UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act
of 1934
(Amendment No. )
Filed by the Registrant ☒
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
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Southwest Airlines Co.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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SOUTHWEST AIRLINES CO.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, MAY 17, 2017
To the
Shareholders:
The Annual Meeting of the Shareholders of Southwest Airlines Co. will be held on May 17, 2017, at 10:00 a.m.,
Mountain Standard Time, at the Kimpton Hotel Palomar Phoenix, 2 East Jefferson Street, Phoenix, Arizona, for the following purposes:
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(1)
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to elect eleven Directors;
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(2)
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to conduct an advisory
(non-binding)
vote to approve named executive officer compensation;
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(3)
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to conduct an advisory
(non-binding)
vote on the frequency of an advisory Shareholder vote to approve named executive officer compensation;
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(4)
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to ratify the selection of Ernst & Young LLP as Southwests independent auditors for the fiscal year ending December 31, 2017; and
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(5)
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to transact such other business as may properly come before the meeting or any adjournment or postponement thereof.
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March 21, 2017, is the date of record for determining Shareholders entitled to receive notice of and to vote at the Annual Meeting or any
adjournment or postponement thereof.
The Annual Meeting will be broadcast live on the Internet. To listen to the broadcast, log on to
www.southwestairlinesinvestorrelations.com
.
To attend the meeting in person, you will need to bring (i) a valid
government-issued photo identification, such as a drivers license or passport; and (ii) either an Admission Ticket or proof of ownership of Southwest Airlines Co. common stock as of March 21, 2017 (such as an account statement from
your broker showing your stock ownership as of March 21, 2017). If you have received a paper copy of your proxy materials, an Admission Ticket is included with your proxy materials. If you have received your proxy materials electronically, you
will need proof of ownership to be admitted to the meeting. If you are a proxy holder for a Shareholder of Southwest who owned shares of Southwests common stock as of March 21, 2017, you must also bring to the meeting the executed proxy
naming you as the proxy holder, signed by the Shareholder who owned shares of Southwests common stock as of March 21, 2017.
Your vote is important. Please sign and return the enclosed proxy or voting instruction card in the enclosed envelope to enable your shares
to be represented at the meeting. Alternatively, you may vote via telephone or the Internet as described in the enclosed proxy or voting instruction card. We encourage you to vote via telephone or the Internet to help us save postage costs. In
addition, if you vote via the Internet, you may elect to have next years Proxy Statement and Annual Report to Shareholders delivered to you electronically. We encourage you to enroll in electronic delivery, as it is a cost-effective way for us
to provide you with proxy materials and annual reports.
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By Order of the Board of Directors,
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Mark R. Shaw
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Corporate Secretary
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April 11, 2017
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2017 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
MAY 17, 2017
Southwests Proxy Statement for the 2017 Annual Meeting of Shareholders and Annual Report to Shareholders for
the fiscal year ended December 31, 2016, are available at
www.southwestairlinesinvestorrelations.com/financials
Table of Contents
Southwest Airlines Co.
P.O. Box 36611
Dallas,
Texas 75235
(214)
792-4000
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
To be Held May 17, 2017
GENERAL
INFORMATION
This Proxy Statement is being furnished in connection with the solicitation of proxies by and on behalf of the Board of
Directors (the Board) of Southwest Airlines Co. (the Company or Southwest) for use at the Annual Meeting of Shareholders of the Company to be held on May 17, 2017, at 10:00 a.m., Mountain Standard Time, at
the Kimpton Hotel Palomar Phoenix, 2 East Jefferson Street, Phoenix, Arizona, or at such other time and place to which the meeting may be adjourned or postponed. The approximate date on which this Proxy Statement and accompanying Proxy are first
being sent or given to Shareholders is April 11, 2017.
Annual Meeting Admission
To attend the meeting in person, you will need to bring (i) a valid government-issued photo identification, such as a drivers
license or passport; and (ii) either an Admission Ticket or proof of ownership of Southwest Airlines Co. common stock as of March 21, 2017 (such as an account statement from your broker showing your stock ownership as of March 21,
2017). If you have received a paper copy of your proxy materials, an Admission Ticket is included with your proxy materials. If you have received your proxy materials electronically, you will need proof of ownership to be admitted to the meeting. If
you are a proxy holder for a Shareholder of Southwest who owned shares of Southwests common stock as of March 21, 2017, you must also bring to the meeting the executed proxy naming you as the proxy holder, signed by the Shareholder who
owned shares of Southwests common stock as of March 21, 2017.
Voting Procedures
A representative of Broadridge Financial Solutions, Inc. will tabulate votes and serve as Inspector of Election for the meeting. Each
Shareholder of record will be entitled to one vote for each share registered in the Shareholders name with respect to each matter to be voted on at the meeting. A Shareholder of record is a person or entity who holds shares on the
record date that are registered in such Shareholders name on the records of Southwests transfer agent. A person or entity who holds shares through a broker, bank, or other nominee is considered a beneficial owner of the
shares. You may receive more than one set of proxy materials. This means your shares are held in more than one account. Please vote all of your shares.
Voting by Shareholders of Record.
If you are a Shareholder of record, you may vote by completing and returning the enclosed proxy card.
You may also vote by telephone from the United States, using the number on the proxy card, or through the Internet, using the instructions on the proxy card. Shares represented by proxy will be voted at the meeting and may be revoked at any time
prior to the time at which they are voted by (i) timely submitting a valid, later-dated proxy; (ii) delivering a written notice of revocation to the Corporate Secretary of the Company; or (iii) voting in person at the meeting. Please
note that attending the meeting without completing a ballot will not revoke any previously submitted proxy. If you properly complete and sign your proxy card, but do not indicate how your shares should be voted on a matter, the shares represented by
your proxy will be voted in accordance with the recommendation of the Companys Board of Directors.
Voting by Beneficial Owners.
If you are a beneficial owner of shares, these proxy materials are being forwarded to you by your broker (or bank or other nominee) who is considered the Shareholder of record of your shares. As the beneficial owner of the shares, you are
entitled to direct your broker as to how to vote your shares. You may so instruct your broker by completing the voting instruction card the broker provides to you. You may also vote by telephone or through the Internet as described in the applicable
instructions your broker has
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provided with these proxy materials. You may change your vote by submitting new voting instructions to your broker in accordance with such brokers procedures. If you provide voting
instructions to your broker, your shares will be voted as you direct. If you do not provide voting instructions, pursuant to the rules of the New York Stock Exchange (the NYSE), your broker may vote your shares only with respect to
proposals as to which it has discretion to vote under the NYSEs rules. For any other proposals, the broker may not vote your shares at all, which is referred to as a broker
non-vote.
Please note that, in the absence of your specific instructions as to how to vote, your broker may not vote your shares with respect to any of the proposals included in this Proxy Statement except for Proposal 4 (Ratification of the Selection of
Independent Auditors), so please provide instructions to your broker regarding the voting of your shares.
As the beneficial owner of shares, you are invited to attend the meeting; however, you may not vote your shares in person at the meeting
unless you obtain a legal proxy from the Shareholder of record of your shares.
Quorum; Effect of Abstentions and Broker
Non-Votes
The presence at the meeting, in person or by proxy, of the holders of a majority of the
shares of the Companys common stock entitled to vote at the meeting is necessary to constitute a quorum. Shareholders of record at the close of business on March 21, 2017, are entitled to vote at the meeting. As of that date, the Company
had issued and outstanding 604,609,828 shares of common stock. Abstentions and broker
non-votes
are each included in the determination of the number of shares present and entitled to vote at the meeting for
purposes of determining the presence or absence of a quorum for the transaction of business at the meeting; however, neither abstentions nor broker
non-votes
are counted as voted either for or against a
proposal and, as such, will not affect the outcome of the vote on any proposal. If you are a beneficial owner of shares and do not provide voting instructions to your broker, your broker will only be entitled to vote your shares in its discretion
with respect to Proposal 4 (Ratification of the Selection of Independent Auditors). Your broker will
not
be able to vote your shares in its discretion with respect to Proposals 1, 2, or 3, which will be referred to as a broker
non-vote
on those proposals.
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PROPOSAL 1 ELECTION OF DIRECTORS
At the Annual Meeting of Shareholders, eleven Directors are nominated to be elected for terms expiring at the 2018 Annual Meeting of
Shareholders. Gary C. Kelly, Tammy Romo, and Mark R. Shaw have been selected as a proxy committee by the Board of Directors, and it is the intention of the proxy committee that, unless otherwise directed therein, proxies will be voted for the
election of all of the nominees listed below. Although it is not contemplated that any of the nominees will be unable to serve, if such a situation arises prior to the meeting, the proxy committee will act in accordance with its best judgment. Each
of the nominees has indicated his or her willingness to serve as a member of the Board of Directors, if elected.
The following sets forth
certain information for each nominee for Director of the Company.
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Name
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Director Since
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Age*
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David W. Biegler
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2006
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70
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J. Veronica Biggins
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2011
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70
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Douglas H. Brooks
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2010
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64
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William H. Cunningham
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2000
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73
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John G. Denison
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2008
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72
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Thomas W. Gilligan
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2015
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62
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Gary C. Kelly
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2004
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61
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Grace D. Lieblein
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2016
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56
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Nancy B. Loeffler
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2003
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70
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John T. Montford
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2002
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73
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Ron Ricks
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2015
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67
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*
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As of February 28, 2017.
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David W. Biegler
served as Chairman of Southcross Energy
Partners GP, LLC (Southcross GP) from August 2011 to January 2017, as Southcross GPs Chief Executive Officer from August 2011 to December 2014, and as its President from October 2012 to March 2014. Southcross GP is the general
partner of Southcross Energy Partners, L.P., a limited partnership that was formed to own, operate, develop, and acquire midstream energy assets. Mr. Biegler served as Chairman of Southcross Holdings LP, the sole owner of Southcross GP, from
August 2014 to January 2016, and served as its Chief Executive Officer from August 2014 to December 2014. From July 2009 to August 2014, Mr. Biegler served as Chairman and Chief Executive Officer of Southcross Energy LLC, formerly the sole
owner of Southcross GP. From 2003 to 2012, Mr. Biegler served as Chairman and Chief Executive Officer of Estrella Energy LP, a former investor in Southcross Energy, LLC. Mr. Biegler also served as interim President and Chief Executive
Officer of Dynegy Inc., a provider of wholesale power, capacity, and ancillary services, from March 2011 to April 2011. He retired as Vice Chairman of TXU Corp. at the end of 2001, having served TXU Corp. as President and Chief Operating Officer
from 1997 until 2001. He previously served as Chairman, President, and Chief Executive Officer of ENSERCH Corporation from 1993 to 1997. During the past five years, Mr. Biegler has served as a Director of the following entities (or of the
general partner of the entity) that are or were publicly traded other than Southwest: Trinity Industries, Inc. (since 1992) and Southcross Energy Partners, L.P. (since 2011). Mr. Biegler also serves as a Director for Austin Industries. In
November 2011, after Mr. Biegler had resigned from the Dynegy Inc. Board, certain subsidiaries of Dynegy Inc. filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. Southcross Holdings LP filed for bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code in March 2016.
The Board has concluded that Mr. Biegler should continue to serve as a Director for the Company
for the following reasons, among others: (i) Mr. Bieglers extensive experience as a Chief Executive Officer and Chief Operating Officer enable him to contribute significantly to the Boards oversight responsibilities on matters
relating to operational and financial strategies and risks, particularly in his roles as a member of the Boards Audit Committee and Safety and Compliance Oversight Committee; (ii) Mr. Bieglers senior management experience, as
well as his experience from serving on multiple public company boards, enable him to contribute significantly with respect to the Boards oversight of matters relating to executive compensation and compensation strategies, particularly in his
role as Chair of the Boards Compensation Committee; and (iii) Mr. Bieglers broad-based knowledge in energy marketing is particularly pertinent in assisting the Board with its oversight of the Companys fuel hedging
program.
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J. Veronica Biggins
is a Managing Partner in the Atlanta office of Diversified Search LLC,
an executive and board search firm. Ms. Biggins was Managing Partner of the Atlanta office of Hodge Partners from 2007 until 2011 when Hodge Partners, also an executive and board search firm, became a part of Diversified Search.
Ms. Biggins served as Assistant to the President of the United States and Director of Presidential Personnel under President William Jefferson Clinton and has also served as Chair of the Czech Slovak American Enterprise Fund.
Ms. Biggins background includes 20 years experience with NationsBank (now Bank of America) and its predecessor. Prior to joining the White House, Ms. Biggins was one of the highest ranking women in the banking industry. During
the past five years, Ms. Biggins has served as a Director of the following companies that are or were publicly traded: Avnet, Inc. (since 1997) and Zep, Inc. (2007-2012). Ms. Biggins has also served on a number of
non-profit
boards.
The Board has concluded that Ms. Biggins should continue to serve as a Director
for the Company for the following reasons, among others: (i) Ms. Biggins brings to the Board extensive financial expertise as well as knowledge of the airline industry through her experience as a Director of AirTran;
(ii) Ms. Biggins has extensive knowledge of compensation and governance matters as a result of her service on the compensation and nominating and corporate governance committees for other publicly traded companies; and
(iii) Ms. Biggins knowledge of the Atlanta market, along with her community involvement and charitable work, is valuable because of the Companys significant focus in these areas.
Douglas H. Brooks
served as Chairman of the Board of Brinker International, Inc., a casual dining restaurant company, from November 2004
to December 2013, as its Chief Executive Officer from January 2004 to January 2013, and as its President from January 1999 to January 2013. Mr. Brooks also served in other capacities for Brinker including as its Chief Operating Officer and as
President of Chilis Grill & Bar. During the past five years, Mr. Brooks has served as a Director of the following companies that are or were publicly traded: Brinker International, Inc. (1999-2013); AutoZone, Inc. (since 2013);
and ClubCorp Holdings, Inc. (since 2013). Mr. Brooks also serves on the Board of Directors of Limbs for Life and is a member of the Professional Advisory Board for St. Jude Childrens Research Hospital.
The Board has concluded that Mr. Brooks should continue to serve as a Director for the Company for the following reasons, among others:
(i) Mr. Brooks adds a unique skill set to the Board because of his lengthy service as a Chief Executive Officer of a company with tens of thousands of employees and operations in the United States, its territories, and numerous other
countries outside of the United States; (ii) Mr. Brooks skill set is particularly valuable to the Board and the Company in connection with the Companys international operations and its exploration of additional international
opportunities; (iii) Mr. Brooks experience managing a company with a large employee base is particularly beneficial to the Board because of the importance to the Company of strong employee relations; and
(iv) Mr. Brooks experience managing a company with a focus on customer service is particularly beneficial to the Board because of the importance of customer service to the Company.
William H. Cunningham, Ph.D.
has been a professor at The University of Texas at Austin since 2000 and holds the James L. Bayless Chair
for Free Enterprise at the Universitys Red McCombs School of Business. Dr. Cunningham served as Chancellor and Chief Executive Officer of The University of Texas System from 1992 to 2000 and as President of The University of Texas at Austin
from 1985 to 1992. During the past five years, Dr. Cunningham has served as a Director of the following companies that are or were publicly traded: Lincoln National Corporation (since 2006); Resolute Energy Corporation (formerly Hicks
Acquisition Company I, Inc., from 2007 to 2015); and LIN Media LLC, successor registrant to LIN TV Corp. (from 2009 to 2014). Dr. Cunningham is also a disinterested Director of John Hancock Funds, III, a registered investment company.
The Board has concluded that Dr. Cunningham should continue to serve as a Director for the Company for the following reasons, among
others: (i) Dr. Cunningham holds a Ph.D. and a Masters of Business Administration in Business, which, combined with his experience as an executive, brings valuable financial and strategic expertise and perspectives to the Board,
particularly in his roles as Presiding Director and as a member of the Audit Committee; and (ii) Dr. Cunningham has served on over 25 corporate boards and teaches corporate governance at The University of Texas Schools of Law and Business,
which enables him to bring valuable and current governance expertise to the Board, particularly in his roles as Presiding Director and Chair of the Nominating and Corporate Governance Committee.
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John G. Denison
served as Chairman of the Board for Global Aero Logistics Inc.
(Global), a diversified passenger airline, from January 2006 until April 2008. Mr. Denison came out of retirement in January 2005 to join Global as its
Co-Chief
Restructuring Officer. He also
served as President and Chief Executive Officer of ATA Airlines Inc. (ATA), a subsidiary of Global, from February 2005 until December 2006. In his capacities with Global and ATA, Mr. Denisons responsibilities included, among
others, managing or supervising business plans, collective bargaining negotiations, restructurings, financings, and major contract negotiations. ATA filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in April 2008.
