, respectively, than if the Firm had not adopted SFAS 123R.
Compensation expense
The Firm recognized noncash compensation expense related to its vari-
ous employee stock-based incentive awards of $2.6 billion, $2.0 billion
and $2.4 billion (including the $712 million incremental impact of
adopting SFAS 123R) for the years ended December 31, 2008, 2007,
and 2006, respectively, in its Consolidated Statements of Income.
These amounts included an accrual for the estimated cost of stock
awards to be granted to full-career eligible employees of $409 million,
$500 million and $498 million for the years ended December 31,
2008, 2007 and 2006, respectively. At December 31, 2008, approxi-
mately $1.9 billion (pretax) of compensation cost related to unvested
awards has not yet been charged to net income. That cost is expected
to be amortized into compensation expense over a weighted-average
period of 1.3 years. The Firm does not capitalize any compensation
cost related to share-based compensation awards to employees.
Cash flows and tax benefits
The total income tax benefit related to stock-based incentive
arrangements recognized in the Firm’s Consolidated Statements of
Income for the years ended December 31, 2008, 2007 and 2006,
was $1.1 billion, $810 million and $947 million, respectively.
The following table sets forth the cash received from the exercise of
stock options under all stock-based incentive arrangements and the
actual tax benefit realized related to the tax deduction from the exer-
cise of stock options.
Year ended December 31, (in millions) 2008 2007 2006
Cash received for options exercised $ 1,026 $2,023 $1,924
Tax benefit realized 72 238 211
Valuation assumptions
The following table presents the assumptions used to value employ-
ee stock options and SARs granted during the period under the
Black-Scholes valuation model.
Year ended December 31, 2008 2007 2006
Weighted-average annualized
valuation assumptions
Risk-free interest rate 3.90% 4.78% 5.11%
Expected dividend yield 3.57 3.18 2.89
Expected common stock
price volatility 34 33 23
Expected life (in years) 6.8 6.8 6.8
Prior to the adoption of SFAS 123R, the Firm used the historical
volatility of its common stock price as the expected volatility assump-
tion in valuing options. The Firm completed a review of its expected
volatility assumption in 2006. Effective October 1, 2006, JPMorgan
Chase began to value its employee stock options granted or modi-
fied after that date using an expected volatility assumption derived
from the implied volatility of its publicly traded stock options.
The expected life assumption is an estimate of the length of time
that an employee might hold an option or SAR before it is exercised
or canceled. The expected life assumption was developed using
historic experience.
Employee stock option and SARs activity
Compensation expense, which is measured at the grant date as the fair value of employee stock options and SARs, is recognized in net income as
described above.
The following table summarizes JPMorgan Chase’s employee stock option and SARs activity for the year ended December 31, 2008, including
awards granted to key employees and awards granted in prior years under broad-based plans.
Year ended December 31, 2008
(in thousands, except Number of Weighted-average Weighted-average Aggregate
weighted-average data) options/SARs exercise price remaining contractual life (in years) intrinsic value
Outstanding, January 1 325,931 $ 41.70
Granted 9,341 41.37
Bear Stearns conversion 3,906 399.91
Exercised (34,761) 33.73
Forfeited (3,382) 44.13
Canceled (17,666) 47.61
Outstanding, December 31 283,369 $ 47.21 3.5 $ 224,632
Exercisable, December 31 242,653 47.85 2.7 224,632