Employee stock-based incentives
Employee stock-based awards
In 2013, 2012 and 2011, JPMorgan Chase granted long-term stock-based awards to certain employees under its Long-Term Incentive Plan, which was last amended in May 2011 (“LTIP”). Under the terms of the LTIP, as of December 31, 2013, 266 million shares of common stock were available for issuance through May 2015. The LTIP is the only active plan under which the Firm is currently granting stock-based incentive awards. In the following discussion, the LTIP, plus prior Firm plans and plans assumed as the result of acquisitions, are referred to collectively as the “LTI Plans,” and such plans constitute the Firm’s stock-based incentive plans.
Restricted stock units (“RSUs”) are awarded at no cost to the recipient upon their grant. Generally, RSUs are granted annually and vest at a rate of 50% after two years and 50% after three years and are converted into shares of common stock as of 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 RSUs awards are subject to forfeiture until vested and contain clawback provisions that may result in cancellation under certain specified circumstances. RSUs entitle the recipient to receive cash payments equivalent to any dividends paid on the underlying common stock during the period the RSUs are outstanding and, as such, are considered participating securities as discussed in Note 24 on page 311 of this Annual Report.
Under the LTI Plans, stock options and stock appreciation rights (“SARs”) have generally 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; the Firm also periodically grants employee stock options and SARs to individual employees. The 2013, 2012 and 2011 grants of SARs become exercisable ratably over five years (i.e., 20% per year) and contain clawback provisions similar to RSUs. The 2013, 2012 and 2011 grants of SARs contain full-career eligibility provisions. SARs generally expire ten 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 and awards granted with no future substantive service requirement, the Firm accrues the estimated value of awards expected to be awarded to employees as of the grant date without giving consideration to the impact of post-employment restrictions. For each tranche granted to employees who will become 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 common stock or treasury shares. During 2013, 2012 and 2011, 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 regularly awarded by the Firm. Effective January 2013, the Compensation Committee and Board of Directors determined that, while all the requirements for vesting of these awards have been met, vesting should be deferred for a period of up to 18 months (i.e., up to July 22, 2014), to enable the Firm to make progress against the Firm’s strategic priorities and performance goals, including remediation relating to the CIO matter. The SARs, which will expire in January 2018, will become exercisable no earlier than July 22, 2014, and have an exercise price of $39.83 (the price of JPMorgan Chase common stock on the date of grant). Vesting will be subject to a Board determination taking into consideration the extent of such progress and such other factors as it deems relevant. The expense related to this award is dependent on changes in fair value of the SARs through the date when the vested number of SARs are determined, if any, and the cumulative expense is recognized ratably over the service period, which was initially assumed to be five years but, effective in the first quarter of 2013, has been extended to six and one-half years. The Firm recognized $14 million, $5 million and $(4) million in compensation expense in 2013, 2012 and 2011, respectively, for this award.
RSUs, employee stock options and SARs activity
Compensation expense for RSUs is measured based on the number of shares granted multiplied by the stock price at the grant date, and for employee stock options and SARs, is measured at the grant date using the Black-Scholes valuation model. Compensation expense for these awards is recognized in net income as described previously. The following table summarizes JPMorgan Chase’s RSUs, employee stock options and SARs activity for 2013.
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| | RSUs | | Options/SARs |
Year ended December 31, 2013 | | Number of shares | Weighted-average grant date fair value | | Number of awards | Weighted-average exercise price | | Weighted-average remaining contractual life (in years) | Aggregate intrinsic value |
(in thousands, except weighted-average data, and where otherwise stated) | | | |
Outstanding, January 1 | | 142,006 |
| $ | 40.49 |
| | 115,906 |
| $ | 42.44 |
| | | |
Granted | | 46,171 |
| 46.92 |
| | 12,563 |
| 46.77 |
| | | |
Exercised or vested | | (62,331 | ) | 43.28 |
| | (35,825 | ) | 37.32 |
| | | |
Forfeited | | (4,605 | ) | 40.77 |
| | (4,007 | ) | 39.44 |
| | | |
Canceled | | NA |
| NA |
| | (1,562 | ) | 104.49 |
| | | |
Outstanding, December 31 | | 121,241 |
| $ | 41.47 |
| | 87,075 |
| $ | 44.24 |
| | 5.6 | $ | 1,622,238 |
|
Exercisable, December 31 | | NA |
| NA |
| | 46,855 |
| 47.50 |
| | 4.2 | 904,017 |
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The total fair value of RSUs that vested during the years ended December 31, 2013, 2012 and 2011, was $2.9 billion, $2.8 billion and $5.4 billion, respectively. The weighted-average grant date per share fair value of stock options and SARs granted during the years ended December 31, 2013, 2012 and 2011, was $9.58, $8.89 and $13.04, respectively. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011, was $507 million, $283 million and $191 million, respectively.
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, 2013, 2012 and 2011, were $865 million, $1.0 billion and $1.0 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.
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Year ended December 31, (in millions) | | 2013 |
| | 2012 |
| | 2011 |
|
Cash received for options exercised | | $ | 166 |
| | $ | 333 |
| | $ | 354 |
|
Tax benefit realized(a) | | 42 |
| | 53 |
| | 31 |
|
| |
(a) | The tax benefit realized from dividends or dividend equivalents paid on equity-classified share-based payment awards that are charged to retained earnings are 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. |
Valuation assumptions
The following table presents the assumptions used to value employee stock options and SARs granted during the years ended December 31, 2013, 2012 and 2011, under the Black-Scholes valuation model.
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Year ended December 31, | | 2013 |
| | 2012 |
| | 2011 |
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Weighted-average annualized valuation assumptions | | | | | | |
Risk-free interest rate | | 1.18 | % | | 1.19 | % | | 2.58 | % |
Expected dividend yield | | 2.66 |
| | 3.15 |
| | 2.20 |
|
Expected common stock price volatility | | 28 |
| | 35 |
| | 34 |
|
Expected life (in years) | | 6.6 | | 6.6 | | 6.5 |
The expected dividend yield is determined using forward-looking assumptions. The expected volatility assumption is derived from the implied volatility of JPMorgan Chase’s 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, and the assumption is based on the Firm’s historical experience.