The Board has concluded that Mr. Denison should continue to serve as a Director for the Company for the following reasons, among others:
(i) Mr. Denison holds a Masters of Business Administration in Finance and has previously served as a Chief Financial Officer; (ii) Mr. Denisons extensive experience in the airline industry, combined with his extensive
experience in the area of financial reporting, brings a unique and valuable perspective to the Board with respect to the Companys operations and risks, particularly in his roles as a member of the Companys Audit Committee and Chair of
the Safety and Compliance Oversight Committee; and (iii) Mr. Denisons experience with business plans, collective bargaining negotiations, and major contract negotiations are extremely valuable to the Boards strategic
discussions.
Thomas W. Gilligan, Ph.D.
has been the Tad and Dianne Taube Director of the Hoover Institution on War, Revolution and
Peace at Stanford University since September 2015. The Hoover Institution on War, Revolution and Peace is a public policy research center devoted to the advanced study of economics, politics, history, and political economy as well as international
affairs. Prior to his appointment at the Hoover Institution, Dr. Gilligan served as the Dean of the McCombs School of Business at The University of Texas at Austin from 2008 to August 2015, where he also held the Centennial Chair in Business
Education Leadership. Prior to his appointment at the McCombs School, Dr. Gilligan held several key administrative roles at the Marshall School of Business at the University of Southern California (USC) between 1987 and 2008, including interim
Dean, the Vice-Dean of Undergraduate Education, director of the Ph.D. program, and the Chair of the Finance and Business Economics Department. During his tenure at USC, he held visiting appointments at Stanford University (1989-1990 and 1994) and
Northwestern University (1995-1996). From 1984 to 1987, Dr. Gilligan taught Economics at the California Institute of Technology. Dr. Gilligan was a staff economist at the Council of Economic Advisers in the White House from 1982 to 1983,
and he served in the United States Air Force from 1972 to 1976. During the past five years, Dr. Gilligan has served as a Director of one publicly traded company other than Southwest: KB Home (since 2012).
The Board has concluded that Dr. Gilligan should continue to serve as a Director for the Company for the following reasons, among others:
(i) Dr. Gilligan holds a Ph.D. in economics, which, combined with his extensive leadership experience, brings valuable and unique economic expertise and perspectives to the Board; (ii) Dr. Gilligan also has extensive knowledge of
political and international affairs, which is valuable to the Board as the Company explores additional international opportunities; and (iii) Dr. Gilligans geographic presence on the West Coast is valuable in connection with the
Companys significant operations in that area.
Gary C. Kelly
has served as the Companys Chairman of the Board since May
2008 and as its Chief Executive Officer since July 2004. Mr. Kelly also served as the Companys President from July 2008 to January 2017, Executive Vice President and Chief Financial Officer from June 2001 to July 2004, and Vice President
Finance and Chief Financial Officer from 1989 to 2001. Mr. Kelly joined the Company in 1986 as its Controller. During the past five years, Mr. Kelly has served as a Director of one publicly traded company other than Southwest: Lincoln
National Corporation (since November 2009).
The Board has concluded that Mr. Kelly should continue to serve as a Director for the
Company for the following reasons, among others: (i) he is the Companys Chief Executive Officer and has been with the Company for over 30 years; (ii) his role and his experience enable him to bring invaluable operational, financial,
regulatory, governance, and cultural perspectives to the Board; and (iii) his role and his experience enable him to continually educate and advise the Board on the Companys industry and related opportunities, issues, and challenges.
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Grace D. Lieblein
served as Vice President, Global Quality of General Motors Corporation
(GM), a company that designs, manufactures, and markets cars, crossovers, trucks, and automobile parts worldwide, from November 2014 to December 2015, as its Vice President, Global Purchasing and Supply Chain from December 2012 to
November 2014, as the GM Brazil President and Managing Director from June 2011 to December 2012, as the GM Mexico President and Managing Director from January 2009 to June 2011, and as Vehicle Chief Engineer from October 2004 to January 2009.
Ms. Lieblein joined GM in 1978 as a
co-op
student at the General Motors Assembly Division in Los Angeles and has held a variety of leadership positions at GM in engineering, product development, and
manufacturing. During the past five years, Ms. Lieblein has served as a Director of one publicly traded company other than Southwest: Honeywell International, Inc. (since 2012).
The Board has concluded that Ms. Lieblein should continue to serve as a Director for the Company for the following reasons, among others:
(i) Ms. Liebleins extensive engineering skills add a unique technical expertise to the Board, and her leadership experience with respect to quality control is particularly valuable with respect to a heavily regulated company like
Southwest; (ii) Ms. Liebleins global leadership experience is particularly valuable to the Board in connection with the Companys expansion of its international operations; (iii) Ms. Liebleins leadership
experience with supply chain management enables her to offer unique strategic perspectives to the Board; and (iv) Ms. Liebleins knowledge of the Midwestern U.S. market adds perspectives to the Board in connection with the
Companys significant operations in that region.
Nancy B. Loeffler
has served as a consultant for Frost Bank since July 2009
and as a member of the Frost Bank Advisory Board since October 2008. A long-time advocate of volunteerism, Ms. Loeffler currently serves on the boards of The Briscoe Western Art Museum and The National Cowgirl Museum. In addition, she serves on
the Executive Committee of The San Antonio Stock Show and Rodeo, on the Executive Committee of The University of Texas System Chancellors Council, and as a Board member of The Cancer Therapy and Research Center. Ms. Loeffler is also a
member of the prestigious Kripke Legend Award Selection Committee for Women in Cancer Research. She has also previously served as Chair of The University of Texas MD Anderson Cancer Center Foundation, as Chair of the Advisory Board of the School of
Nursing at The University of Texas Health Science Center of San Antonio, as well as on the Board of Trustees for the Vice Presidents Residence Foundation in Washington, D.C.
The Board has concluded that Ms. Loeffler should continue to serve as a Director for the Company for the following reasons, among others:
(i) Ms. Loefflers background provides the Board with valuable perspectives on governmental affairs and the legislative process; and (ii) her extensive experience with community service and cultural affairs is valuable to the
Board because of the Companys significant focus on these areas.
John T. Montford, J.D.
has been President and Chief Executive
Officer of JTM Consulting, LLC, a state and federal governmental relations firm, since January 2010. Mr. Montford was retained by General Motors in January 2010 as a consultant and served in the capacity of Senior Advisor of Government
Relations and Global Public Policy until January 2012. In his consulting role, Mr. Montford also served on the Executive Committee of General Motors. From 2001 through 2009, Mr. Montford served in a number of positions in the
telecommunications industry. These included: President of Southwestern Bell and Southern New England Company, External Affairs (2001-2005); Senior Vice President for Legislative and Regulatory Affairs for SBC and AT&T (2005-2007); and President,
Western Region, AT&T Services (2008-2009). Mr. Montford was Chancellor of the Texas Tech University System from 1996 to 2001 and also served in the Texas Senate from 1983 to 1996, where he served as both Chairman of the Senate Finance
Committee and Chairman of the Senate State Affairs Committee. In 2002, Mr. Montford was named Chancellor Emeritus of the Texas Tech University System. He is a former active duty U.S. Marine Officer and an elected District Attorney.
The Board has concluded that Mr. Montford should continue to serve as a Director for the Company for the following reasons, among others:
(i) Mr. Montfords extensive executive experience in the areas of governmental relations, regulatory affairs, and public policy is valuable to a heavily-regulated company like Southwest; (ii) this same experience enables
Mr. Montford to provide valuable perspectives and input on governance matters, particularly in his roles as a member of the Boards Nominating and Corporate Governance
Committee and Compensation Committee; and (iii) his experience as Chairman of the Senate Finance Committee
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(for example, his role in drafting a budget of over $100 billion for the State of Texas) brings valuable perspectives to the Company in connection with its financial strategies and
reporting, particularly in his role as Chair of the Boards Audit Committee.
Ron Ricks
has served as the Companys Vice
Chairman of the Board since July 2015. Mr. Ricks also served as the Companys Executive Vice President & Chief Legal & Regulatory Officer from September 2011 to July 2015, Corporate Secretary from May 2008 to January
2013, Executive Vice President Corporate Services from May 2008 to September 2011, Executive Vice President Law, Airports, & Public Affairs from September 2006 to May 2008, and Senior Vice President Law, Airports, & Public Affairs from
August 2004 until September 2006. Mr. Ricks joined the Company in 1986 as its Vice President Governmental Affairs.
The Board has
concluded that Mr. Ricks should continue to serve as a Director for the Company for the following reasons, among others: (i) Mr. Ricks has over 30 years of institutional knowledge of the Companys operations, governmental
affairs, and community relations, which enables him to provide insight and perspectives to the Board that cannot be replicated by other Board candidates; (ii) Mr. Ricks experience as the Companys former Chief Legal &
Regulatory Officer is particularly valuable with respect to the Boards related oversight responsibilities; and (iii) Mr. Ricks leadership experience over airports and public affairs enables him to provide unique strategic
perspectives with respect to the Companys growth plans, both domestic and international.
Vote Required
Provided a quorum is present at the meeting, the affirmative vote of a majority of the votes cast by the holders of shares entitled to vote in
the election of Directors is required to elect Directors. A majority of the votes cast means the number of votes cast for a Director must exceed the number of votes cast against that Director.
Recommendation of the Board of Directors
The Board of Directors unanimously recommends a vote FOR the election of each of the nominees for Director named above. Proxies solicited by
the Board of Directors will be so voted unless Shareholders specify a different choice.
7
CORPORATE GOVERNANCE
General
The
business of the Company is managed under the direction of the Board of Directors. Pursuant to the requirements of the NYSE, a majority of the members of the Board must be independent, as defined by NYSE rules. The Board of Directors meets on a
regularly scheduled basis to review significant developments affecting the Company, to act on matters requiring approval by the Board, and to otherwise fulfill its responsibilities. The Board of Directors has adopted Corporate Governance Guidelines,
based on the recommendation of its Nominating and Corporate Governance Committee, to further its goal of providing effective governance of the Companys business for the long-term benefit of the Companys Shareholders, Employees, and
Customers. These guidelines set forth policies concerning overall governance practices for the Company, including the following:
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|
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Qualifications of Directors
|
|
Board Self-Evaluation
|
Board Meetings
|
|
Ethics
|
Director Responsibilities
|
|
Director and Senior Management Compensation
|
Independence of Directors
|
|
Direct Stock Ownership
|
Size of Board and Selection Process
|
|
Access to Management
|
Resignation Policy
|
|
Access to Independent Advisors
|
Board Committees
|
|
Director Orientation and Continuing Education
|
Executive Sessions; Communications with
Non-Management
Directors
|
|
Public Communications
|
|
Other Practices
|
The Companys Corporate Governance Guidelines, along with its Code of Ethics and the Charters for its
Audit, Compensation, Nominating and Corporate Governance, Safety and Compliance Oversight, and Executive Committees, are available on the Companys website, www.southwestairlinesinvestorrelations.com/corporate-governance. Shareholders may also
obtain copies of these documents upon written request to Southwest Airlines Co., Investor Relations,
HDQ-6IR,
P.O. Box 36611, Dallas, Texas 75235.
Board Membership and Qualifications
General Qualification Requirements; Diversity Considerations.
The Companys Nominating and Corporate Governance Committee is
responsible for recommending to the Board the criteria for Board membership, as set forth in the Companys Corporate Governance Guidelines. The Corporate Governance Guidelines require that members of the Board (i) possess the highest
personal and professional ethics, integrity, and values; (ii) possess practical wisdom and mature judgment; (iii) be committed to the best long-term interests of the Companys Employees, Customers, and Shareholders; (iv) be
willing to devote sufficient time to fulfill their responsibilities; and (v) be willing to serve on the Board for an extended period of time. The Corporate Governance Guidelines also require the following factors to be considered in connection
with the nomination or appointment of new Board members: (i) finance, marketing, government, education, and other professional experience or knowledge relevant to the success of the Company in the current business environment;
(ii) independence (for
non-management
Directors); (iii) in the case of current Directors being considered for
re-nomination,
a Directors past attendance at
Board and committee meetings and participation in and contributions to such meetings; and (iv) diversity. Each individual is evaluated in the context of the Board as a whole, with the objective of recommending to Shareholders a group that
collectively can best serve the long-term interests of the Companys Employees, Customers, and Shareholders. The Board does not have a formal policy with regard to Board member diversity. Rather, diversity is one of many factors considered by
the Board in assessing the qualifications of Board candidates. Furthermore, in considering diversity, the Board takes into account various types of diversity, such as diversity of experience, geography, gender, ethnicity, color, and age, with the
goal of obtaining diverse perspectives. The Boards primary consideration is to identify candidates with the background, experience, and skills that will best fulfill the Boards and the Companys needs at the time a search is being
conducted. Therefore, the Board does not believe it is appropriate to either nominate or exclude from nomination an individual based on gender, ethnicity, color, age, or similar factors.
8
The Corporate Governance Guidelines prohibit
non-Employee
Directors from serving on more than six public company boards and prohibit Employee Directors from serving on more than three public company boards. The Corporate Governance Guidelines also require that the nature and time involved in a
Directors service on other boards be considered in connection with the evaluation of the suitability of that Director. In addition, in accordance with the Corporate Governance Guidelines, Directors should advise the Chairman of the Board and
the Chairman of the Nominating and Corporate Governance Committee in advance of accepting an invitation to serve on the board of directors, the audit committee, or the compensation committee of another publicly traded company.
Attendance at Meetings.
The Board of Directors held six meetings during 2016 (some of which spanned two days). During 2016, each of the
Companys current Directors attended at least 75 percent of the total number of Board and applicable committee meetings held during the period for which he or she served as a Director. It is the Boards policy that every Director and
nominee for Director should make every effort to attend the Companys Annual Meeting of Shareholders. All of the Companys Directors attended the 2016 Annual Meeting of Shareholders.
Board Leadership Structure
Gary C. Kelly, the Companys Chief Executive Officer, also serves as the Companys Chairman of the Board. The Board of Directors
believes this is in the best interests of the Company and its Shareholders because Mr. Kelly is in the best position to (i) properly and timely identify matters that should be brought to the Boards attention, (ii) prioritize
Board agenda items, and (iii) identify the individuals in the best position to present agenda items. The Board believes this structure is considerably more efficient and effective than (i) requiring an outside Chairman of the Board to
duplicate many of the Chief Executive Officers efforts or (ii) requiring the Chief Executive Officer to relay communications through another member of the Board. In addition, the Board believes the following practices accomplish
independent oversight of management without the need to separate the roles of the Chief Executive Officer and the Chairman of the Board:
|
|
|
All members of the Board, other than the Chief Executive Officer and Vice Chairman of the Board, are independent, and each member is elected annually by the Companys Shareholders.
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|
All members of the Boards Audit, Compensation, and Nominating and Corporate Governance Committees are independent.
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|
The Board meets, at a minimum, six times per year, and at each regular meeting of the Board, the Board is apprised of the Companys operations and strategies through briefings by (i) the Chief Executive
Officer, (ii) other members of senior management with key responsibilities for the Companys ongoing operations and current initiatives, and (iii) any other Employees or advisors requested by the Board.
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|
In addition to scheduled updates, the Board and its committees also request updates from management regarding matters deemed significant at any given time.
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|
The
non-management
Board members hold executive sessions outside the presence of the Chief Executive Officer and other management.
|
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|
The independent Board members hold executive sessions that include only independent directors.
|
|
|
|
The Board and its committees provide regular input regarding items to be covered in future agendas.
|
In addition, pursuant to the Companys Corporate Governance Guidelines, the Board is required to appoint an independent member of the
Board to serve as its Presiding Director. The duties of the Presiding Director, which is the Boards lead independent Director, include the following:
|
|
|
presiding over executive sessions of the
non-management
Directors;
|
|
|
|
presiding over executive sessions of the independent Directors;
|
|
|
|
consulting with the Chairman of the Board concerning the Boards agendas;
|
9
|
|
|
coordinating the activities of the
non-management
and independent Directors and the agenda for executive sessions;
|
|
|
|
communicating feedback to the Chief Executive Officer following executive sessions;
|
|
|
|
facilitating communications between the Board and the Chief Executive Officer;
|
|
|
|
at the standing invitation of the Boards committees, attending meetings of Board committees on which the Presiding Director does not already serve;
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|
assisting the Nominating and Corporate Governance Committee with its oversight of the annual evaluation of the Board and its committees and communicating results of individual Director assessments to individual Board
members;
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|
|
|
consulting with the Nominating and Corporate Governance Committee with respect to recommendations for the assignment of Board members to the Boards committees; and
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|
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|
communicating (along with the Chair of the Compensation Committee) the results of the Boards evaluation of the Chief Executive Officer.
|
The Board believes all of the foregoing factors provide an appropriate balance between effective and efficient Company leadership and
sufficient oversight by
non-Employee
Directors.
