Compensation Committee Report

	Compensation Committee Report
	Summary Compensation Table
	Option Grants in 1999
	PG Awards in 1999
	Pension Benefits
	Severence and Change in Control
	Other Arrangements

EXECUTIVE COMPENSATION
Compensation Committee Report on Executive Compensation
The Compensation and Benefits Committee has overall responsibility for determining the compensation of the Company’s executive officers as well as for other compensation programs. No member of the Committee is an employee of the Company or participates in any of its executive compensation programs. The Committee considers data provided by independent compensation consultants. The Committee also obtains input from the full Board before taking action on executive officer compensation.
Objectives
The Company has designed its executive compensation programs to:

Attract, motivate and retain the most competent executives;
Link the financial interests of the Company’s executives and its shareholders; and
Provide rewards for behavior consistent with the Company’s values.

To meet these objectives, the Committee considers objective and subjective factors in making pay decisions for executive officers of the Company. These factors range from competitive pay practices to its judgment of business and individual performance.

Executive Officer Compensation Programs and Policies
Compensation Guidelines. The Committee sets executive compensation guidelines for base salary, annual incentive and long-term incentive awards for each executive officer position. The Committee uses three factors to set these guidelines: (1) competitive pay practices, (2) job scope and responsibility and (3) the Company’s need to attract, retain and reward executive talent. The importance of each factor varies by individual. For 1999 the Committee reviewed competitive pay practices at approximately 50 companies that compete with the Company in business or for executive talent. The Standard & Poor’s (S&P) 500 Index includes substantially all of these companies and the S&P Financial Index includes approximately one-third of these companies. When the Committee approves compensation, it considers these guidelines, current competitive market data and its judgment of Company, business unit and individual performance as described below.
Base Salary. The Committee reviews possible merit increases in salary every 18 months or longer. During this review the Committee considers the compensation guideline for the executive officer position and individual performance. The Committee may also increase the base salary of executives who are promoted or change jobs within the executive group or in special circumstances.
Annual Incentive Awards. The Company’s annual incentive award program compensates executive officers for annual performance. The Committee approved 1999 annual incentive awards for the named executives in amounts ranging from 1.4 to 2.7 times their annual incentive award guidelines and for all executive officers in amounts ranging from 1.2 to 2.7 times their annual incentive award guidelines.
For 1999 the Company paid 1999 annual incentive awards to eight executive officers, including the named executives, under an award structure designed to preserve the Company’s tax deductions under the Million Dollar Cap. (The Company’s Million Dollar Cap policy is described on pages 27-28.) The awards contain a formula based on the Company’s 1999 return on equity and growth in earnings per share. The Company may pay the awards in cash or a combination of cash and restricted shares. In assessing performance the Committee applied the formula to determine the maximum amount payable and then used its judgment about annual goal and leadership performance to make actual awards below these maximum values. The Committee gave equal weight to the goal and leadership categories.
The Committee evaluated progress toward goals based on these areas:
Shareholder Value (50% weight). Includes 1999 shareholder return, earnings growth, revenue growth and return on equity.
Customer Satisfaction (25% weight). Includes customer survey results, expansion and retention of customer base and development of products and services.
Employee Satisfaction (25% weight). Includes 1999 employee survey results and the Company’s and the business units’ success in making progress toward long-term, world class targets.

