JP Morgan Chase 2010 Annual Report Download - page 212

Notes to consolidated financial statements
212 JPMorgan Chase & Co./2010 Annual Report
The following table summarizes JPMorgan Chase’s employee stock option and SARs activity for the year ended December 31, 2010, including
awards granted to key employees and awards granted in prior years under broad-based plans.
Year ended
December 31, 2010
(in thousands, except weighted-average data, and
where otherwise noted)
Number of
options/SARs
Weighted-average
exercise price
Weighted-average remaining
contractual life (in years)
Aggregate
intrinsic value
Outstanding, January 1
266,568
$
45.83
Granted
20,949
42.96
Exercised
(12,87
0
)
30.69
Forfeited
(3,076)
34.82
Canceled (37,044) 65.95
Outstanding, December 31
234,527 $ 43.33 3.4 $ 1,191,151
Exercisable, December 31
181,183
45.52
2.1
788,217
The weighted-average grant date per share fair value of stock
options and SARs granted during the years ended December 31,
2010, 2009 and 2008, was $12.27, $8.24 and $10.36, respec-
tively. The total intrinsic value of options exercised during the years
ended December 31, 2010, 2009 and 2008, was $154 million,
$154 million and $391 million, respectively.
Compensation expense
The Firm recognized the following noncash compensation expense
related to its various employee stock-based incentive plans in its
Consolidated Statements of Income.
Year ended December 31, (in millions)
2010
2009 2008
Cost of prior gran
ts of RSUs and SARs
that are amortized over their appli-
cable vesting periods $ 2,479
$ 2,510 $ 2,228
Accrual of estimated costs of RSUs and
SARs to be granted in future periods
including those to full-career eligible
employees 772 845 409
Total noncash
compensation
expense related to employee
stock-based incentive plans $ 3,251
$ 3,355 $ 2,637
At December 31, 2010, approximately $1.5 billion (pretax) of
compensation cost related to unvested awards had not yet been
charged to net income. That cost is expected to be amortized into
compensation expense over a weighted-average period of 0.9
years. The Firm does not capitalize any compensation cost related
to share-based compensation awards to employees.
Cash flows and tax benefits
Income tax benefits related to stock-based incentive arrangements
recognized in the Firm’s Consolidated Statements of Income for
the years ended December 31, 2010, 2009 and 2008, were $1.3
billion, $1.3 billion and $1.1 billion, respectively.
The following table sets forth the cash received from the exercise
of stock options under all stock-based incentive arrangements, and
the actual income tax benefit realized related to tax deductions
from the exercise of the stock options.
Year ended December 31, (in millions)
20
10
200
9
200
8
Cash r
e
ceived for options exercised
$
205
$ 437
$1,026
Tax benefit realized
14
11
72
In June 2007, the FASB ratified guidance which requires that
realized tax benefits from dividends or dividend equivalents paid
on equity-classified share-based payment awards that are
charged to retained earnings be recorded as an increase to
additional paid-in capital and included in the pool of excess tax
benefits available to absorb tax deficiencies on share-based
payment awards. Prior to the issuance of this guidance, the Firm
did not include these tax benefits as part of this pool of excess
tax benefits. The Firm adopted this guidance on January 1, 2008;
its adoption did not have an impact on the Firm’s Consolidated
Balance Sheets or results of operations.
Valuation assumptions
The following table presents the assumptions used to value employee
stock options and SARs granted during the years ended December 31,
2010, 2009 and 2008, under the Black-Scholes valuation model.
Year ended December 31,
20
10
2009 2008
Weighted
-
average annua
l
ized
valuation assumptions
Risk-free interest rate
3.89
%
2.33% 3.90 %
Expected dividend yield
(a)
3.13 3.40 3.57
Expected common stock price volatility
37
56 34
Expected life (in years)
6.4
6.6 6.8
(a) In 2010 and 2009, the expected dividend yield was determined using
historical dividend yields.
The expected volatility assumption is derived from the implied
volatility of JPMorgan Chase’s 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 exer-
cised or canceled, and the assumption is based on the Firm’s
historical experience.