Executive Sessions and
Communications with
Non-Management
Directors
Pursuant to the Companys Corporate
Governance Guidelines, the
non-management
members of the Board of Directors are required to meet at regularly scheduled executive sessions without the presence of management. The Companys Corporate
Governance Guidelines also provide that to the extent that, at any time, the
non-management
members of the Board of Directors include Directors who are not independent, the independent Directors will also meet
at least annually in an executive session that includes only independent directors. The Boards Presiding Director, Dr. William H. Cunningham, presides over these executive sessions. Shareholders and any other interested parties may
communicate directly with the Presiding Director or any or all of the
non-management
or other members of the Board by writing to such Director(s), c/o Southwest Airlines Co., Attn: Presiding Director, P.O. Box
36611, Dallas, Texas 75235.
Risk Oversight
The Board is responsible for overseeing managements assessments of major risks facing the Company and for reviewing options to mitigate
such risks. The Boards oversight of major risks occurs at both the full Board level and at the Board committee level. The Board and its committees use the following procedures to monitor and assess risks.
The Board
. The Chief Executive Officer, members of senior management, and other personnel and advisors, as requested by the Board,
report on the Companys financial and operating strategies, as well as any related risks, at every regular meeting of the Board. Based on these reports, the Board requests
follow-up
data and presentations
to address any specific concerns and recommendations.
The Audit Committee.
In accordance with the requirements of the NYSE, the
Audit Committee assists the Board with its oversight responsibilities by discussing the Companys major financial risk exposures, its policies with respect to risk assessment and risk management, and the steps management has taken to monitor
and control or mitigate financial risk exposures. The Audit Committee discusses with the Companys management, as well as the Companys Internal Audit Department (including in executive sessions), the Companys policies with respect
to risk assessment and risk management and advises management on its risk assessment approach and its prioritization of risks. The Audit Committee also receives regular reports on, and assessments of, the Companys internal controls from the
Companys Internal Audit Department and members of management responsible for financial controls. In addition, the Audit Committee receives the independent auditors assessment of the Companys internal controls and financial risks,
which includes the independent
auditors report on its procedures for identifying fraud and addressing any risk of management override. The
Audit Committee also receives management reports regarding specific areas of financial risk and discusses strategies to mitigate risk. Further, the Audit
Committee reviews with management cyber security and other risks relevant to the Companys computerized information system controls and security.
10
The Safety and Compliance Oversight Committee.
The Boards Safety and Compliance
Oversight Committee assists the Board with overseeing the Companys activities with respect to safety and operational compliance. Pursuant to its Charter, the Safety and Compliance Oversight Committee is responsible for periodically assessing
the Companys safety and operational compliance obligations and associated risks and performance relative to those standards. In fulfilling this responsibility, the Safety and Compliance Oversight Committee regularly specifies areas to be
addressed at its meetings and requires that individuals from a variety of operational levels be available to discuss their areas of responsibility and respond to questions.
The Nominating and Corporate Governance Committee.
The Nominating and Corporate Governance Committee receives updates and advice from
management and outside advisors regarding the Companys procedures for complying with corporate governance regulations, as well as with respect to the Companys governance structure and protections. This Committee also reviews the
Companys Corporate Governance Guidelines at least annually to further the Companys goal of providing effective governance.
The Compensation Committee.
The Compensation Committee receives updates and advice on the ongoing advisability of the Companys
compensation practices both from management and from the Compensation Committees independent consultant. The Compensation Committee also assists the Board with its annual review of succession planning.
The Compensation Committee is aware of the need to routinely assess the Companys compensation policies and practices as they relate to
the Companys risk management and whether the structure and administration of the Companys compensation and incentive programs could influence risk-taking throughout the organization. The Compensation Committee has determined that the
compensation policies and practices for the Companys Employees are not reasonably likely to have a material adverse effect on the Company for the following reasons, among others:
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|
|
The Compensation Committees bonus determinations take into account multiple general performance standards established by the Company to support its Vision and related strategies and goals, rather than a single
measure such as stock price performance or earnings. This has served as a multi-dimensional tool for the Compensation Committee to use in awarding bonuses, so that factors that are deemed significant to industry and operational performance are
considered in addition to financial measures. This multi-dimensional approach reduces the risk that can be created when financial results are the only drivers of incentive payments. The Compensation Committee believes it is important to take into
account multiple measures of financial and operational performance, as well as comparative pay in the market, for the following reasons, among others: (i) using a measure such as the Companys stock price performance at any specified point
in time is not necessarily indicative of the Companys overall financial and operational performance, (ii) the Compensation Committee believes that rewarding Employees based solely on a measure such as stock price appreciation could create
business risks by effectively encouraging Employees to focus on short-term results at the expense of the long-term financial and operational health of the Company, and (iii) the Compensation Committee believes that basing short-term incentive
compensation on a single measure such as stock price performance presents undue retention risks.
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|
The Compensation Committee has historically exercised a certain amount of discretion in awarding bonuses, in part to minimize the risk-taking that can result from a strict application of performance-based awards.
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|
Incentive compensation is used responsibly, with appropriate focus on both Company and individual performance to effectively balance risks and rewards.
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|
The Compensation Committee has adopted a clawback policy, pursuant to which, to the extent permitted by governing law, the Company may seek to recoup certain incentive-based compensation in the event the Company is
required to restate its publicly reported financial statements due to material noncompliance with any financial reporting requirement under the securities laws as a result of misconduct.
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The Companys Insider Trading Policy prohibits Employees from entering into hedging transactions with respect to the Companys securities.
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11
Committees of the Board
The Board has established the following standing committees to assist it with fulfilling its responsibilities: (i) Audit, (ii)
Compensation, (iii) Nominating and Corporate Governance, (iv) Safety and Compliance Oversight, and (v) Executive. The following table provides information on the Boards current committee memberships.
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Name
|
|
Audit
Committee
|
|
Compensation
Committee
|
|
Nominating and
Corporate
Governance
Committee
|
|
Safety and
Compliance
Oversight
Committee
|
|
Executive
Committee
|
David W. Biegler
|
|
X
|
|
Chair
|
|
|
|
X
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|
|
J. Veronica Biggins
|
|
|
|
X
|
|
X
|
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|
|
|
Douglas H. Brooks
|
|
|
|
|
|
X
|
|
X
|
|
|
William H. Cunningham
|
|
X
|
|
|
|
Chair
|
|
|
|
X
|
John G. Denison
|
|
X
|
|
|
|
|
|
Chair
|
|
X
|
Thomas W. Gilligan
|
|
X
|
|
|
|
|
|
X
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|
|
Gary C. Kelly
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|
Chair
|
Grace D. Lieblein
|
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X
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X
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|
Nancy B. Loeffler
|
|
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|
X
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|
X
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|
|
|
|
John T. Montford
|
|
Chair
|
|
X
|
|
X
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|
|
|
|
Ron Ricks
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|
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|
X
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|
X
|
Audit Committee
. The primary functions of the Audit Committee include assisting the Board in its
oversight of (i) the integrity of the Companys financial statements, (ii) the Companys compliance with legal and regulatory requirements, (iii) the independent auditors qualifications and independence, (iv) the
performance of the Companys internal audit function and independent auditors, and (v) business risks related to cyber security. The Audit Committee held nine meetings during 2016. The Audit Committee has been established in accordance
with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, and the Board has determined that each of the members of the Audit Committee is independent under all applicable rules of the Securities and Exchange Commission (the
SEC) and the NYSE governing Audit Committee membership. The Board has also determined that all five members of the Audit Committee satisfy the criteria adopted by the SEC to serve as an audit committee financial expert for
the Audit Committee.
Compensation Committee.
General.
The primary functions of the Compensation Committee include (i) reviewing and approving corporate goals
and objectives relevant to the compensation of the Chief Executive Officer; (ii) evaluating the Chief Executive Officers performance in light of those goals and objectives; (iii) together with the other independent members of the
Board (as directed by the Board and to the extent consistent with any applicable plan documents or law), determining and approving the Chief Executive Officers compensation level based on the Compensation Committees evaluation;
(iv) with the advice of the Chairman of the Board and the Chief Executive Officer, conducting an annual review of the compensation structure of the Companys officers and approving the salary, bonus, and other incentive and equity-related
compensation for each of the Companys executive officers who are subject to Section 16(b) of the Securities Exchange Act of 1934, as amended (Reporting Officers); (v) reviewing and approving all stock-based compensation
arrangements for Employees of the Company (including executive officers) and making recommendations to the Board with respect to equity-based plans that are subject to Board approval; and (vi) making recommendations to the Board with respect to
non-CEO
Reporting Officer compensation and incentive compensation plans that are subject to Board approval. The Compensation Committee is also responsible for reviewing
non-Employee
Director compensation at least annually and making any related recommendations to the full Board. To the extent permitted by applicable law and regulations, the Compensation Committee has the
power to delegate any of the authority above to subcommittees or to individual members of the Compensation Committee, as it deems appropriate. The Board has determined that each of the members of the Compensation Committee is (i) independent
under the NYSEs rules governing
12
Compensation Committee membership; (ii) a
non-employee
director under Rule
16b-3
of the Securities
Exchange Act of 1934, as amended; and (iii) an outside director under Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation Committee held five meetings during 2016.
Role of executive officers in determining or recommending the amount or form of executive and Director compensation.
At
the Compensation Committees request, the Companys Chief Executive Officer and its Executive Vice President Corporate Services provide regular input regarding compensation designs and recommendations presented to the Compensation
Committee. In connection with the Compensation Committees decisions, the Chief Executive Officer also reviews with the Compensation Committee the relative roles, scope of responsibilities, and performance of the Companys other executive
officers. The roles of the Chief Executive Officer and the Executive Vice President Corporate Services in connection with the Compensation Committees determinations are discussed in more detail below under Compensation of Executive
Officers Compensation Discussion and Analysis.
Use of consultants.
The Compensation Committee is
directly responsible for the appointment, retention, compensation, and oversight of the work of any compensation consultant, independent legal counsel, or other advisor retained by the Compensation Committee in its sole discretion. During 2016, the
Compensation Committee continued to engage Pay Governance LLC, an independent executive compensation advisory firm, as the Compensation Committees independent consultant. With respect to executive compensation earned for 2016, the Compensation
Committee based its decisions in part on market data provided by its consultant, as well as recommendations from the consultant with respect to form and amount of executive compensation. Market data is discussed below under Compensation of
Executive Officers Compensation Discussion and Analysis Role of Independent Compensation Consultant; Benchmarking; Market Data.
In 2016, at the Compensation Committees request, its consultant also provided data and assessments related to the
adequacy and effectiveness of the Companys compensation program for
non-Employee
members of the Board. Based on this information, the Compensation Committee decided not to recommend any changes in
non-Employee
Director compensation for 2016.
The Compensation Committee uses the
information provided by its independent consultant (i) for the purpose of informing, as opposed to determining, the Compensation Committees decisions; and (ii) to assist it in balancing between compensation that is appropriately
linked to performance and compensation that is adequate for retention purposes. Although the Compensation Committee considers any recommendations received from its consultant, the Compensation Committees decisions are ultimately based on its
own assessment of the information provided to it in the context of the totality of the Companys circumstances at any given point in time. Additional detail regarding the work performed by the independent consultant, as well as the Compensation
Committees related determinations, is included below under Compensation of Executive Officers Compensation Discussion and Analysis.
The Compensation Committee has considered the independence of its consultant in light of SEC rules and NYSE listing standards.
The Compensation Committee received a letter from its consultant addressing its independence, which addressed the following factors: (i) other services provided to the Company by the independent consultant; (ii) fees paid by the Company as
a percentage of the consultants total revenue; (iii) policies or procedures maintained by the consultant that are designed to prevent a conflict of interest; (iv) any business or personal relationships between the individual
consultants involved in the engagement and members of the Compensation Committee; (v) any business or personal relationships between the Companys executive officers and the independent consultant or the individual consultants involved in
the engagement; and (vi) any Company stock owned by the individual consultants involved in the engagement. Questions intended to elicit information regarding business or personal relationships between the independent consultant and the
individual consultants involved in the engagement and the Companys Board members and
13
executive officers were also included in the Companys annual Director and Executive Officer Questionnaires. Taking into account the foregoing, the Compensation Committee has not raised any
conflict of interest.
Nominating and Corporate Governance Committee.
The primary functions of the Nominating and Corporate
Governance Committee include (i) developing and annually reviewing and recommending to the Board a set of Corporate Governance Guidelines applicable to the Company; (ii) reviewing potential candidates for Board membership;
(iii) recommending a slate of nominees to be selected by the Board for the Annual Meeting of Shareholders; (iv) recommending to the Board the composition of the Boards Committees; and (v) overseeing the evaluation of the Board
and management. The Nominating and Corporate Governance Committee identifies potential candidates for first-time nomination as a Board member using a variety of sources such as recommendations from current Board members, management, and contacts in
communities served by the Company. The Board of Directors has determined that each of the members of the Nominating and Corporate Governance Committee is independent under the NYSEs rules governing Board membership.
The Nominating and Corporate Governance Committee will also consider nominees submitted by Shareholders based on the criteria set forth in the
Companys Corporate Governance Guidelines; provided that such nominations are submitted in accordance with the requirements of the Companys Bylaws. These requirements are discussed below under Other Matters Submission of
Shareholder Proposals. The Nominating and Corporate Governance Committee held five meetings during 2016.
Safety and Compliance
Oversight Committee.
The primary functions of the Safety and Compliance Oversight Committee include: (i) assisting the Board in overseeing the Companys activities with respect to safety and operational compliance;
(ii) periodically assessing the Companys safety and operational compliance obligations and associated risks and performance relative to those standards; (iii) reviewing such policies, programs, and procedures as it shall deem
necessary; (iv) meeting regularly with Company management to assess the Companys safety and operational compliance practices generally; and (v) periodically reporting to the Board on the adequacy and effectiveness of the
Companys safety and operational compliance programs. The Safety and Compliance Oversight Committee held six meetings during 2016.
Executive Committee
. The primary function of the Executive Committee is to assist the Board in fulfilling its oversight
responsibilities. The Executive Committee has authority to act for the Board on most matters during the intervals between Board meetings. The Executive Committee held two meetings during 2016.
Certain Relationships and Related Transactions, and Director Independence
Review, Approval, or Ratification of Transactions with Related Persons; Director Independence Determinations
. The Company does not have
a formal written policy with respect to the review, approval, or ratification of transactions with related persons, but has established procedures to identify these transactions and bring them to the attention of the Board for consideration. These
procedures include formal written questionnaires to Directors and executive officers and written procedures followed by the Companys Internal Audit Department to identify related person transactions.
The Company requires that all of its Directors and executive officers complete an annual questionnaire that requires them to identify and
describe any transactions that they or their respective related parties may have with the Company, whether or not material. Separately, the Companys Internal Audit Department analyzes accounts payable records to search for payments involving
(i) the Companys Directors and executive officers, (ii) known relatives of the Companys Directors and executive officers, (iii) companies and organizations with which the Directors and executive officers are associated,
and (iv) security holders known to the Company to be the beneficial owner of more than five percent of the Companys common stock. The questionnaire for
non-Employee
Directors is also designed to
elicit information that should be considered to determine that the Company satisfies the NYSEs requirement that a majority of its Board members be independent within the meaning of the NYSEs rules. Relevant information regarding
Directors is then provided to the Nominating and Corporate Governance Committee, which is responsible for evaluating the qualifications of Board nominees, including independence, and for making recommendations to the Board regarding
(i) nominations for Board membership; and (ii) individual qualifications for committee membership, taking into account various additional
14
regulatory requirements, including independence requirements, that specifically apply to the different Board committees. In making its recommendations to the Board, the Nominating and Corporate
Governance Committee considers the following regulatory guidance: (i) Item 404(a) of Regulation
S-K
of the Securities Act of 1933, as amended (
Transactions with Related Persons
); (ii) Accounting
Standards Codification Topic 850 (
Related Party Disclosures
); (iii) Public Company Accounting Oversight Board Auditing Standard No. 18 (
Related Parties
); and (iv) the NYSEs governance standards related to independence
determinations. Based on the foregoing, the Board has determined that the following Board members are independent under applicable NYSE standards: David W. Biegler, J. Veronica Biggins, Douglas H. Brooks, William H. Cunningham, John G. Denison,
Thomas W. Gilligan, Grace D. Lieblein, Nancy B. Loeffler, and John T. Montford.