The Committee evaluated leadership by considering a variety of factors, such as innovation, strategic vision, customer focus, management effectiveness, teamwork, integrity, diversity, developing others and managing change, without assigning weights to these factors.
The Company paid to other executive officers 1999 annual incentive awards that were not tied to a formula because the Million Dollar Cap limits would not typically apply to their compensation. The Committee based the annual incentive awards for these executives on the same goal and leadership factors described above.
The Committee used similar criteria to evaluate the goal and leadership performance of Messrs. Golub and Chenault. The specific factors the Committee used to evaluate Mr. Golub’s goal performance are described on pages 28-30. The Committee also used these factors in evaluating Mr. Chenault’s performance. The Committee did not assign weights to the goal categories in evaluating their performance. In addition, the Committee evaluated their leadership based on its judgment of their overall leadership of the senior management team and the Company.
Long-Term Incentive Awards. The Company’s long-term incentive award program rewards executive officers for Company, business unit and individual performance over more than one year. In 1999 regular long-term awards included stock option and Portfolio Grant (PG) awards. The Committee approved awards in amounts that were consistent with compensation guidelines after reviewing the size and value of other stock option and PG awards held by each executive officer.
Stock Options. Ten-year stock options reward executive officers if the Company’s share price increases for all shareholders. Executives may exercise one-third of the 1999 grant after two years, two-thirds after three years and the full grant after four years. Each of these installments vests one year later than pre-1999 stock option grants. The Committee expects this longer vesting schedule will provide additional incentive for executive officers to remain with the Company. For individual estate and tax planning, the Committee approved changes that permit executive officers to transfer their stock options to certain family members. Transferees may exercise options only if the executive remains responsible for the taxes due on exercise and vesting and other requirements are met.
PG Awards. PG awards in 1999 for executive officers included PG-X awards and Transition PG awards. The PG awards are designed to preserve the Company’s tax deductions under the Million Dollar Cap. The awards contain a formula based on the Company’s 1999-2001 earnings or earnings per share growth, revenue growth, average return on equity and total shareholder return compared to the total return of the S&P Financial Index. The Committee may adjust downward the results produced by these performance measures based on its judgment of Company, business unit and individual performance.
To receive payment, PG-X award holders must be employed by the Company through the payment date in September 2003. This vesting period is 18 months longer than for prior PG awards. Similar to the vesting change for 1999 stock options, the Committee expects this longer vesting schedule will provide additional incentive for executive officers to remain with the Company. In 1999 the Committee also granted "Transition PG" awards that have a scheduled payment date in September 2002. The Committee made these one-time awards to recognize that the PG-X awards would have vested in 2002 if they had the same vesting design of prior PG awards. To partially offset these longer vesting periods, the Company will increase the initial payout values of PG-X and Transition PG awards by 5%.
Additional Awards. The Committee may in its judgment grant short- and long-term awards for special contributions or job promotions, to attract new hires to the Company, to retain executives or in special circumstances. In 1999 the Committee granted restricted shares to 11 executives to provide a strong retention incentive linked to share price.
These awards vest in installments ending six years from the grant date. The Committee also granted awards to Messrs. Golub and Chenault which are described below under "Special Awards."
Deferral and Other Programs. Under the annual Pay for Performance Deferral Program, executives may defer part of their current compensation to a later date. Each year the Company adds to or subtracts from the deferred compensation an amount based on a schedule linked to the Company’s return on equity. The Company also provides executive officers with pension, profit sharing, incentive savings, life insurance, perquisite and other benefits consistent with market practices.
Share Ownership. The Company’s share ownership policy requires about 150 senior officers to meet share ownership targets. The program includes these key features:
Participants have a share ownership target based on a multiple of their base salary, ranging from three times base salary for certain participants to 20 times for Mr. Golub.
As an incentive to maximize shareholder value, a participant may count toward his or her target the value of owned shares, 50% of the unrealized gain in stock options and 50% of the market value of restricted shares, with market value based on the market price of the Company’s common shares.
The Committee expects participants to meet their targets within five years and to make pro rata progress each year.

Detrimental Conduct. To help protect the Company’s competitive position, about 675 employees have signed agreements that require them to forfeit compensation they receive through stock option, restricted share and Portfolio Grant awards if they engage in behavior that is detrimental to the Company. Detrimental behavior covers conduct such as working for certain competitors, soliciting customers or employees after employment ends and disclosure of confidential information.
Million Dollar Cap. Current U.S. tax law has a $1,000,000 tax deduction limit on compensation the Company pays to the Chief Executive Officer and the four other most highly compensated executive officers. (In this Proxy Statement we refer to these five executives as the "named executives.") The limit does not apply to "performance-based" compensation. Compensation is "performance-based" if the Company can pay it only if objective performance criteria set by the Committee are met. The Committee may use discretion to set actual compensation below the maximum amount calculated by application of the performance criteria.
The Committee’s general policy is to structure compensation programs that allow the Company to fully deduct the compensation under the Million Dollar Cap rules. The Committee also believes that the Company needs flexibility to meet its objectives, even if the Company may not deduct all of the compensation. The Company expects that compensation from the 1999 annual incentive, stock option, PG-X and Transition PG awards will be treated as performance-based and be deductible. The Company also expects that the Million Dollar Cap limitations will apply to compensation from the vesting of certain restricted share awards granted to covered individuals for retention purposes.
Chief Executive Officer Compensation
The Committee made decisions about Mr. Golub’s 1999 compensation and awards after considering input from the full Board. These decisions were in accordance with the Company’s programs and included the following:
Salary. Mr. Golub’s salary did not increase in 1999.
Annual Incentive. The Committee approved a 1999 annual incentive award for Mr. Golub that consisted of $2,400,000 cash and 7,556 restricted shares. This award had a final value under the program of 2.7 times his annual incentive award guideline. The restricted shares vest in annual installments over three years. The Committee determined this award based on Mr. Golub’s goal and leadership performance, the Company’s results and the economic and competitive environment in 1999.
Overall, the Committee concluded that the Company achieved excellent results in 1999. The Committee considered these factors to be most important with no particular weightings given among the factors:
Financial Performance
Financial Measures. The Company met or exceeded its long-term financial targets. Compared with 1998, the Company’s 1999 net income increased 16%, revenue (on a managed basis) increased 13% and diluted earnings per share increased 14% (excluding one-time items in 1998). 1999 return on equity was 25%. The Company’s balance sheet remained strong.
Shareholder Return. Total shareholder return in 1999 was 63%, significantly exceeding the performance of the S&P 500 Index, the S&P Financial Index and the Dow Jones Industrials Average (the Dow). (The Dow includes companies in the S&P 500 Index and the S&P Financial Index.)

