JP Morgan Chase 2006 Annual Report Download - page 107

Employee stock-based awards
The Firm has granted restricted stock, restricted stock units (“RSUs”), stock options,
and stock-settled SARs to certain of its employees.
In 2006, JPMorgan Chase granted long-term stock-based awards under the
2005 Long-Term Incentive Plan (the “2005 Plan”). 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 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 stock-based
compensation plans (“LTI Plans”). The 2005 Plan became effective on May 17,
2005, after approval by shareholders at the 2005 annual meeting. The 2005
Plan replaced three existing stock-based compensation plans – the 1996 Plan
and two nonshareholder-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.
Restricted stock and RSUs are granted by JPMorgan Chase at no cost to the
recipient. These awards are subject to forfeiture until certain restrictions have
lapsed, including continued employment for a specified period. The recipient of a
share of restricted stock is entitled to voting rights and dividends on the common
stock. An RSU entitles the recipient to receive a share of common stock after the
applicable restrictions lapse; the recipient is entitled to receive cash payments
equivalent to any dividends paid on the underlying common stock during the peri-
od the RSU is outstanding. Effective January 2005, the equity portion of the Firm’s
annual incentive awards were granted primarily in the form of RSUs. The Firm also
periodically grants discretionary share-based payment awards, primarily in the
form of both employee stock options and SARs.
Under the LTI Plans, stock options and SARs have been granted with an exer-
cise 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.
The Firm’s share-based compensation awards generally vest in multiple
tranches.
JPMorgan Chase & Co. / 2006 Annual Report 105
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 OPEB medical
and life insurance payments are net of expected retiree contributions:
U.S. Non-U.S.
Year ended December 31, defined benefit defined benefit OPEB before Medicare
(in millions) pension plans pension plans Medicare Part D subsidy Part D subsidy
2007 $ 561 $ 83 $ 130 $ 15
2008 563 81 132 16
2009 583 88 133 18
2010 602 93 135 19
2011 623 97 137 20
Years 2012–2016 3,417 533 657 121
The following table presents JPMorgan Chase’s actual rate of return on plan assets for the U.S. and non-U.S. defined benefit pension and OPEB plans:
U.S. Non-U.S.
December 31, 2006 2005 2004 2006 2005 2004
Actual rate of return:
Defined benefit pension plans 13.40% 7.50% 12.50% 2.80-7.30% 2.70-15.90% 2.30-10.50%
OPEB plans 9.30 3.30 7.10 NA NA NA
Note 8 – Employee stock-based incentives
Effective January 1, 2006, the Firm adopted SFAS 123R and all related inter-
pretations using the modified prospective transition method. SFAS 123R
requires all share-based payments to employees, including employee stock
options and stock appreciation rights (“SARs”) , to be measured at their grant
date fair values. Results for prior periods have not been restated. The Firm
also adopted the transition election provided by FSP FAS 123(R)-3.
JPMorgan Chase had previously adopted SFAS 123, effective January 1, 2003,
using the prospective transition method. Under SFAS 123, the Firm accounted
for its stock-based compensation awards at fair value, similar to the SFAS
123R requirements. However, under the prospective transition method,
JPMorgan Chase continued to account for unmodified stock options that were
outstanding as of December 31, 2002, using the APB 25 intrinsic value
method. Under this method, no expense was recognized for stock options
granted at an exercise price equal to the stock price on the grant date, since
such options have no intrinsic value.
Upon adopting SFAS 123R, the Firm began to recognize in the Consolidated
statements of income compensation expense for unvested stock options previ-
ously accounted for under APB 25. Additionally, JPMorgan Chase recognized
as compensation expense an immaterial cumulative effect adjustment resulting
from the SFAS 123R requirement to estimate forfeitures at the grant date
instead of recognizing them as incurred. Finally, the Firm revised its accounting
policies for share-based payments granted to retirement-eligible employees
under SFAS 123R. Prior to adopting SFAS 123R, the Firm’s accounting policy
for share-based payment awards granted to retirement-eligible employees was
to recognize compensation cost over the award’s stated service period. For
awards granted to retirement-eligible employees in 2006, JPMorgan Chase
recognized compensation expense on the grant date without giving considera-
tion to the impact of post employment restrictions. In the first quarter of 2006,
the Firm also began to accrue the estimated cost of stock awards granted to
retirement-eligible employees in January 2007.