Ongoing Reporting Obligations with Respect to
Related Person Transactions
. In order to provide an ongoing mechanism for monitoring related person transactions and Board member independence, each Board member and executive officer of the Company is required to sign an acknowledgement that he
or she will promptly inform the Company of any new information that should be considered by the Board subsequent to the Directors or executive officers completion of his or her annual questionnaire.
15
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
At the close of business on March 21, 2017, the record date for determining Shareholders entitled to notice of and to vote at the meeting,
there were outstanding 604,609,828 shares of common stock, $1.00 par value, each share of which is entitled to one vote.
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of February 28, 2017, information with respect to persons who, to the Companys knowledge,
beneficially own more than five percent of the Companys common stock.
|
|
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Amount and Nature
of Beneficial
Ownership
|
|
|
Percent of
Class(1)
|
PRIMECAP Management Company
|
|
|
72,467,912(2)
|
|
|
11.8%
|
177 E. Colorado Blvd., 11
th
Floor
Pasadena, CA 91105
|
|
|
|
|
|
|
|
|
|
Berkshire Hathaway Inc.
|
|
|
43,203,775(3)
|
|
|
7.0%
|
Warren E. Buffett
National Indemnity Company
Medical Protective Company
|
|
|
|
|
|
|
3555 Farnam Street
Omaha, NE 68131(4)
|
|
|
|
|
|
|
|
|
|
The Vanguard Group
|
|
|
38,212,331(5)
|
|
|
6.2%
|
100 Vanguard Blvd.
|
|
|
|
|
|
|
Malvern, PA 19355
|
|
|
|
|
|
|
|
|
|
BlackRock, Inc.
|
|
|
36,641,896(6)
|
|
|
6.0%
|
55 East 52
nd
Street
|
|
|
|
|
|
|
New York, NY 10055
|
|
|
|
|
|
|
|
|
|
FMR LLC
|
|
|
34,740,726(7)
|
|
|
5.7%
|
245 Summer Street
Boston, MA 02210
|
|
|
|
|
|
|
|
|
|
Vanguard Chester Funds Vanguard Primecap Fund
|
|
|
33,597,600(8)
|
|
|
5.5%
|
100 Vanguard Blvd.
Malvern, PA 19355
|
|
|
|
|
|
|
(1)
|
Percentages are calculated based on the number of outstanding shares of the Companys common stock as of February 28, 2017, which was 614,351,178.
|
(2)
|
Information is based on an Amendment to Schedule 13G filed with the SEC on February 9, 2017, by PRIMECAP Management Company. PRIMECAP Management Company reported sole voting power with respect to 12,891,856 shares,
sole dispositive power with respect to 72,467,912 shares, and no shared voting or dispositive power.
|
(3)
|
Information is based on a Schedule 13G filed with the SEC on February 14, 2017, jointly by Warren E. Buffett, Berkshire Hathaway Inc., National Indemnity Company, and Medical Protective Company. Warren E. Buffett
and Berkshire Hathaway Inc. each reported no sole voting or dispositive power over shares beneficially owned and shared voting and dispositive power with respect to 43,203,775 shares. National Indemnity Company reported no sole voting or dispositive
power over shares beneficially owned and shared voting and dispositive power with respect to 43,195,053 shares, and Medical
|
|
Protective Company reported no sole voting or dispositive power over shares beneficially owned and
|
16
|
shared voting and dispositive power with respect to 8,722 shares. Based on the Schedule 13G filing, National Indemnity Company and Medical Protective Company beneficially owned 7.0 percent
and less than 1.0 percent, respectively, of the Companys outstanding shares of common stock as of February 28, 2017.
|
(4)
|
This address is listed in the Schedule 13G filed with the SEC on February 14, 2017, jointly by Warren E. Buffett, Berkshire Hathaway Inc., National Indemnity Company, and Medical Protective Company, as the
address of each of Mr. Buffett and Berkshire Hathaway Inc. The address of National Indemnity Company is listed as 3024 Harney Street, Omaha, Nebraska 68131. The address of Medical Protective Company is listed as 5814 Reed Road, Fort Wayne, IN
46835.
|
(5)
|
Information is based on an Amendment to Schedule 13G filed with the SEC on February 13, 2017, by The Vanguard Group, a parent holding company. The Vanguard Group reported sole voting power with respect to 838,462
shares, sole dispositive power with respect to 37,342,355 shares, shared voting power with respect to 31,113 shares, and shared dispositive power with respect to 869,976 shares.
|
(6)
|
Information is based on an Amendment to Schedule 13G filed with the SEC on January 27, 2017, by BlackRock, Inc. BlackRock, Inc., a parent holding company or control person, reported sole voting power with respect
to 32,948,218 shares, sole dispositive power with respect to 36,641,896 shares, and no shared voting or dispositive power.
|
(7)
|
Information is based on an Amendment to Schedule 13G filed with the SEC on February 14, 2017, by FMR LLC. FMR LLC, a parent holding company, reported sole voting power with respect to 3,821,654 shares, sole
dispositive power with respect to 34,740,726 shares, and no shared voting or dispositive power. In addition, Abigail P. Johnson, a Director, the Chairman, and the Chief Executive Officer of FMR LLC, reported sole dispositive power with respect to
34,740,726 shares, no shared dispositive power, and no sole or shared voting power. Further, according to the Amendment to Schedule 13G, members of the Johnson family, including Abigail P. Johnson, are the predominant owners, directly or through
trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family group and all other Series B shareholders have entered into a shareholders voting agreement under which all Series B
voting common shares will be voted in accordance with the majority vote of Series B voting common shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders voting agreement, members of the
Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC. Neither FMR LLC nor Abigail P. Johnson has the sole power to vote or direct the voting of the shares owned directly by the
various investment companies registered under the Investment Company Act of 1940 (the Fidelity Funds) advised by Fidelity Management & Research Company, a wholly owned subsidiary of FMR LLC, which power resides with the Fidelity
Funds Boards of Trustees. Fidelity Management & Research Company carries out the voting of the shares under written guidelines established by the Fidelity Funds Boards of Trustees.
|
(8)
|
Information is based on an Amendment to Schedule 13G filed with the SEC on February 13, 2017, by Vanguard Chester Funds Vanguard Primecap Fund. Vanguard Chester Funds Vanguard Primecap Fund reported
sole voting power with respect to 33,597,600 shares, no shared voting power, and no sole or shared dispositive power.
|
17
Security Ownership of Management
The following table sets forth, as of February 28, 2017, information regarding the beneficial ownership of the Companys common stock
by each of the members of the Companys Board of Directors, each of the executive officers of the Company named in the Summary Compensation Table, and all current executive officers and Directors as a group.
|
|
|
|
|
|
|
|
|
Name of Beneficial Owner
|
|
Amount and Nature of
Beneficial Ownership(1)
|
|
|
Percent of
Class
|
|
David W. Biegler(2)
|
|
|
43,346
|
|
|
|
*
|
|
J. Veronica Biggins(3)
|
|
|
34,171
|
|
|
|
*
|
|
Douglas H. Brooks(4)
|
|
|
53,639
|
|
|
|
*
|
|
William H. Cunningham
|
|
|
59,839
|
|
|
|
*
|
|
John G. Denison(5)
|
|
|
45,139
|
|
|
|
*
|
|
Thomas W. Gilligan
|
|
|
3,031
|
|
|
|
*
|
|
Gary C. Kelly(6)
|
|
|
518,840
|
|
|
|
*
|
|
Grace D. Lieblein
|
|
|
3,031
|
|
|
|
*
|
|
Nancy B. Loeffler
|
|
|
33,597
|
|
|
|
*
|
|
John T. Montford
|
|
|
23,305
|
|
|
|
*
|
|
Ron Ricks
|
|
|
142,874
|
|
|
|
*
|
|
Robert E. Jordan(7)
|
|
|
48,835
|
|
|
|
*
|
|
Jeff Lamb
|
|
|
46,450
|
|
|
|
*
|
|
Tammy Romo(8)
|
|
|
50,284
|
|
|
|
*
|
|
Michael G. Van de Ven(9)
|
|
|
112,334
|
|
|
|
*
|
|
Current Executive Officers and Directors as a Group (18 persons)(10)
|
|
|
1,246,861
|
|
|
|
*
|
|
(1)
|
Unless otherwise indicated, beneficial owners have sole rather than shared voting and investment power with respect to their shares, other than rights shared with spouses pursuant to joint tenancy or marital property
laws.
|
(2)
|
Includes 4,707 shares held by Mr. Bieglers spouse.
|
(3)
|
Includes 32 shares held by Ms. Biggins spouse.
|
(4)
|
Includes 10,000 shares that Mr. Brooks had the right to acquire within 60 days pursuant to stock options.
|
(5)
|
Includes 10,000 shares that Mr. Denison had the right to acquire within 60 days pursuant to stock options.
|
(6)
|
Includes (i) 69,883 shares held in a family trust with respect to which Mr. Kelly serves as trustee and (ii) 69,891 shares held in a family trust with respect to which Mr. Kellys spouse serves as
trustee.
|
(7)
|
Includes 10,179 shares held for Mr. Jordans account under the Companys profit sharing plan, with respect to which he has the right to direct the voting.
|
(8)
|
Includes 3,369 shares held for Ms. Romos account under the Companys profit sharing plan, with respect to which she has the right to direct the voting.
|
(9)
|
Includes 681 shares held for Mr. Van de Vens account under the Companys profit sharing plan, with respect to which he has the right to direct the voting.
|
(10)
|
In addition to the amounts disclosed in footnotes (2) through (9), with respect to the other executive officers of the Company, includes 787 shares held for an executive officers account under the
Companys profit sharing plan, with respect to which the executive officer has the right to direct the voting.
|
18
COMPENSATION OF EXECUTIVE OFFICERS
COMPENSATION DISCUSSION AND ANALYSIS
Table of Contents
19
COMPENSATION DISCUSSION AND ANALYSIS
The Company is required to provide detailed compensation information in this Proxy Statement regarding its Chief Executive Officer, its Chief
Financial Officer, and each of its three other most highly compensated executive officers who were serving as such at the end of fiscal 2016. For 2016, these executive officers, who will be referred to in this Proxy Statement as the named
executive officers, were (i) Gary C. Kelly, Chairman of the Board & Chief Executive Officer; (ii) Tammy Romo, Executive Vice President & Chief Financial Officer; (iii) Michael G. Van de Ven, Chief Operating
Officer; (iv) Robert E. Jordan, Executive Vice President & Chief Commercial Officer; and (v) Jeff Lamb, Executive Vice President Corporate Services. For purposes of this Compensation Discussion and Analysis, the Compensation
Committee will be referred to as the Committee.
EXECUTIVE SUMMARY
Set forth below is a summary of (i) the Companys overall compensation objectives, (ii) the
Committees related compensation philosophy, and (iii) the Committees compensation decisions for 2016.
Compensation Objectives and Philosophy
The Companys compensation programs are designed to align with the Companys Vision to become the
worlds most loved, most flown, and most profitable airline. To support this Vision, the Committee maintains a strong and transparent
pay-for-performance
philosophy, with a substantial equity component. The Committee also believes in retention. Therefore, the Committee seeks to balance
pay-for-performance
with pay that is
adequate for retention purposes and that is equitable internally.
Pay-for-Performance.
To effect its
pay-for-performance
philosophy, the Committee emphasizes variable pay as a percentage of
overall executive pay. For 2016, the Committee applied a structured and transparent approach to
pay-for-performance
through the incorporation of the following four
variable pay components:
|
|
|
performance-based cash incentive opportunities, the ultimate value of which was based on the Companys performance relative to multiple metrics set forth in the Companys 2016 Management Incentive Scorecard
that were tied to the Companys Vision and key strategic initiatives;
|
|
|
|
discretionary cash bonus opportunities, the ultimate value of which was based on subjective determinations regarding the named executive officers individual performance for 2016;
|
|
|
|
long-term equity incentive opportunities in the form of service-based, time-vesting restricted stock units (RSUs), the ultimate value of which will be based on the Companys stock price performance over
multiple years; and
|
|
|
|
long-term performance-based equity incentive opportunities in the form of performance-based RSUs, the ultimate value of which will be based on the Companys
pre-tax
Return on
Invested Capital (ROIC) performance over a three-year period, a metric chosen because of its significance to the Companys Shareholders.
|
Retention.
To address retention, the Committee seeks to balance external market competitive
considerations and internal equity. The Committee believes that, to be competitive, executive compensation should be within a reasonable range of median compensation, based on available market data both within and outside of the airline industry.
The Committee uses this information as a reference point along with its considerations of relative named executive officer roles, responsibilities, performance, and tenure. For purposes of this Compensation Discussion and Analysis, references to the
adequacy, appropriateness, and competitiveness (and similar references), as well as comparisons to market, should be interpreted in the context of this Committee objective. The market data considered by the Committee is discussed below under
Role of Independent Compensation Consultant; Benchmarking; Market Data.
The charts on the following page show each element of compensation as a percentage of
total compensation for 2016 and demonstrate the Committees commitment to
pay-for-performance,
with an emphasis on equity.
20
|
|
|
Compensation Elements as a Percentage of 2016 Total Compensation*
|
|
|
Gary C. Kelly
|
|
|
|
|
Tammy Romo
|
|
|
|
|
Michael G. Van de Ven
|
|
|
|
|
Robert E. Jordan
|
|
|
|
|
Jeff Lamb
|
|
|
|
*Amounts include compensation to the extent required to be reported in the Summary Compensation Table
pursuant to the compensation disclosure rules of the SEC.
|
21
|
Summary of 2016 Executive Compensation
2016 Base Pay.
For
the fifth year in a row, in accordance with Mr. Kellys wishes, his base pay of $675,000 did not increase. In addition, neither Ms. Romo nor Mr. Jordan received a base pay increase during 2016, and Mr. Van de Ven and
Mr. Lamb received only nominal increases of approximately one and two percent, respectively.
Additional information regarding 2016 base pay is provided below under Determination of 2016 Executive
Compensation; Analysis of Individual Compensation Elements Salary.
2016 Short-Term Incentive Compensation
. For 2016, 80 percent of each of the named
executive officers short-term incentive compensation opportunity was based on the Companys performance relative to multiple
pre-established
performance metrics set forth in the Companys
Management Incentive Scorecard. The related amounts received by the named executive officers are disclosed in the
Non-Equity
Incentive Plan Compensation column of the Summary
Compensation Table and were based on Company performance at 112.6 percent of target. The specific performance metrics, targets, and performance results are disclosed below under Determination of 2016 Executive Compensation; Analysis of
Individual Compensation Elements Short-Term Incentive Compensation. Each of the named executive officers also received a subjectively-determined discretionary bonus, based on individual performance and contributions to the
Companys results. The related amounts received by the named executive officers are disclosed in the Bonus column of the Summary Compensation Table and are also discussed in more detail below under Determination of 2016
Executive Compensation; Analysis of Individual Compensation Elements Short-Term Incentive Compensation.
For purposes of this Compensation Discussion and Analysis, the terms short-term incentive and short-term
incentive compensation are used to describe the amounts disclosed in both columns.
2016 Long-Term Incentive Compensation.
The Committee believes that equity
should constitute a strong component of overall compensation. For 2016, Mr. Kellys equity value increased to 600 percent of base compared with 560 percent of base in 2015, which increased his overall compensation opportunity in
the area with respect to which the Committee believed he was most significantly under market. With the exception of Ms. Romo, as a percentage of base, the value of the other named executive officers 2016 equity awards did not increase
compared with 2015, and ranged from approximately 360 percent of base to approximately 400 percent of base. Ms. Romos equity value increased to approximately 300 percent of base for 2016 compared with approximately
244 percent of base for 2015 to reflect her promotion from Senior Vice President to Executive Vice President subsequent to her 2015 grants. Consistent with the Committees focus on performance-based compensation, every named executive
officers performance-based RSUs increased as a percentage of total RSUs.
Additional detail regarding the 2016 equity grants is included below under Determination of 2016 Executive
Compensation; Analysis of Individual Compensation Elements Long-Term Incentive Compensation.
|
22
COMPENSATION COMMITTEES CONSIDERATION OF 2016
SAY-ON-PAY
VOTE
At its 2016 Annual Meeting of Shareholders,
votes in favor of approving the Companys named executive officer compensation constituted close to 95 percent of the shares voted either for or against the proposal. The Committee interpreted the results of the Companys 2016
say-on-pay
vote as a continued endorsement of (i) the Committees overall compensation philosophy and structure, (ii) the Companys executive pay levels
generally, and (iii) the Committees justifications for its individual executive compensation decisions.
