JP Morgan Chase 2006 Annual Report Download - page 108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JPMorgan Chase & Co.
106 JPMorgan Chase & Co. / 2006 Annual Report
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 fol-
lowing table summarizes JPMorgan Chase’s employee stock option and SARs activity for the year ended December 31, 2006, including awards granted to key employees
and awards granted in prior years under broad-based plans:
Year ended December 31, 2006
(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 1 444,157 $ 38.61
Granted 15,229 45.85
Exercised (70,446) 29.93
Forfeited (3,365) 36.14
Canceled (9,348) 47.88
Outstanding, December 31 376,227 $ 40.31 4.3 $ 3,384,553
Exercisable, December 31 317,174 40.63 3.8 2,794,461
The Firm separately recognizes compensation expense for each tranche of each
award as if it were a separate award with its own vesting date. For each
tranche granted (other than grants to employees who are retirement eligible at
the grant date), 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 retirement eligible during the vesting peri-
od. For each tranche granted to employees who will become retirement 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 retirement eli-
gibility date or the vesting date of the respective tranche.
The Firm’s policy for issuing shares upon settlement of employee share-based
payment awards is to issue either new shares of common stock or treasury
shares. During 2006, the Firm issued new shares of common stock from
January 1 through May 31, 2006, and treasury shares from June 1 through
December 31, 2006.
On March 21, 2006, the Board of Directors approved a stock repurchase pro-
gram that authorizes the repurchase of up to $8 billion of the Firm’s common
shares, which supersedes a $6 billion stock repurchase program approved in
2004. The $8 billion authorization includes shares to be repurchased to offset
issuances under the Firm’s employee stock-based plans. The actual number of
shares repurchased is subject to various factors, including: market conditions;
legal considerations affecting the amount and timing of repurchase activity; the
Firm’s capital position (taking into account goodwill and intangibles); internal
capital generation; and alternative potential investment opportunities. The
repurchase program does not include specific price targets or timetables; may
be executed through open market purchases or privately negotiated transac-
tions, or utilizing Rule 10b5-1 programs; and may be suspended at any time.
In December 2005, the Firm accelerated the vesting of approximately 41 mil-
lion 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 mil-
lion, and was recognized as compensation expense in the fourth quarter of
2005. The Firm believed 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.
Restricted stock and RSU activity
Compensation expense for restricted stock and RSUs is measured based upon
the number of shares granted multiplied by the stock price at the grant date,
and is recognized in Net income as previously described. The following table
summarizes JPMorgan Chase’s restricted stock and RSU activity for 2006:
Restricted stock and RSU activity
Year ended December 31, 2006
(in thousands, except weighted Number of Weighted-average
average data) Shares grant date fair value
Outstanding, January 1 84,604 $ 35.22
Granted 44,553 39.43
Lapsed(a) (33,327) 31.00
Forfeited (7,374) 40.28
Restricted stock/RSUs outstanding
December 31 88,456 $ 38.50
(a) Lapsed awards represent awards granted in prior years for which, in the case of restricted
stock, restrictions have lapsed; and, in the case of RSUs, the awards have been converted
into common stock.
The total fair value of shares that vested during the years ended December 31,
2006, 2005 and 2004, was $1.3 billion, $1.1 billion and $1.7 billion, respectively.
The vesting of certain restricted stock and RSU awards issued prior to 2002
was conditioned upon certain service requirements being met and JPMorgan
Chase’s common stock reaching and sustaining target prices within a five-
year performance period. During 2002, it was determined that it was no
longer probable that the target stock prices related to forfeitable awards
granted in 1999, 2000, and 2001 would be achieved within their respective
performance periods, and accordingly, previously accrued expenses were
reversed. The target stock prices for these awards ranged from $73.33 to
$85.00. These awards were forfeited as follows: 1.2 million shares granted in
1999 were forfeited in January 2004; 1.2 million shares granted in 2000
were forfeited in January 2005; and 1.2 million shares granted in 2001 were
forfeited in January 2006.
The weighted-average grant date per share fair value of stock options and SARs granted during the years ended December 31, 2006, 2005 and 2004, was $10.99,
$10.44 and $13.77, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was $994 million, $364
million and $520 million, respectively.