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.
Objectives
The Company has designed its executive compensation programs to:
- attract, motivate and retain the most talented 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 2000 the Committee reviewed competitive pay
practices at approximately 70 companies that compete with the Company
in business or for executive talent. The Standard & Poor's (S&P) 500
Index includes nearly all 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 2000 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 1.4 to 2.7 times their annual incentive award guidelines.
For 2000 the Company paid 2000 annual incentive awards to nine
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 21-22.) In assessing executive officer performance,
the Committee applied an objective formula based on the Company's
2000 return on equity and growth in earnings per share to determine the
maximum amount payable. The Committee 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 Company may pay the awards in cash or
a combination of cash and restricted shares.
The Committee evaluated progress toward goals based on these
areas:
- Shareholder Value (50% weight). Includes 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 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 2000 annual incentive
awards that were not tied to a maximum value 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 22-25. 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 2000 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 value of outstanding 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 2000 grant after two years, two-thirds after
three years and the full grant after four years.
PG Awards. The Committee granted PG-XI awards in 2000 for
executive officers to link their interests to longer-term financial and
shareholder return performance. 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 or the segment's 2000-2002
earnings per share or earnings growth, revenue growth and average
return on equity, and the Company's total shareholder return compared
to that of the S&P Financial Index. The Committee may adjust
downward the maximum values produced by these performance measures
based on its judgment of Company, business unit and individual
performance. To receive payment, PG-XI award holders must be
employed by the Company through the payment date in September 2004.
Additional Awards. The Committee may in its judgment grant short-or long-term awards for special contributions or job promotions, to
attract new hires to the Company, to retain executives or in special
circumstances. In 2000 the Committee granted restricted shares to four
executive officers, stock options to seven executive officers and PG
awards to seven executive officers to attract new hires, recognize job promotions and provide a strong retention incentive linked to share price.
The restricted shares vest in installments ending six years from the grant
date and contain Company performance measures as a condition to
vesting. Stock options vest in installments ending in four or six years
from the grant date. We show Messrs. Cracchiolo's and Kelly's special
retention and promotional awards in the summary compensation table on
page 26.
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
approximately 170 senior officers, including executive 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, approximately 690 employees, including executive officers, have
signed agreements that require them to forfeit compensation they receive
through stock option, restricted share and/or 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 2000 annual incentive, stock option and
PG-XI 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.
Chief Executive Officer Compensation
The Committee implemented the terms of the 1999 Agreement with
Mr. Golub described on page 36 and made decisions about Mr. Golub's
2000 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 2000.
Annual Incentive. The Committee approved a 2000 annual incentive
award for Mr. Golub of $3,200,000. This award had a value of 2.7
times his annual incentive award guideline. 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
2000.
Overall, the Committee concluded that the Company achieved very
strong results in 2000. 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 1999, diluted earnings
per share increased 14% and revenue (on a managed basis)
increased 13%. Return on equity in 2000 was 25%.
Additionally, net income increased 14% and the Company's
balance sheet remained strong.
- Shareholder Return. As of year-end, total shareholder return
was slightly negative in 2000, decelerating from the double-digit growth we experienced over the past three years. The
Company's return outperformed the Dow Jones Industrial
Average and the S&P 500 (down 5% and 9%, respectively),
but underperformed the S&P Financials, which returned 26%.
(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 excellent
progress in its card business during 2000, growing cards in
force, billed business and accounts receivable and achieving
market share gains in the card and lending businesses.
Highlights of the year included:
- increasing the number of cards in force worldwide by
12%, surpassing the 50 million mark for the first time;
- increasing billed business by 17%, the result of higher
cards in force and higher spending per basic cardmember
worldwide;
- increasing worldwide lending balances by 24% and
maintaining credit quality;
- increasing market share in card purchase volume in the
United States and in many international markets and
maintaining its position as the sixth largest lender among
U.S. card issuers;
- launching several new cards around the world, including
Blue for Business targeted at small businesses in the
United States and the Blue credit card from American
Express in Italy, the Netherlands, New Zealand, Spain and
Sweden, a Singapore Airlines cobrand product in Asia,
and two Costco cobrand cards in Canada; and
- expanding the network of merchants that accept the
Company's cards around the world, as well as in online
commerce.
- International Growth. Overall, the Company's international
businesses made significant progress and contributed to an
increase in net income, meeting a previously stated target of
25% to 30% growth. The Company expanded its card
network by launching proprietary charge and credit products
in 15 international markets, 25 affinity card products and
seven new distribution agreements across international
markets, as well as substantially expanding its distribution
channels through relationships with banks and other
institutions. It added 12 partners to its global card network
business, bringing the total to 70 partners in 74 countries. In
addition, the Company formed a partnership with JCB Co.,
Ltd. (Japan Credit Bureau), the largest merchant acquirer in
Japan.
- Financial Services. American Express Financial Advisors
(AEFA) achieved growth in assets under management and
increases in sales and financial plans. AEFA also continued
to post double-digit growth in the size of the financial
advisor field force. In 2000, AEFA successfully rolled out a
program that provides financial advisors with a broader range
of choices for structuring their relationship with the
Company. AEFA's progress, however, slowed significantly in
the fourth quarter as a number of issues converged to
negatively impact results (see "Disappointments," below). The
Company's American Express Bank subsidiary made strong
progress in shifting its focus to the consumer business, away
from corporate lending.
- E-commerce strategies. The Company launched a new
homepage and introduced several capabilities. These include
Private Payments, an industry-leading product that allows
cardmembers to use a unique, one-time card number for
online purchases, and the Offer Zone, which consolidates
American Express and merchant offers to cardmembers in a
single site. In addition, the Company expanded its
international Internet capabilities, including new sites in
Sweden, the Netherlands, Italy and Spain. The Company
made strategic equity investments in more than 20 additional
interactive companies, which provide capabilities that will
make the Company's website more attractive and relevant to
consumers, from online restaurant reservations to voice-enabled customer services.
Employees and Leadership Talent
- In 2000, the Company showed continued improvement in
employee satisfaction, 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
received wide-ranging recognition as a top corporate
employer.
- The Company's multi-year focus on improving the leadership
capabilities of its senior management and ensuring that
appropriate talent exists within the Company proved effective
in 2000, when it was able to fill nearly all of the top
positions created as a result of its reorganization with
internal successors.
Disappointments
In addition to these accomplishments, the Committee also
considered some disappointments, including:
- expense growth rates across most of the business units that
exceeded revenue growth rates; and
- relatively weakened performance at AEFA, impacted by
losses in its high-yield bond portfolio, lower equity markets,
narrower investment spreads, and higher expenses from the
implementation of the new advisor program.
Annual Long-Term Incentive Awards. As part of our annual award
program, the Committee approved a grant of 840,000 nonqualified stock
option shares for Mr. Golub which was above his compensation
guideline. The Committee also approved a PG-XI award with a grant
value of $1,000,000 which was at his compensation guideline.
PG-IX Payout. Mr. Golub's PG-IX award earned a maximum value
using a formula based on (1) the Company's earnings per share growth,
revenue growth and average return on equity during 1998-2000 and
(2) the total return to shareholders compared with the total return in the
S&P Financial Index over the 1998-2000 period. The Committee
adjusted downward the formula-driven maximum value based on its
judgment of the Company's performance. The Committee approved a
payment of $2,630,000 in accordance with these provisions.
COMPENSATION AND BENEFITS COMMITTEE
Frank P. Popoff, Chairman
Beverly Sills Greenough
Jan Leschly
Richard A. McGinn