ROLE OF INDEPENDENT COMPENSATION CONSULTANT; BENCHMARKING; MARKET DATA
The Committee receives information and input from its independent compensation consultant regarding, among other matters, market data and
competitive compensation trends and practices. With respect to 2016, the data provided by the consultant included reviews of the named executive officers base salary, annual bonus/short-term incentive compensation, total cash compensation
(base salary plus annual bonus/short-term incentive compensation), long-term incentive compensation (equity), and total direct compensation (total cash compensation plus long-term incentive compensation) relative to similar positions reported in the
databases below.
|
|
|
General Industry
Comparable
Companies
|
|
Towers Watson 2015 General Industry Executive Compensation Database.
From this database, the compensation consultant identified 49 companies that were considered to be representative of consumer-oriented businesses and/or
transportation services. (1)
|
General Industry
Total
Sample
|
|
Towers Watson 2015 General Industry Executive Compensation Database (465 Companies).
|
Airline Data
|
|
American Airlines Group, Inc., Delta Air Lines,
Inc., and United Continental Holdings, Inc. (2)
|
(1)
|
Where possible, the data was adjusted by the independent consultant to take into account differences in company size.
|
(2)
|
The Committee focused on these three airlines as the most relevant (
e.g.,
from a competitive hiring standpoint). The airline data was based on 2014 compensation data reported in these airlines 2015 proxy
statements and was not aged. In addition, the data was discounted to take into account differences in revenues between these airlines and the Company.
|
In composing the Companys peer groups, the Committees independent consultant places principal focus on comparable companies in
consumer-oriented businesses (General Industry Comparable Companies). The Committee views this group as representative of organizations that are relevant for monitoring the adequacy of the Companys executive pay levels and evaluating
company performance. Other airlines are constituents of this group, and the independent consultant calls out practices of select airlines for additional context on key positions. In addition, to provide broader market context, the independent
consultant provides the Committee with data derived from other transportation and general industry companies.
In referencing market data,
the Committee did not directly target any individual named executive officers compensation; rather, the market data provided context for the Committees judgment as to what it considered to be appropriate pay. The Committee does not
directly target named executive officer compensation to specific market data because (i) the market data is not necessarily comprehensive; and (ii) in particular with respect to airlines, the data does not always include good matches to
the Companys executive positions, which in many cases involve a unique combination of responsibilities that do not correspond directly to the roles that are included in available market data. In addition, because of the limited amount of
airline industry data, the Committee deems it advisable to reference the broader compensation data provided by general industry surveys, which also serve as indicators of the named executive officers potential value to other organizations who
might seek to hire them.
23
INTERNAL EQUITY; ROLE OF MANAGEMENT
Because approximately 83 percent of the Companys Employees are subject to collective bargaining agreements that govern their
compensation structure (these Employees are referred to as contract Employees), these negotiated agreements factor significantly into Company-wide compensation decisions, including executive compensation decisions. In approaching
executive compensation decisions, the Committee seeks to balance market-appropriate levels of compensation and internal equity. The Committee considers internal equity by assessing the roles, responsibilities, and levels of accountability of the
named executive officers relative to (i) each other; (ii) other officers; and (iii) other Employees, including contract Employees. The Committee also considers a named executive officers tenure in his or her current role.
For
purposes of this Compensation Discussion and Analysis, references to internal equity should be interpreted in this context.
At the Committees request:
|
|
|
Mr. Kelly and Mr. Lamb (who oversees the Companys People Department) (i) provide regular input regarding overall compensation designs and recommendations presented to the Committee and
(ii) review with the Committee the relative roles and responsibilities of the Companys other executive officers;
|
|
|
|
Mr. Kelly reviews with the Committee the relative performance of the Companys other executive officers and provides input with respect to their compensation generally and their compensation relative to each
other; and
|
|
|
|
Mr. Lamb works with the Committee Chair and the Committees independent consultant to provide market data and recommendations with respect to Mr. Kellys compensation.
|
The input from Mr. Kelly and Mr. Lamb not only assists the Committee with its compensation determinations, it serves a valuable
purpose in connection with the Companys succession planning. Although the Committee is not obligated to accept any of Mr. Kellys recommendations, the Committee gives considerable weight to any such recommendations because of
Mr. Kellys ability to directly observe, on a
day-to-day
basis, each officers contributions and performance. In addition, Mr. Kelly regularly
travels to visit with Employees at all levels in varying locations and is able to relay Employee concerns that he believes should be considered by the Committee as it addresses matters of internal equity. Additional information regarding
managements role with respect to executive compensation determinations is included below.
DETERMINATION
OF 2016 EXECUTIVE COMPENSATION; ANALYSIS OF INDIVIDUAL COMPENSATION ELEMENTS
Set forth below is a discussion of (i) each of the
elements of the Companys compensation program for all
non-contract
Employees, including the Companys named executive officers; (ii) the purposes and objectives associated with each element;
(iii) the manner in which each element fits within the Companys overall compensation objectives and decisions with respect to other elements; (iv) the Committees determinations regarding the amounts paid or to be paid to each
of the named executive officers for 2016; and (v) where applicable, the involvement of the Committees independent consultant and members of management in compensation decisions.
Salary
Objective of Base Pay.
The Committees objective with respect to base pay is to provide a reasonable base level of monthly income relative to an Employees job responsibilities, skills, tenure with the Company, performance, and the
market for the Employees skills (both within and outside of the airline industry).
Approach to 2016
Base Pay; Individual Base Pay Determinations for the Named Executive Officers and Pay Relative to Each Other.
Notwithstanding market data that would support an increase in Mr. Kellys base pay, in accordance with Mr. Kellys
wishes, he did not receive an increase in base pay for 2016. Likewise, Ms. Romo and Mr. Jordan did not receive any increase in base pay during 2016, and Mr. Van de Ven and Mr. Lamb only received nominal increases of one and two
percent, respectively.
24
Short-Term Incentive Compensation
Objectives
of Short-Term Incentive Compensation
.
The Committee believes short-term incentive
compensation opportunities are necessary to attract and retain Employees at the manager level and above, in particular at the officer level, given the prevalence of performance-based compensation arrangements in the market in which the Company
competes for executive talent. Short-term incentive compensation opportunities are also provided at these levels generally to (i) reflect the additional time, responsibility, and accountability associated with these positions, in particular
senior executive positions; (ii) create total compensation opportunities that are within a reasonable range of median in the marketplace; and (iii) further incentivize management to contribute to the Companys overall annual
performance.
Approach to 2016 Short-Term Incentive Compensation.
General.
The Committee provides a structured and transparent approach to the named executive officers
short-term incentive opportunities by providing most of their opportunities pursuant to the Companys Senior Executive Short Term Incentive Plan (the Incentive Plan), which provides for the payment of cash bonuses based on
performance measures and targets that are
pre-established
by the Committee.
For 2016, (i)
80 percent of each named executive officers short-term incentive compensation opportunity was pursuant to the Incentive Plan and was therefore dependent on Company performance relative to
pre-established
metrics; and (ii) 20 percent was based on the Committees subjective and discretionary determinations regarding the named executive officers individual contributions to Company
performance. Poor individual performance could negate any compensation that might otherwise have been earned under the Incentive Plan based on Company performance.
Executive officers were presented with a target short-term incentive opportunity (applicable to both the Incentive Plan opportunity and the
discretionary bonus opportunity) equal to a percent of their base salary in accordance with the table below, with differences in percentages reflecting differences in levels of responsibility.
|
|
|
|
|
Target Short-Term Incentive Opportunity
(Percentage of Base Salary)
|
Chief Executive Officer
|
|
150%
|
Executive Vice President
|
|
120%
|
Senior Vice President
|
|
100%
|
The total short-term incentive payout for each named executive officer could range between zero and 150 percent of the named executive officers
target bonus opportunity depending on performance (both Company and individual).
Performance-Based Short-Term
Incentive Compensation Opportunities under the Incentive Plan and Related Payouts.
Pursuant to the Incentive Plan, the Committee established 2016 performance metrics and targets based on the Companys 2016 Management
Incentive Scorecard (the Scorecard). The Scorecard included ten specific metrics within four general Scorecard standards. The general Scorecard standards, each of which were weighted, corresponded with (i) the Companys
publicly stated Vision to become the worlds most loved, most flown, and most profitable airline; and (ii) the Companys related key strategic initiatives. The Company performed at 112.6 percent of target for 2016, compared with
Company performance at 114.0 percent of target for 2015. This resulted in year-over-year decreases in the amounts shown for Messrs. Kelly, Van de Ven, and Jordan in the
Non-Equity
Incentive Plan
Compensation Column of the Summary Compensation Table. Ms. Romos payout increased because of her promotion from Senior Vice President to Executive Vice President and the related increase in her target short-term incentive opportunity from
100 percent of target for 2015 to 120 percent of target for 2016. Mr. Lambs nominal increase in payout correlated with his nominal increase in base pay.
25
The specific metrics, targets, and weightings established with respect to the Scorecard, as well
as the results and payout percentages with respect to 2016, are set forth in the table below.
2016 Management Incentive Scorecard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scorecard Standards
|
|
|
Strategic Initiatives
(25.00%)
|
|
Metric
Weight
|
|
|
Target Range (Subjective:
0-150%)
|
|
Component Payout
Percentage
|
New Reservation System
|
|
|
6.25%
|
|
|
Initiative Performing Better Than Target
|
|
150.0%
|
Reliability
|
|
|
6.25%
|
|
|
Initiative Performing Better Than Target
|
|
116.7%
|
Hospitality
|
|
|
6.25%
|
|
|
Initiative Performing On Target
|
|
100.0%
|
Infrastructure Construction Programs
|
|
|
6.25%
|
|
|
Initiative Performing Better Than Target
|
|
150.0%
|
Most Loved
(16.66%)
|
|
|
|
|
Target Range
|
|
Result
|
|
Component
Payout
Percentage
|
|
Metric
Weight
|
|
|
0%
Threshold
|
|
50%
Award
|
|
75%
Award
|
|
100%
Target
|
|
150%
Max
|
|
|
Net Promoter Score(1)
|
|
|
8.33%
|
|
|
62.0%
|
|
64.0%
|
|
64.5%
|
|
65.0%
|
|
68.0%
|
|
69.3%
|
|
150.0%
|
Voluntary Turnover(2)
|
|
|
8.33%
|
|
|
3.05%
|
|
2.95%
|
|
2.85%
|
|
2.80%
|
|
2.60%
|
|
2.44%
|
|
150.0%
|
Most Flown
(8.33%)
|
|
|
|
|
|
Ontime Performance(3)
|
|
|
8.33%
|
|
|
78.0%
|
|
80.5%
|
|
81.0%
|
|
81.5%
|
|
83.5%
|
|
80.8%
|
|
65.0%
|
Most Profitable
(50.00%)
|
|
|
|
|
|
Total Operating
Revenue
($ billions)
|
|
|
16.66%
|
|
|
20.24
|
|
20.45
|
|
20.66
|
|
20.87
|
|
21.29
|
|
20.43
|
|
43.3%
|
Cost per available seat mile (CASM), excluding fuel and profitsharing
(Non-GAAP)
(Cents)(4)
|
|
|
16.66%
|
|
|
8.19
|
|
8.15
|
|
8.13
|
|
8.11
|
|
8.01
|
|
8.10
|
|
106.1%
|
Return on Invested Capital (ROIC)(5)
|
|
|
16.66%
|
|
|
15.0%
|
|
17.5%
|
|
20.0%
|
|
25.0%
|
|
30.0%
|
|
30.0%
|
|
150.0%
|
|
|
|
|
|
|
Total Payout for Company Performance
|
|
112.6%
|
(1)
|
(Total Promoters-Total Detractors) divided by Total Survey Participants.
|
(2)
|
Total Voluntary Terminations divided by Total Number of Employees Available for Termination.
|
(3)
|
Number of scheduled flights that arrived less than 15 minutes after scheduled arrival time divided by total scheduled flights.
|
(4)
|
Calculated as operating expenses (excluding fuel and oil expense, profitsharing expense, and special items*), divided by available seat miles of 148.5 billion, which is the average cost to fly an aircraft seat
(empty or full) one mile.
|
(5)
|
ROIC is measured before taxes and excludes special items*.
|
*Additional information regarding special items is
included in the accompanying reconciliation tables. See Note Regarding Use of
Non-GAAP
Financial Measures at the end of this Compensation Discussion and Analysis.
26
The Committee believes the Scorecard provided appropriate metrics and targets for use under the
Incentive Plan because (i) the Scorecard metrics and targets directly tie to the Companys Vision and key strategic initiatives; (ii) the Scorecard creates a multi-dimensional mechanism to determine overall short-term incentive
funding based on Company performance, so that factors that are deemed significant to the industry and operational performance may be considered in addition to financial measures; (iii) there is a strong correlation between the Scorecard and the
manner in which the Company manages and measures its own performance generally, as the goals are highly relevant to the Company, its Shareholders, its Customers, and its Employees; (iv) the Scorecard has been in existence and communicated in
varying forms for over a decade and therefore incorporates standards with which Employees were already familiar and to which Employees are likely to respond; (v) the Scorecard provides visibility to the Committee regarding what management
communicates to its Employees as important; (vi) the Scorecard enables the Committee to take into account the Chief Executive Officers specific views regarding the areas within the Scorecard that require the most focus; (vii) the use
of a multi-dimensional guide for short-term incentives mitigates the risk that can be created when financial results are the only drivers of incentive payments; and (viii) individualized objectives can be customized based on applicable goals
within the Scorecard.
Discretionary Bonus Determinations for the Named Executive Officers and Pay Relative to
Each Other; Use of Discretion.
The Committee approved individual named executive officer discretionary bonus amounts based on (i) the named executive officers individual contributions to the Companys performance (including their
individual performance relative to the factors covered by the Scorecard); (ii) the nature and extent of the Companys accomplishments; (iii) input from the Chief Executive Officer with respect to the other named executive officers;
(iv) individual contributions, roles, and responsibilities, which, by their nature, can involve subjective assessments; and (v) other factors the Committee deemed significant.
The Committee believed, and continues to believe, that it is appropriate and in the best interests of the Company for the Committee to
ultimately retain some discretion to use its common sense in determining a portion of the named executive officers short-term incentive compensation based on a subjective view of individual performance. The Committee believes that retaining
this discretion provides the Company and/or the Committee with the flexibility to:
|
|
|
consider a variety of factors in assessing individual contributions depending on the nature of an individuals roles and responsibilities within the Company;
|
|
|
|
evaluate individual goals and payouts in light of unexpected events or changes in the industry and related changes in business strategies, thereby minimizing the risk that individuals will continue to focus on areas
that become less relevant just to achieve a bonus payout;
|
|
|
|
reward individuals for the Companys superior operational and financial performance relative to its peers during periods when the Company and its peers must react to adverse events that are out of the
Companys control (
e.g.
, fuel costs, economic fluctuations, competitor actions, weather events, terrorist threats, and other events that can influence the Companys business plan and strategies); and
|
|
|
|
re-focus
Employee energy when an unanticipated opportunity arises that could lead to long-term benefits and reward related individual contributions.
|
In determining the size of the named executive officers discretionary bonuses, the Committee took into account the factors discussed
below for each named executive officer. In determining the size of these bonuses relative to other Employees of the Company, the Committee took into account the fact that these are the individuals who, because of their roles and responsibilities,
have the ability to most directly impact the Companys overall results, as well as the most accountability for the Companys results.
Chief Executive Officer.
Mr. Kelly received a discretionary bonus equal to 112.6 percent of target. The Committee
deemed this appropriate taking into consideration Mr. Kellys strong and strategic overall leadership with respect to the Companys Vision and, in particular, his contributions with respect to each of the Companys strategic
initiatives, its strong ROIC and CASM results, its improved Net Promoter Score, and its completion of labor contracts with five workgroups.
27
Other Named Executive Officers
.
Each of the other named executive officers also
received a discretionary bonus equal to 112.6 percent of target, reflecting their coordinated contributions to the Companys 2016 performance. In assessing the individual performance of the other named executive officers, the Committee
relied heavily on Mr. Kellys and Mr. Lambs input regarding the relative roles, scope of responsibilities, and performance of each of these officers with respect to the Companys 2016 results, as well as their respective
contributions to the Companys Vision and initiatives, including, among others, (i) Ms. Romos overall contributions with respect to the Companys strategic planning and, in particular, her strategic contributions with
respect to the Companys financial results and financial planning, its capital allocation, and its fleet planning and modernization; (ii) Mr. Van de Vens contributions with respect to the Companys operational improvements
and improved Net Promoter Score and Reliability, its fleet planning and modernization, and its completion of labor contracts with five workgroups; (iii) Mr. Jordans contributions with respect to the Companys Reliability and
Hospitality initiatives and improved Net Promoter Score, and the Companys progress towards its move to a single reservation system; and (iv) Mr. Lambs contributions with respect to the Companys infrastructure construction
programs, its Employee enhancements and improvements in voluntary turnover rate, and its technology deliveries, including its progress towards its move to a single reservation system.