Business Performance
Growth in Card Businesses. The Company made significant progress in its card business by:
– Increasing the number of cards in force by nearly 8%.
– Launching several new cards in the United States (including Blue from American Express, the first widely marketed credit card that has a built-in "smart chip," and co-branded cards with Costco and Fidelity).
– Increasing market share in accounts receivable growth.
– Expanding the network of merchants that accept the Company’s cards around the world.
Opening the Network. The Company added 16 partners to its global card network business.
International Growth. The Company increased its financial services business outside the United States and expanded its card network. The Company launched 17 consumer charge, revolving and small business products and substantially expanded its distribution channels through relationships with banks and other institutions.
E-commerce Strategies. The Company introduced new online products and services, including Membership B@nking, American Express Brokerage, a digital wallet and American Express@Work, a desktop portal for business to business electronic commerce. The Company also introduced "My American Express," which allows customers to tailor the website to their needs. The Company licensed its smart card technology to others in the industry to promote a uniform technology standard for smart card usage.
Financial Services. American Express Financial Advisors (AEFA) posted strong growth in assets under management and improved the investment performance of its mutual funds. In 1999 AEFA piloted a program that provides financial advisors with a broader range of choices for structuring their relationship with AEFA.
Investments. To position the Company for future growth, the Company funded investments in its smart card, e-commerce and card marketing programs.

Employees and Leadership Talent
Overall, the Company’s employee satisfaction scores continued to improve, based on results of its annual employee survey. The survey measures employee perceptions in a number of areas, including employee development, integrity, teamwork and customer focus. The Company has been recognized as a top corporate employer.
In 1999 the Company continued to focus on improving the leadership capabilities of its senior management and ensuring that appropriate talent exists within the Company.

In addition to these accomplishments, the Committee also considered some disappointments, including:
An increase in the Company’s overall expenses that rose at the same rate as revenues.
A "time to market" for new products which—though much better—still falls short of the Company’s goals.
A difficult year at American Express Bank.
Legal actions at AEFA that led to an agreement in principle to settle three class action lawsuits relating to the sales of insurance and annuity products.

Annual Long-Term Incentive Awards. The Committee approved a grant of 180,000 stock option shares for Mr. Golub. The Committee also approved PG-X and Transition PG awards, each with a grant value of $1,000,000. These awards are consistent with Mr. Golub’s compensation guidelines.
PG-VIII Payout. Mr. Golub’s PG-VIII award contained a formula based on (1) the Company’s earnings per share growth and average return on equity during 1997-1999 and (2) the average share price for the 60 trading days before February 28, 2000. The Committee adjusted downward the formula-driven results based on its judgment of the Company’s performance and the impact of certain one-time capital gains and accounting changes. The Committee approved a payment of $2,867,598 in accordance with these provisions.
Special Awards
In April 1999 the Company announced plans for the Chief Executive Officer succession. The Company announced that Mr. Golub plans to remain as Chairman and Chief Executive Officer until April 2001. At that time Mr. Chenault will become Chief Executive Officer. Mr. Golub plans to remain as Chairman for approximately one year commencing April 2001. After this period, Mr. Chenault will become Chairman.
The Board believes it is important for this transition to be completed successfully. The Board also believes the Company has achieved extraordinary success since Mr. Golub became Chief Executive Officer. This is reflected by consistent and sustained earnings growth, a 295% total return to shareholders from July 1993 to December 1998 and continued strengthening of the Company’s competitive position. In light of these considerations, in 1999 the Committee approved special awards for Messrs. Golub and Chenault. These awards included 750,000 stock option shares for Mr. Golub and 400,000 stock option shares and 40,000 restricted shares for Mr. Chenault. The Committee also approved arrangements for Mr. Golub’s remaining tenure as Chief Executive Officer and for his service as Chairman of the Board in 2001-2002, as described on page 42.

COMPENSATION AND BENEFITS COMMITTEE
Frank P. Popoff, Chairman
Anne L. Armstrong
Beverly Sills Greenough
Jan Leschly
Richard A. McGinn

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