JP Morgan Chase 2009 Annual Report Download - page 194

Notes to consolidated financial statements
JPMorgan Chase & Co./2009 Annual Report 192
Note 9 – Employee stock-based incentives
Employee stock-based awards
In 2009, 2008, and 2007, JPMorgan Chase granted long-term
stock-based awards to certain key employees under the 2005 Long-
Term Incentive Plan (the “2005 Plan”). The 2005 Plan, plus prior
Firm plans and plans assumed as the result of acquisitions, consti-
tute the Firm’s stock-based incentive plans (collectively,“LTI Plan”).
The 2005 Plan became effective on May 17, 2005, and was
amended in May 2008. Under the terms of the amended 2005
plan, as of December 31, 2009, 199 million shares of common
stock are available for issuance through May 2013. The amended
2005 Plan is the only active plan under which the Firm is currently
granting stock-based incentive awards.
Restricted stock units (“RSUs”) are awarded at no cost to the recipi-
ent upon their grant. RSUs are generally granted annually and gener-
ally vest at a rate of 50% after two years and 50% after three years
and convert into shares of common stock at the vesting date. In
addition, RSUs typically include full-career eligibility provisions, which
allow employees to continue to vest upon voluntary termination,
subject to post-employment and other restrictions based on age or
service-related requirements. All of these awards are subject to
forfeiture until the vesting date. An RSU entitles the recipient to
receive cash payments equivalent to any dividends paid on the under-
lying common stock during the period the RSU is outstanding and, as
such, are considered participating securities as discussed in Note 25
on page 232 of this Annual Report.
Under the LTI Plan, stock options and stock appreciation rights
(“SARs”) have been granted with an exercise price equal to the fair
value of JPMorgan Chase’s common stock on the grant date. The
Firm typically awards SARs to certain key employees once per year,
and it also periodically grants discretionary stock-based incentive
awards to individual employees, primarily in the form of both
employee stock options and SARs. The 2009, 2008 and 2007
grants of SARs to key employees vest ratably over 5 years (i.e.,
20% per year) and do not include any full-career eligibility provi-
sions. These awards generally expire 10 years after the grant date.
The Firm separately recognizes compensation expense for each
tranche of each award as if it were a separate award with its own
vesting date. Generally, for each tranche granted, compensation
expense is recognized on a straight-line basis from the grant date
until the vesting date of the respective tranche, provided that the
employees will not become full-career eligible during the vesting
period. For awards with full-career eligibility provisions, the Firm
accrues the estimated value of awards expected to be awarded to
employees who will be retirement-eligible as of the grant date
without giving consideration to the impact of post-employment
restrictions. For each tranche granted to employees who will be-
come full-career eligible during the vesting period, compensation
expense is recognized on a straight-line basis from the grant date
until the earlier of the employee’s full-career eligibility date or the
vesting date of the respective tranche.
The Firm’s policy for issuing shares upon settlement of employee
stock-based incentive awards is to issue either new shares of com-
mon stock or treasury shares. During 2009, 2008 and 2007, the
Firm settled all of its employee stock-based awards by issuing
treasury shares.
In January 2008, the Firm awarded to its Chairman and Chief
Executive Officer up to 2 million SARs. The terms of this award are
distinct from, and more restrictive than, other equity grants regu-
larly awarded by the Firm. The SARs, which have a 10-year term,
will become exercisable no earlier than January 22, 2013, and have
an exercise price of $39.83. The number of SARs that will become
exercisable (ranging from none to the full 2 million) and their
exercise date or dates may be determined by the Board of Directors
based on an annual assessment of the performance of both the
CEO and JPMorgan Chase. The Firm recognizes this award ratably
over an assumed five-year service period, subject to a requirement
to recognize changes in the fair value of the award through the
grant date. The Firm recognized $9 million and $1 million in com-
pensation expense in 2009 and 2008, respectively, for this award.
In connection with the Bear Stearns merger, 46 million Bear Stearns
employee stock awards, principally RSUs, capital appreciation plan
units and stock options, were exchanged for equivalent JPMorgan
Chase awards using the merger exchange ratio of 0.21753. The fair
value of these employee stock awards was included in the Bear
Stearns purchase price, since substantially all of the awards were
fully vested immediately after the merger date under provisions that
provided for accelerated vesting upon a change of control of Bear
Stearns. However, Bear Stearns vested employee stock options had
no impact on the purchase price; since the employee stock options
were significantly out of the money at the merger date, the fair
value of these awards was equal to zero upon their conversion into
JPMorgan Chase options.
The Firm also exchanged 6 million shares of its common stock for
27 million shares of Bear Stearns common stock held in an irrevoca-
ble grantor trust (the “RSU Trust”), using the merger exchange ratio
of 0.21753. The RSU Trust was established to hold common stock
underlying awards granted to selected employees and key executives
under certain Bear Stearns employee stock plans. The RSU Trust was
consolidated on JPMorgan Chase’s Consolidated Balance Sheets as of
June 30, 2008, and the shares held in the RSU Trust were recorded in
“Shares held in RSU Trust,” which reduced stockholders’ equity,
similar to the treatment for treasury stock. A related obligation to
issue stock under these employee stock plans is reported in capital
surplus. The issuance of shares held in the RSU Trust to employees
has no effect on the Firm’s total stockholders’ equity, net income or
earnings per share. Shares held in the RSU Trust were distributed in
2008 and 2009, with a majority of the shares in the RSU Trust dis-
tributed through December 2009. There were 2 million shares in the
RSU Trust as of December 31, 2009. The remaining shares are ex-
pected to be distributed over the next three years.