Long-Term Incentive Compensation
Objectives of Equity Compensation.
Equity awards are used by the Company (i) to serve as a
performance-based method to bring executive compensation closer to market median; (ii) to attract and retain Employees; (iii) as an incentive and reward for achievement of the Companys long-term objectives; and (iv) to further
align the interests of the Companys Employees with those of its Shareholders. Because the Company is subject to regulatory limits on the number of shares it may issue pursuant to awards under equity plans, equity awards are limited to senior
management level Employees and to members of the Board of Directors. The Committee, with the input of its independent consultant, has concluded that senior management positions are currently the positions with respect to which equity can most
effectively serve as an attraction and retention mechanism. In addition, equity serves as a mechanism to further align senior managements compensation with the Companys overall business results. With respect to other Employees, the
Company places more emphasis on cash compensation.
Approach to Equity Compensation.
The Committee
believes that equity should constitute a strong component of overall compensation. It applies its judgment in determining the size of long-term incentive (equity) awards, which involves informing itself of practices and levels of equity pay in the
market for a given position. Based on this information, the Committee has established the size of equity awards as a percentage of base pay, having taken into account internal equity, prior year awards, total direct compensation for each individual,
and an individuals specific performance.
During 2016, the Committee granted equity awards in the form of service-based, time-vesting
RSUs and performance-based RSUs that are settleable in shares of common stock. As shown in the Grants of Plan-Based Awards in Fiscal 2016 table, the ultimate value of each of the named executive officers performance-based RSUs will be based on
the Companys average ROIC over a three-year period. The number of performance-based RSUs and the number of shares of the Companys common stock to be issued, if any, as of the vesting date will be based on the achievement of the targets
below. In addition, the percentage of performance-based RSUs that will vest will be interpolated between the targets below only after a minimum performance level has been achieved.
28
|
|
|
|
|
|
|
Performance Period
|
|
Vesting Date
|
|
ROIC in Performance Period(1)
|
|
Number of Performance-
Based RSUs Vesting and
Settleable in Common Stock
as of the Vesting Date
|
January 1, 2016
Through
December 31, 2018
|
|
February 21, 2019(2)
|
|
13.0% or less
|
|
Grant Amount x 0%
|
|
|
16.0%
|
|
Grant Amount x 100%
|
|
|
20.0%
|
|
Grant Amount x 150%
|
|
|
23.0%
|
|
Grant Amount x 175%
|
|
|
25.0% or greater
|
|
Grant Amount x 200%
|
(1)
|
See Note Regarding Use of
Non-GAAP
Financial Measures at the end of this Compensation Discussion and Analysis.
|
(2)
|
Vesting is subject to the individuals continued service as an Employee, Board member, or advisor through the vesting date.
|
Individual Equity Determinations for the Named Executive Officers.
Chief Executive Officer
.
During 2016, the Committee granted long-term equity incentive awards to Mr. Kelly with a
total grant date fair value of $4,049,992, representing an increase from 560 percent of his base pay in 2015 to 600 percent of base for 2016, which resulted in a 7.1 percent year-over-year increase in value. In approving this increase, the Committee
considered retention and referenced market data, which indicated that Mr. Kellys total compensation was most significantly under market with respect to long-term incentives. Reflecting the Committees commitment to performance-based
compensation, Mr. Kellys performance-based RSUs increased as a percentage of total RSUs, from 30 percent of total RSUs in 2015 to 35 percent in 2016.
Other Named Executive Officers.
During 2016, with the exception of Ms. Romo, each of the other named executive officers received
only nominal increases in their total long-term incentive opportunities, reflecting the fact that grants were based on a percentage of base pay; however each received an increase in performance-based RSUs as a percentage of total RSUs. As with the
Chief Executive Officers grants, the Committee considered retention and referenced market data as a guide for determining an appropriate relative value for these individuals long-term incentive awards, with Ms. Romos historic
equity awards being particularly low relative to market. As a result of Ms. Romos promotion from Senior Vice President to Executive Vice President, her equity award as a percentage of base pay increased from 244 percent of base in
2015 to 300 percent of base in 2016.
Tax Considerations; Timing of Grants.
Section 162(m)
(Section 162(m)) of the Internal Revenue Code of 1986, as amended (the Internal Revenue Code), generally limits to $1,000,000 the federal tax deductibility of compensation paid to certain named executive officers, including
compensation deemed to be received upon vesting of RSUs. Section 162(m) provides an exception to such limitation for certain performance-based compensation (the 162(m) Exception). The Companys equity awards are granted pursuant to
the Companys Amended and Restated 2007 Equity Incentive Plan, which has been designed to satisfy the conditions of such exception to the extent deemed necessary, feasible, and in the best interests of the Company.
Retirement Benefits
Southwest offers
tax-qualified
401(k) and profit sharing plans to all eligible Employees, including the
named executive officers. Southwests 401(k) and profit sharing plans are intended to be competitive in the market and include five-year vesting provisions that are designed to contribute to Employee loyalty and retention. Southwests
401(k) plans provide for a
dollar-for-dollar
match on Employee contributions, subject to limits specified by the Board, applicable collective bargaining agreements, and
the Internal Revenue Code and applicable Treasury Regulations.
29
Southwests profit sharing plan provides for an annual Company contribution to Employee
accounts equal to an amount determined by the Board in its sole discretion. Historically, including for 2016, this has been a uniform percentage of each Employees compensation up to an amount that is cumulatively equal to 15 percent of
the Companys operating profit (as defined in the plan) for the year. For all Employees, other than the Pilot work group, the Company will allocate 10 percent of each Employees eligible compensation as a contribution to the profit
sharing plan and will pay approximately 3.2 percent of the Employees eligible compensation in cash. Pursuant to the terms of their collective bargaining agreement, Pilots will receive approximately 13.2 percent of their eligible
compensation as a contribution to the profit sharing plan. The profit sharing plan is intended to serve as an incentive and reward to Employees because the plan is based on overall Company profitability. The numbers in the All Other
Compensation column of the Summary Compensation Table reflect fluctuations in profit sharing contributions based on fluctuations in the Companys profitability for the three years covered by the table.
The Committee has not historically considered the value of its retirement plans when establishing other compensation elements and amounts for
the named executive officers because of the broad-based nature of these benefits and the relatively small portion of total executive compensation represented by them. Nevertheless, in 2017, the Committee approved a cash payment to all of the
Companys officers equal to Company contributions they would have received in the profit sharing plan for 2016, but for limits set forth in Section 401(a)(17) of the Internal Revenue Code. The Committees decision aligned this officer
benefit with the benefits to which the Companys Pilots are entitled pursuant to their new collective bargaining agreement, as well as Mr. Kellys right to the excess amount pursuant to his individual deferred compensation arrangement
discussed below.
Nonqualified Deferred Compensation
Southwest offers nonqualified deferred compensation arrangements to Employees who are subject to certain limits established by the Internal
Revenue Code with respect to qualified plan contributions. Because these arrangements, by their nature, are tied to the qualified plan benefits, they have not been considered when establishing salary and bonus elements and amounts. The
Companys excess benefit plan is available to Employees with amounts that cannot be contributed to the 401(k) or profit sharing plans due to limits under Section 415(c) of the Internal Revenue Code. Named executive officers who do not elect to
participate in the Companys excess benefit plan receive payment in the form of cash equal to the contribution the executive would have otherwise been entitled to receive pursuant to the terms of the excess benefit plan. The cash payment is
made at the same time as the named executive officer would have otherwise received a contribution to the excess benefit plan. The excess benefit plan is discussed in more detail below under Nonqualified Deferred Compensation in Fiscal
2016.
The Company has also adopted the Deferred Compensation Plan for Senior Leadership and
Non-Employee
Members of the Southwest Airlines Co. Board of Directors (the 2015 Deferred Compensation Plan). Pursuant to such plan, officers of the Company who are not eligible to participate in
the Companys 2005 Deferred Compensation Plan for Pilots may, prior to each plan year, irrevocably elect to defer a portion of their compensation otherwise payable to them with respect to such plan year; provided that they have also irrevocably
elected to contribute to the Companys 401(k) plan the lesser of (i) the maximum elective deferral permitted by the Internal Revenue Code or (ii) the maximum elective contributions permitted under the terms of the 401(k) plan with
respect to such plan year. In addition, pursuant to the 2015 Deferred Compensation Plan,
non-Employee
members of the Board may, prior to each plan year, irrevocably elect to contribute all or a portion of
their annual cash retainer fees otherwise payable to them with respect to such plan year.
Southwest also maintains two nonqualified
deferred compensation plans that are available to Pilots only, pursuant to the terms of their collective bargaining agreement. In addition, Mr. Kelly has an individual deferred compensation arrangement pursuant to which the Company credits to
Mr. Kellys account an amount equal to any Company contributions that would have otherwise been made on his behalf to the Companys qualified plans, but that exceed the limits under Sections 415(c) and 401(a)(17) of the Internal
Revenue Code for qualified plans. Mr. Kellys deferred compensation bears interest at ten percent, the interest rate established in 1982 when the first arrangement of this type was put into place with respect to the Companys Chairman
Emeritus, Mr. Herbert D. Kelleher. Mr. Kellys deferred compensation arrangement is discussed in more detail below under Nonqualified Deferred Compensation in Fiscal 2016.
30
Change-in-Control
Arrangements
The Company has established
change-in-control
arrangements for
all of its Employees for the purpose of offering protection in the event of a termination of employment following a
change-in-control.
All officers of the Company,
including the Chief Executive Officer and the other named executive officers, are parties to the Companys Executive Service Recognition Plan Executive Employment Agreements. In general, in the event of termination subsequent to a
change-in
control, these agreements provide for a maximum incremental benefit approximately equal to (i) one year of salary and (ii) two years of bonus. In addition, the Companys equity plans provide
for acceleration of any unvested stock options (but not RSUs) at the time of a
change-in-control.
The terms of these arrangements are discussed in detail below under
Potential Payments Upon Termination or
Change-in-Control.
The remainder of the Companys Employees are provided
change-in-control
benefits through the Companys Change of Control Severance Pay Plan (to the extent they are not otherwise beneficiaries of an enforceable contract
with the Company providing for severance payments in the event of a reduction in force or furlough).
The Companys
change-in-control
arrangements were all put in place in the 1980s and do not have any impact on the Companys other compensation elements because any incremental benefit
from these arrangements is not triggered unless there is a termination of employment following a
change-in-control.
The Company believes it is appropriate to keep these
arrangements in place, in particular for the Companys officers, because the Company believes they serve to (i) continue to attract and retain well-qualified executive personnel and (ii) enhance the ability of the Company to retain
officers to carry on the Companys business as usual in the event of any real or rumored possibilities of a
change-in-control
of the Company. In particular, with
respect to the Chief Executive Officer, a
change-in-control
arrangement is intended to provide some assurance that, should the Company receive proposals from third
parties with respect to its future, he can, without being influenced by the uncertainties of his own situation, (i) assess such proposals, (ii) formulate an objective opinion as to whether or not such proposals would be in the best
interests of the Company and its Shareholders, and (iii) take any other action regarding such proposals as the Board might determine to be appropriate.
Perquisites and Other Benefits
All of the Companys Employees and their immediate family members are eligible to fly free on Southwest Airlines on a standby basis, and
officers of the Company and their spouses and dependent children are eligible to fly free on Southwest Airlines on a reserved seat basis. In addition, during 2016, officers of the Company were entitled, at their election, to an annual deposit of
225,000 Rapid Rewards points to their Rapid Rewards account. During 2016, the Companys officers were also eligible, at their election, to participate in an executive health program that is part of the Southwest Airlines Co. Welfare Benefit
Plan.
The Committee believes the differences in the rights of the Companys officers compared to the rights of other Employees are
justified based on the additional time, responsibilities, and accountability associated with the officer positions. In addition, the differences reflect a cost/benefit analysis associated with whether or not to provide officer level flight
privileges to all Employees. The named executive officers, like the Companys other contract and
non-contract
Employees, also participate in various Employee benefit plans, including medical and dental
care plans; life, accidental death and dismemberment and disability insurance; and vacation and sick time. These elements of compensation are not taken into account when establishing salary and bonus elements and amounts.
Significant Corporate Governance and Compensation Policies and Practices
Clawback Policy.
The Committee has adopted a clawback policy, pursuant to which, to the extent permitted by
governing law, the Company may seek to recoup certain incentive-based compensation in the event the Company is required to restate its publicly reported financial statements due to material noncompliance with any financial reporting requirement
under the securities laws as a result of misconduct.
Share Ownership Guidelines
. The Committee has
adopted share ownership guidelines for the Companys executive officers and Board members. The Companys Chief Executive Officer is expected to meet a share ownership level with a value equal to or exceeding five times his annual base
salary, and all other
31
executive officers are expected to meet a share ownership level with a value equal to or exceeding three times their annual base salary. Members of the Board are expected to meet a share
ownership level with a value equal to or exceeding three times their annual cash retainer for Board services. Share ownership is defined to include shares of the Companys common stock (including shares held in the Companys
profit sharing plan), unvested RSUs, and performance shares held pursuant to the Companys Outside Director Incentive Plan. The Companys executive officers are expected to meet the stated ownership levels within five years of becoming an
executive officer. Members of the Board are expected to meet the stated ownership level within three years of becoming a Board member. The Committee has the authority to monitor and adjust these ownership guidelines as it deems appropriate from time
to time. All of the Companys executive officers, including the named executive officers, and all of the Companys Board members meet the requirements of the Companys share ownership guidelines. In addition to the Companys
share ownership guidelines, (i) the Companys Insider Trading Policy prohibits Employees from entering into hedging transactions with respect to the Companys securities; and (ii) the Companys Blackout and
Pre-Clearance
Procedures, which supplement its Insider Trading Policy, prohibit the Companys officers and Board members from holding Company securities in a margin account or pledging Company securities as
collateral for a loan.
N
OTE
R
EGARDING
U
SE
OF
N
ON
-GAAP
F
INANCIAL
M
EASURES
The Companys consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These GAAP financial statements include (i) unrealized
non-cash
adjustments and
reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging; and (ii) other charges and benefits the Company believes are
unusual and/or infrequent in nature and thus may not be indicative of its ongoing operational performance.
As a result, the Company also
provides financial information in this Compensation Discussion and Analysis that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides
supplemental
non-GAAP
financial information, which the Companys management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as
supplemental information to its GAAP results. The following measures are often provided, excluding special items, and utilized by the Companys management, analysts, and investors to enhance comparability of year-over-year results, as well as
to compare results to other airlines: Operating expenses,
non-GAAP,
excluding fuel and oil expense and profitsharing expense; and Operating income,
non-GAAP.
The
Companys
non-GAAP
financial results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts
-
all reflected within
fuel and oil expense in the period of settlement. Thus, fuel and oil expense on a
non-GAAP
basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging,
as it reflects the Companys actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected for both GAAP and
non-GAAP
purposes in the period of contract settlement. The Company believes these
non-GAAP
results provide a better measure of the impact of the Companys fuel hedges on
its operating performance and liquidity since they exclude the unrealized,
non-cash
adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to
derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within fuel and oil expense. This enables the Companys management, as well as investors and analysts, to consistently assess the Companys
operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to
varying calculations, and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.
Further information on (i) the Companys fuel hedging program, (ii) the requirements of accounting for derivative instruments,
and (iii) the causes of hedge ineffectiveness and/or
mark-to-market
gains or losses from derivative instruments is included in the Companys Annual Report on
Form
10-K
for the fiscal year ended December 31, 2016.
32
In addition, the Companys GAAP results in the applicable periods include other charges or
benefits that are deemed special items that the Company believes are not indicative of its ongoing operations and make its results difficult to compare to prior periods, anticipated future periods, or to its competitors results.
Financial measures identified as
non-GAAP
(or as excluding special items) have been adjusted to exclude special items. Special items include:
|
1.
|
Union contract bonuses recorded for certain workgroups. As the bonuses would only be paid at ratification of the associated tentative agreement and would not represent an ongoing expense to the Company, management
believes its results for the associated periods are more usefully compared if the impacts of ratification bonus amounts are excluded from results. Generally, union contract agreements cover a specified three- to five- year period, although such
contracts officially never expire, and the agreed upon terms remain in place until a revised agreement is reached, which can be several years following the amendable date;
|
|
2.
|
A noncash impairment charge related to leased slots at Newark Liberty International Airport as a result of the Federal Aviation Administration announcement in April 2016 that this airport was being changed to a
Level 2 schedule-facilitated airport from its previous designation as Level 3; and
|
|
3.
|
Lease termination costs recorded during 2016 as a result of the Company acquiring five of its Boeing
737-300
aircraft off operating leases, as part of the Companys strategic
effort to phase out its
737-300
aircraft from operations by the end of third quarter 2017 in the most economically advantageous manner possible. The Company had not budgeted for these early lease
termination costs, as they were subject to negotiations being concluded with the third party lessors. The Company recorded the fair value of the aircraft, as well as any associated remaining obligations to the balance sheet as debt.
|
Because management believes each of these items can distort the trends associated with the Companys ongoing
performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of these items in order to enhance consistency and comparativeness with
results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. The following measures are often provided, excluding special items, and utilized by the Companys management, analysts,
and investors to enhance comparability of year-over-year results, as well as to compare results to other airlines: Operating expenses,
non-GAAP,
excluding fuel and oil expense and profitsharing expense; and
Operating income,
non-GAAP.
The Company has also provided ROIC, which is calculated, in part,
using
non-GAAP
financial measures. The Company believes ROIC is a meaningful measure because it quantifies how well the Company generates operating income relative to the capital it has invested in its
business. Although ROIC is commonly used as a measure of capital efficiency, definitions of ROIC differ; therefore, the Company is providing an explanation of its calculation for ROIC (before taxes and excluding special items) in the
accompanying reconciliation tables (see Return on Invested Capital).
33
Reconciliation of Reported Amounts to
non-GAAP
Financial Measures
(unaudited) (in millions)
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
Total operating expenses, as reported
|
|
$
|
16,665
|
|
Deduct: Fuel and oil expense
|
|
|
(3,647)
|
|
Deduct: Union contract bonuses
|
|
|
(356)
|
|
Deduct: Asset impairment
|
|
|
(21)
|
|
Deduct: Lease termination expense
|
|
|
(22)
|
|
|
|
|
|
|
Total operating expenses,
non-GAAP,
excluding fuel and oil
expense
|
|
$
|
12,619
|
|
Deduct: Profitsharing expense
|
|
|
(586)
|
|
|
|
|
|
|
Operating expenses,
non-GAAP,
excluding fuel and oil
expense and profitsharing expense
|
|
$
|
12,033
|
|
|
|
|
|
|
|
|
Operating income, as reported
|
|
$
|
3,760
|
|
Deduct: Reclassification between Fuel and oil and Other (gains) losses, net, associated with
current period settled contracts
|
|
|
(5)
|
|
Deduct: Contracts settling in the current period, but for which gains and/or (losses) have been
recognized in a prior period (a)
|
|
|
(197)
|
|
Add: Union contract bonuses
|
|
|
356
|
|
Add: Asset impairment
|
|
|
21
|
|
Add: Lease termination expense
|
|
|
22
|
|
|
|
|
|
|
Operating income,
non-GAAP
|
|
$
|
3,957
|
|
|
|
|
|
|
(a) As a result of prior hedge ineffectiveness and/or contracts marked to market through the income statement.
34
Return on Invested Capital (in millions) (unaudited)
|
|
|
|
|
|
|
Year Ended
December 31,
2016
|
|
Operating income, as reported
|
|
$
|
3,760
|
|
Add: Union contract bonuses
|
|
|
356
|
|
Deduct: Net impact from fuel contracts
|
|
|
(202)
|
|
Add: Asset impairment
|
|
|
21
|
|
Add: Lease termination expense
|
|
|
22
|
|
|
|
|
|
|
Operating income,
non-GAAP
|
|
$
|
3,957
|
|
Net adjustment for aircraft leases (1)
|
|
|
111
|
|
Adjustment for fuel hedge accounting
|
|
|
(152)
|
|
|
|
|
|
|
Adjusted Operating income,
non-GAAP
|
|
$
|
3,916
|
|
|
|
Average invested capital (2)
|
|
$
|
12,152
|
|
Equity adjustment for hedge accounting
|
|
|
886
|
|
|
|
|
|
|
Adjusted average invested capital
|
|
$
|
13,038
|
|
|
|
Return on Invested Capital,
pre-tax
|
|
|
30.0%
|
|
(1) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with
estimated depreciation expense for those same aircraft).
(2) Average invested capital is an average of the five most recent quarter end balances of debt,
net present value of aircraft leases, and equity adjusted for hedge accounting.
35
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with the
Companys management. Based on such review and discussion and relying thereon, we have recommended to the Companys Board of Directors that the Compensation Discussion and Analysis contained in this Proxy Statement be included in the
Companys Annual Report on Form
10-K
for the year ended December 31, 2016, and in this Proxy Statement.
|
|
|
|
|
COMPENSATION COMMITTEE
|
|
|
|
|
David W. Biegler, Chair
|
|
|
J. Veronica Biggins
|
|
|
Grace D. Lieblein
|
|
|
Nancy B. Loeffler
|
|
|
John T. Montford
|
36
Summary Compensation Table
The following table provides information with respect to compensation earned by the named executive officers for the years ended
December 31, 2016, 2015, and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
Name and Principal Position
|
|
Year
|
|
Salary
($)(1)
|
|
Bonus
($)(2)
|
|
Stock
Awards
($)(3)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)(2)(4)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
($)(5)
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
Gary C. Kelly
|
|
2016
|
|
675,000
|
|
228,015
|
|
|
4,049,992
|
|
|
|
912,060
|
|
|
40,638
|
|
|
275,955
|
(6)
|
|
6,181,660
|
Chairman of the Board
& Chief Executive Officer*
|
|
2015
|
|
675,000
|
|
232,875
|
|
|
3,780,011
|
|
|
|
923,400
|
|
|
30,554
|
|
|
305,665
|
|
|
5,947,505
|
|
2014
|
|
675,000
|
|
224,775
|
|
|
2,999,886
|
|
|
|
904,770
|
|
|
23,561
|
|
|
174,793
|
|
|
5,002,785
|
|
|
|
|
|
|
|
|
|
Tammy Romo
|
|
2016
|
|
460,000
|
|
124,310
|
|
|
1,379,991
|
|
|
|
497,242
|
|
|
|
|
|
153,269
|
(7)
|
|
2,614,812
|
Executive Vice President
& Chief Financial Officer
|
|
2015
|
|
451,250
|
|
101,200
|
|
|
1,102,543
|
|
|
|
419,520
|
|
|
|
|
|
65,363
|
|
|
2,139,876
|
|
2014
|
|
426,250
|
|
103,200
|
|
|
666,691
|
|
|
|
384,248
|
|
|
|
|
|
47,604
|
|
|
1,627,993
|
|
|
|
|
|
|
|
|
|
Michael G. Van de Ven
|
|
2016
|
|
474,375
|
|
128,364
|
|
|
1,900,000
|
|
|
|
513,456
|
|
|
|
|
|
170,681
|
(8)
|
|
3,186,876
|
Chief Operating Officer*
|
|
2015
|
|
469,375
|
|
124,080
|
|
|
1,879,998
|
|
|
|
514,368
|
|
|
|
|
|
65,363
|
|
|
3,053,184
|
|
2014
|
|
465,000
|
|
139,500
|
|
|
1,325,237
|
|
|
|
498,629
|
|
|
|
|
|
47,604
|
|
|
2,475,970
|
|
|
|
|
|
|
|
|
|
Robert E. Jordan
|
|
2016
|
|
470,000
|
|
127,013
|
|
|
1,786,004
|
|
|
|
508,051
|
|
|
|
|
|
167,665
|
(9)
|
|
3,058,733
|
Executive Vice President
& Chief Commercial Officer
|
|
2015
|
|
469,375
|
|
112,800
|
|
|
1,785,971
|
|
|
|
514,368
|
|
|
|
|
|
65,363
|
|
|
2,947,877
|
|
2014
|
|
465,000
|
|
123,876
|
|
|
1,325,237
|
|
|
|
498,629
|
|
|
|
|
|
47,604
|
|
|
2,460,346
|
|
|
|
|
|
|
|
|
|
Jeff Lamb
|
|
2016
|
|
458,750
|
|
124,310
|
|
|
1,656,012
|
|
|
|
497,242
|
|
|
|
|
|
165,753
|
(11)
|
|
2,902,067
|
Executive Vice President
Corporate Services (10)
|
|
2015
|
|
448,750
|
|
124,200
|
|
|
1,620,038
|
|
|
|
492,480
|
|
|
|
|
|
65,363
|
|
|
2,750,831
|
*
|
For fiscal 2016, Mr. Kelly served as Chairman of the Board, President, & Chief Executive Officer; and Mr. Van de Ven served as Executive Vice President & Chief Operating Officer.
|
(1)
|
On an annualized basis, none of Mr. Kelly, Ms. Romo, or Mr. Jordan received a salary increase during 2016, remaining at an annual rate of $675,000; $460,000; and $470,000 respectively. On an annualized
basis, Mr. Lambs salary for 2016 was increased to $460,000 from $450,000 in 2015, aligning him with Ms. Romo, and Mr. Van de Vens salary for 2016 was increased to $475,000 from $470,000 in 2015. Differences between the
annualized numbers and the salaries reported in the table reflect the fact that salary adjustments were not in effect for the full year periods.
|
(2)
|
In accordance with the SECs rules, for each year, the amount disclosed reflects
bonuses/non-equity
incentive plan compensation earned with respect to such year, whether or
not actually paid in such year.
|
(3)
|
Awards consist of RSUs and performance-based RSUs that are settleable in shares of common stock. The values included in this column represent the grant date fair value of these awards computed in accordance with
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 determined without regard to forfeitures. The assumptions used in calculating the values for fiscal 2016 are included in Note 9 to
the Companys financial statements included in its Annual Report on Form
10-K
for the fiscal year ended December 31, 2016. With respect to the grants of performance-based RSUs, at the maximum number,
the value for Mr. Kelly would be $2,835,010; for Ms. Romo $1,104,008; for Mr. Van de Ven $950,000; for Mr. Jordan $893,021; and for Mr. Lamb $827,987.
|
(4)
|
Amounts consist of short-term incentive compensation earned based upon performance measures and targets established pursuant to the Companys Senior Executive Short Term Incentive Plan. This plan and the awards
earned thereunder are discussed in detail above under Compensation Discussion and Analysis.
|
(5)
|
Consists of above-market earnings on deferred compensation provided pursuant to a deferred compensation letter
agreement between the Company and Mr. Kelly. Mr. Kellys deferred
|
37
|
compensation arrangement is discussed in more detail above under Compensation Discussion and Analysis and below under Nonqualified Deferred Compensation in Fiscal 2016.
|
(6)
|
Includes (i) Company matching contributions to the Southwest Airlines Co. 401(k) Plan of $24,000; (ii) a Company contribution of $11,000 to be made to the Companys profit sharing plan in 2017, but that was earned
with respect to 2016; (iii) a cash amount of $8,430 (to be paid directly to Mr. Kelly in 2017), which amount was earned with respect to 2016 pursuant to the Companys profit sharing plan, representing the portion of the Companys profit
sharing paid in cash directly to participants; (iv) a Company contribution of $221,951 to be made pursuant to Mr. Kellys individual deferred compensation arrangement in 2017, but that was earned with respect to fiscal 2016; (v) free travel on
Southwest Airlines; (vi) an annual deposit of 225,000 Rapid Rewards points to Mr. Kellys Rapid Rewards account; and (vii) a Company-paid physical for Mr. Kelly.
|
(7)
|
Includes (i) Company matching contributions to the Southwest Airlines Co. 401(k) Plan of $24,000; (ii) a Company contribution of $11,000 to be made to the Companys profit sharing plan in 2017, but that was
earned with respect to 2016; (iii) a cash amount of $8,430 (to be paid directly to Ms. Romo in 2017), which amount was earned with respect to 2016 pursuant to the Companys profit sharing plan, representing the portion of the
Companys profit sharing paid in cash directly to participants; (iv) a cash amount of $15,500 (to be paid directly to Ms. Romo in 2017), which amount was earned with respect to 2016 pursuant to the Companys profit sharing plan,
but could not be contributed to the profit sharing plan because of Internal Revenue Service (IRS) limits on amounts that may be contributed to
tax-qualified
plans; and (v) a cash amount of
$94,339 (to be paid directly to Ms. Romo in 2017), which amount was earned with respect to 2016, equal to the Companys applicable profit sharing contribution rate times her eligible earnings above the IRS limit for
tax-qualified
plans.
|
(8)
|
Includes (i) Company matching contributions to the Southwest Airlines Co. 401(k) Plan of $24,000; (ii) a Company contribution of $11,000 to be made to the Companys profit sharing plan in 2017, but that was
earned with respect to 2016; (iii) a cash amount of $8,430 (to be paid directly to Mr. Van de Ven in 2017), which amount was earned with respect to 2016 pursuant to the Companys profit sharing plan, representing the portion of the
Companys profit sharing paid in cash directly to participants; (iv) a cash amount of $15,500 (to be paid directly to Mr. Van de Ven in 2017), which amount was earned with respect to 2016 pursuant to the Companys profit sharing
plan, but could not be contributed to the profit sharing plan because of IRS limits on amounts that may be contributed to
tax-qualified
plans; and (v) a cash amount of $111,751 (to be paid directly to
Mr. Van de Ven in 2017), which amount was earned with respect to 2016, equal to the Companys applicable profit sharing contribution rate times his eligible earnings above the IRS limit for
tax-qualified
plans.
|
(9)
|
Includes (i) Company matching contributions to the Southwest Airlines Co. 401(k) Plan of $24,000; (ii) a Company contribution of $11,000 to be made to the Companys profit sharing plan in 2017, but that was
earned with respect to 2016; (iii) a cash amount of $8,430 (to be paid directly to Mr. Jordan in 2017), which amount was earned with respect to 2016 pursuant to the Companys profit sharing plan, representing the portion of the
Companys profit sharing paid in cash directly to participants; (iv) a Company contribution of $15,500 to be made to the Companys excess benefit plan on behalf of Mr. Jordan in 2017, which amount was earned with respect to 2016
pursuant to the Companys profit sharing plan, but could not be contributed to the profit sharing plan because of IRS limits on amounts that may be contributed to
tax-qualified
plans; and (v) a cash
amount of $108,735 (to be paid directly to Mr. Jordan in 2017), which amount was earned with respect to 2016, equal to the Companys applicable profit sharing contribution rate times his eligible earnings above the IRS limit for
tax-qualified
plans.
|
(10)
|
In accordance with SEC rules, 2016 was the second year for which Mr. Lamb was required to be included in the proxy statement executive compensation tables.
|
(11)
|
Includes (i) Company matching contributions to the Southwest Airlines Co. 401(k) Plan of $24,000; (ii) a
Company contribution of $11,000 to be made to the Companys profit sharing plan in 2017, but that was earned with respect to 2016; (iii) a cash amount of $8,430 (to be paid directly to Mr. Lamb in 2017), which amount was earned with
respect to 2016 pursuant to the Companys profit sharing plan,
|
38
|
representing the portion of the Companys profit sharing paid in cash directly to participants; (iv) a Company contribution of $15,500 to be made to the Companys excess benefit
plan on behalf of Mr. Lamb in 2017, which amount was earned with respect to 2016 pursuant to the Companys profit sharing plan, but could not be contributed to the profit sharing plan because of IRS limits on amounts that may be
contributed to
tax-qualified
plans; and (v) a cash amount of $106,823 (to be paid directly to Mr. Lamb in 2017), which amount was earned with respect to 2016, equal to the Companys applicable
profit sharing contribution rate times his eligible earnings above the IRS limit for
tax-qualified
plans.
|
Mr. Kelly has an individual deferred compensation arrangement pursuant to which the Company makes contributions to Mr. Kellys
account to the extent such amounts cannot be contributed to the qualified 401(k) and profit sharing plans due to contribution limits and compensation limits established by the Internal Revenue Code. Mr. Kellys deferred compensation
arrangement is discussed in more detail above under Compensation Discussion and Analysis and below under Nonqualified Deferred Compensation in Fiscal 2016. The Compensation Committees determinations regarding the amount
of executive salary and
bonus/non-equity
incentive plan compensation in proportion to total compensation are discussed in detail above under Compensation Discussion and Analysis.
Grants of Plan-Based Awards in Fiscal 2016
The following table provides information with respect to grants of plan-based awards to the named executive officers in 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Possible Payouts
Under
Non-Equity
Incentive Plan Awards(1)
|
|
Estimated Future Payouts Under
Equity
Incentive Plan Awards(2)
|
|
All Other
Stock
Awards:
Number
of Shares of
Stock or Units
(#)(3)
|
|
Grant Date
Fair Value of
Stock Awards
($)(4)
|
Name
|
|
Grant Date
|
|
Threshold ($)
|
|
Target ($)
|
|
Maximum ($)
|
|
Threshold (#)
|
|
Target (#)
|
|
Maximum (#)
|
|
|
Gary C. Kelly
|
|
|
|
N/A
|
|
810,000
|
|
1,215,000
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
N/A
|
|
38,013
|
|
76,026
|
|
|
|
1,417,505
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,595
|
|
2,632,488
|
Tammy Romo
|
|
|
|
N/A
|
|
441,600
|
|
662,400
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
N/A
|
|
14,803
|
|
29,606
|
|
|
|
552,004
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,204
|
|
827,987
|
Michael G. Van de Ven
|
|
|
|
N/A
|
|
456,000
|
|
684,000
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
N/A
|
|
12,738
|
|
25,476
|
|
|
|
475,000
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,214
|
|
1,425,000
|
Robert E. Jordan
|
|
|
|
N/A
|
|
451,200
|
|
676,800
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
N/A
|
|
11,974
|
|
23,948
|
|
|
|
446,510
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,921
|
|
1,339,494
|
Jeff Lamb
|
|
|
|
N/A
|
|
441,600
|
|
662,400
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
N/A
|
|
11,102
|
|
22,204
|
|
|
|
413,994
|
|
|
1/27/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,307
|
|
1,242,018
|
(1)
|
These columns show the potential value of the annual cash incentive payout under the Companys Senior Executive Short Term Incentive Plan for each named executive officer based on achievement at threshold, target,
and maximum performance levels. The potential payouts were performance-driven and therefore completely at risk. The amount of the award, beginning at zero percent of the target payout, was interpolated between performance targets only after a
minimum performance level was achieved. The business metrics and targets used to determine the amounts of the awards paid are described above under Compensation Discussion and Analysis.
|
(2)
|
The awards consist of performance-based RSUs granted under the Companys Amended and Restated 2007 Equity
Incentive Plan (the 2007 Equity Plan) with respect to the performance period from January 1, 2016 to December 31, 2018 (the Performance Period). The performance-based RSUs vest on February 21, 2019 (the
Vesting Date), and are settleable in shares of common stock. These columns show the potential number of shares of common stock to be paid out upon vesting of the performance-based RSUs for each named executive officer based on
achievement at the threshold, target, and maximum performance levels. The potential payouts are performance-driven and therefore completely at
|
39
|
risk. The number of performance-based RSUs that will vest and the number of shares of the Companys common stock to be issued, if any, as of the Vesting Date will be determined based on the
achievement of ROIC
(pre-tax)
targets. The percentage of performance-based RSUs vesting will be interpolated between ROIC performance targets only after a minimum ROIC performance level has been achieved as
follows: (i) if the ROIC in the Performance Period is 13.0 percent or less, zero percent of the performance-based RSUs granted will vest; (ii) if the ROIC in the Performance Period is 16.0 percent, one hundred percent of the
performance-based RSUs granted will vest; (iii) if the ROIC in the Performance Period is 20 percent, one hundred fifty percent of the performance-based RSUs granted will vest; (iv) if the ROIC is 23 percent, one hundred
seventy-five percent of the performance-based RSUs granted will vest; and (v) if the ROIC is 25 percent or greater, two hundred percent of the performance-based RSUs granted will vest. ROIC
(pre-tax)
means Adjusted Operating Income divided by Adjusted Average Invested Capital. Adjusted Operating Income means Operating income (calculated in accordance with Accounting Principles
Generally Accepted in the United States (GAAP) as adjusted to reflect the impact to Operating income from (a) fuel contracts (net), (b) special items, as disclosed from time to time in the Companys earnings releases and filings with the
SEC, (c) aircraft leases (net), and (d) fuel hedge premium expense. Average Invested Capital is an average of the five most recent quarter end balances of debt, net present value of aircraft leases, and equity adjusted for
hedge accounting. ROIC
(pre-tax)
for the Performance Period will be the average of the ROIC
(pre-tax)
over the three full fiscal years within the Performance Period. The
Company does not pay dividends on unvested performance-based RSUs.
|
(3)
|
The awards consist of RSUs granted under the 2007 Equity Plan. The RSUs are settleable in shares of common stock and will vest with respect to
one-third
of the shares covered
thereby annually, beginning on February 21, 2017. The Company does not pay dividends on unvested RSUs.
|
(4)
|
The values included in this column represent the grant date fair value of these awards computed in accordance with FASB ASC Topic 718 determined without regard to forfeitures. The assumptions used in calculating the
values for fiscal 2016 are included in Note 9 to the Companys financial statements included in its Annual Report on Form
10-K
for the fiscal year ended December 31, 2016.
|
Outstanding Equity Awards at Fiscal 2016
Year-End
The following table provides information with respect to stock options and RSUs (including performance-based RSUs) held by the named executive
officers as of December 31, 2016. Stock options and RSUs (including performance-based RSUs) are the only types of equity awards that have been granted to the named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
Name
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
|
Option
Exercise
Price
($)
|
|
|
|
Option
Expiration
Date
|
|
|
|
Number of
Shares or
Units
of
Stock That
Have Not
Vested
(#)(1)
|
|
|
|
Market
Value of
Shares
or
Units of
Stock That
Have Not
Vested
($)(2)
|
|
|
|
Equity
Incentive Plan
Awards:
Number
of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)(3)
|
|
|
|
Equity
Incentive Plan
Awards:
Market
or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)(2)
|
Gary C. Kelly
|
|
|
|
100,000
|
|
|
|
|
|
|
|
6.75
|
|
|
|
02/01/2019
|
|
|
|
199,339(4)
|
|
|
|
9,935,056
|
|
|
|
125,806(5)
|
|
|
|
6,270,171
|
Tammy Romo
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,728(6)
|
|
|
|
2,627,964
|
|
|
|
46,402(7)
|
|
|
|
2,312,676
|
Michael G. Van de Ven
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,988(8)
|
|
|
|
4,285,642
|
|
|
|
43,188(9)
|
|
|
|
2,152,490
|
Robert E. Jordan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,010(10)
|
|
|
|
4,137,218
|
|
|
|
39,608(11)
|
|
|
|
1,974,063
|
Jeff Lamb
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,058(12)
|
|
|
|
3,641,211
|
|
|
|
37,926(13)
|
|
|
|
1,890,232
|
(1)
|
The awards consist of RSUs that are settleable in shares of common stock, including RSUs acquired upon the satisfaction of performance criteria underlying an award of performance-based RSUs for the performance period
from January 1, 2014 to December 31, 2016.
|
(2)
|
Market value is computed by multiplying the number of RSUs or performance-based RSUs by $49.84, which was the closing price per share of the Companys common stock on December 30, 2016 (the last trading day of
the fiscal year), on the NYSE.
|
40
(3)
|
The awards consist of performance-based RSUs that are settleable in shares of common stock, including (i) performance-based RSUs that were granted on January 28, 2015, with respect to the performance period
from January 1, 2015 to December 31, 2017, and that will vest on February 21, 2018; and (ii) performance-based RSUs that were granted on January 27, 2016, with respect to the performance period from January 1, 2016 to
December 31, 2018, and that will vest on February 21, 2019. In accordance with SEC rules, the amount represents the maximum number of performance-based RSUs that may vest on the February 21, 2018 and February 21, 2019 vesting
dates. The potential payouts are performance-driven and therefore completely at risk. The number of performance-based RSUs that will vest and the number of shares of the Companys common stock to be issued, if any, as of the February 21,
2018 and February 21, 2019 vesting dates will be determined based on the achievement of ROIC targets during the applicable performance period.
|
(4)
|
Of these RSUs (i) 42,746 vested on February 21, 2017; (ii) 90,316 will vest on May 14, 2017; (iii) 42,746 will vest on February 21, 2018; and (iv) 23,531 will vest on February 21, 2019.
|
(5)
|
Of these performance-based RSUs, the maximum number that may vest on February 21, 2018 is 49,780; and the maximum number that may vest on February 21, 2019 is 76,026.
|
(6)
|
Of these RSUs (i) 12,627 vested on February 21, 2017; (ii) 20,074 will vest on May 14, 2017; (iii) 12,626 will vest on February 21, 2018; and (iv) 7,401 will vest on February 21, 2019.
|
(7)
|
Of these performance-based RSUs, the maximum number that may vest on February 21, 2018 is 16,796; and the maximum number that may vest on February 21, 2019 is 29,606.
|
(8)
|
Of these RSUs (i) 23,469 vested on February 21, 2017; (ii) 26,313 will vest on May 14, 2017; (iii) 23,468 will vest on February 21, 2018; and (iv) 12,738 will vest on February 21, 2019.
|
(9)
|
Of these performance-based RSUs, the maximum number that may vest on February 21, 2018 is 17,712; and the maximum number that may vest on February 21, 2019 is 25,476.
|
(10)
|
Of these RSUs (i) 22,362 vested on February 21, 2017; (ii) 26,313 will vest on May 14, 2017; (iii) 22,362 will vest on February 21, 2018; and (iv) 11,973 will vest on February 21, 2019.
|
(11)
|
Of these performance-based RSUs, the maximum number that may vest on February 21, 2018 is 15,660; and the maximum number that may vest on February 21, 2019 is 23,948.
|
(12)
|
Of these RSUs (i) 20,273 vested on February 21, 2017; (ii) 21,411 will vest on May 14, 2017; (iii) 20,272 will vest on February 21, 2018; and (iv) 11,102 will vest on February 21, 2019.
|
(13)
|
Of these performance-based RSUs, the maximum number that may vest on February 21, 2018 is 15,722; and the maximum number that may vest on February 21, 2019 is 22,204.
|
Option Exercises and Stock Vested During Fiscal 2016
The following table provides information with respect to stock options exercised by, and stock awards vested for, the named executive officers
during 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
Name
|
|
Number of Shares
Acquired on
Exercise
(#)
|
|
|
Value Realized on Exercise
($)
|
|
|
Number of Shares
Acquired on
Vesting
(#)
|
|
|
Value Realized on Vesting
($)(1)
|
|
Gary C. Kelly
|
|
|
|
|
|
|
|
|
|
|
101,624
|
|
|
|
4,180,260
|
|
Tammy Romo
|
|
|
|
|
|
|
|
|
|
|
23,538
|
|
|
|
966,483
|
|
Michael G. Van de Ven
|
|
|
|
|
|
|
|
|
|
|
54,573
|
|
|
|
2,243,909
|
|
Robert E. Jordan
|
|
|
|
|
|
|
|
|
|
|
54,231
|
|
|
|
2,230,465
|
|
Jeff Lamb
|
|
|
|
|
|
|
|
|
|
|
45,797
|
|
|
|
1,882,689
|
|
(1)
|
Calculated by multiplying the number of shares acquired upon the February 21, 2016, May 14, 2016, and May 15, 2016, vesting of RSUs by $39.31, $41.56, and $41.56, respectively, the closing prices of the
Companys common stock on the respective dates of vesting (or, where vesting did not occur on a trading day, the last trading day prior to vesting).
|
41
Nonqualified Deferred Compensation in Fiscal 2016
As discussed above under Compensation Discussion and Analysis, the Company maintains
tax-qualified
401(k) and profit sharing plans for its eligible Employees. The 401(k) plans provide for a Company match on Employee contributions, and the profit sharing plan provides for an annual Company
contribution equal to a percentage of Company profits that is allocated among participant accounts as a uniform percentage of compensation. In conjunction with these
tax-qualified
plans, the Company offers a
non-qualified
excess benefit plan, which is designed to provide benefits with respect to
Company
contributions (excess amounts) that cannot be contributed to the 401(k) and profit sharing plans
due to qualified plan contribution limits established by the Internal Revenue Code. Employee contributions to the excess benefit plan are not allowed. Pursuant to the excess benefit plan, Employees, including the named executive officers, with
excess amounts of at least $1,000 who have previously properly elected to participate in the plan, may defer payment of their excess amounts by making a timely deferral election under the excess benefit plan. Employees are immediately
100 percent vested in their benefits under the excess benefit plan; however, the benefits are unsecured obligations of the Company in the event of its bankruptcy or insolvency. Prior to the beginning of each plan year, participants are allowed
to select a rate of return to apply to the contributions to be made with respect to the upcoming plan year. The excess benefit plan currently allows participants to select a rate of return equal to either or both of two investment options:
(i) the Citibank 90 Day Treasury Bill Index plus two percentage points and (ii) the Vanguard Institutional Standard & Poors 500 Index Fund. During fiscal 2016, the Citibank 90 Day Treasury Bill Index plus two percentage
points earned a rate of return equal to 2.27 percent, and the Vanguard Institutional Index Fund option earned a rate of return equal to 11.93 percent. Once an excess amount is credited to a participants account, the participant may
not change that investment election for that amount or transfer amounts between funds. Participants are entitled to a distribution of their accounts upon separation from service with the Company and must elect the time and form of distribution of
their accounts prior to their first year of participation in the excess benefit plan. Distribution may be in a lump sum payout or in equal annual installments over a period of up to five years and may be received or commenced (i) in the
calendar year of separation from service or (ii) the calendar year following the year in which separation from service occurs.
The
Company also offers a separate
non-qualified
deferred compensation plan, the 2015 Deferred Compensation Plan, which is designed to provide benefits with respect to
Employee
contributions that cannot be
contributed to the Companys 401(k) plans due to qualified plan limits established by the IRS. Pursuant to the 2015 Deferred Compensation Plan, officers of the Company who are not eligible to participate in the Companys 2005 Deferred
Compensation Plan for Pilots may, prior to the beginning of a plan year, irrevocably elect to defer a portion of their eligible compensation otherwise payable to them with respect to such plan year; provided that they have also irrevocably elected
to contribute to the Companys 401(k) plan the lesser of (i) the maximum elective deferral permitted under Section 402(g)(1) of the Internal Revenue Code with respect to the taxable year coinciding with the applicable plan year or
(ii) the maximum elective contributions permitted under the terms of the Companys 401(k) plan with respect to the applicable plan year.
Non-Employee
Board members are also eligible to participate in
the 2015 Deferred Compensation Plan and may, prior to the beginning of a plan year, irrevocably elect to defer a percentage of their annual cash retainer fees otherwise payable to them with respect to such plan year. The 2015 Deferred Compensation
Plan currently provides a rate of return equal to the Citibank 90 Day Treasury Bill Index plus two percentage points. During fiscal 2016, the Citibank 90 Day Treasury Bill Index plus two percentage points earned a rate of return equal to
2.27 percent. Participant benefits are unsecured obligations of the Company in the event of its bankruptcy or insolvency. Participants are entitled to a distribution of their accounts upon separation from service with the Company and must elect
the time and form of distribution of their accounts prior to their first year of participation in the 2015 Deferred Compensation Plan. Distribution may be in a lump sum payout or in equal annual installments over a period of up to five years and may
be received or commenced (i) in the calendar year of separation from service or (ii) the calendar year following the year in which separation from service occurs.
Mr. Kelly has an individual deferred compensation arrangement pursuant to which the Company makes contributions to Mr. Kellys
account to the extent such amounts cannot be contributed to the
tax-qualified
401(k) and profit sharing plans due to contribution limits and compensation limits established by the Internal Revenue Code. The
individual deferred compensation arrangement with Mr. Kelly provides for accrual and crediting to
42
Mr. Kellys account, each January, of simple interest at a rate of ten percent, compounded annually, on the accrued and unpaid balance of the deferred compensation credited to his
account as of the preceding December 31. Subject to any applicable requirements of Section 409A of the Internal Revenue Code, the deferred compensation credited to Mr. Kellys account will be paid to him at the rate of $200,000 per
calendar year, commencing with the calendar year following the year in which (i) he attains age 65 or (ii) his employment terminates, whichever occurs later.
The following table provides information with respect to nonqualified deferred compensation earned by the named executive officers for 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified Deferred Compensation for Fiscal 2016
|
|
Name
|
|
Plan
|
|
Executive
Contributions
in Last
Fiscal Year
($)
|
|
Southwest
Contributions
in Last
Fiscal Year
($)
|
|
|
Aggregate
Earnings
in Last
Fiscal
Year
($)
|
|
Aggregate
Withdrawals/
Distributions
in Last
Fiscal
Year
($)
|
|
Aggregate
Balance at
December 31,
2016
($)
|
|
Gary C. Kelly
|
|
Letter Agreement
|
|
|
|
|
221,951(1)
|
|
|
81,115(2)
|
|
|
|
|
1,384,877(3)(4)
|
|
|
|
Excess Benefit Plan
|
|
|
|
|
|
|
|
1,397(5)
|
|
|
|
|
63,012(6)
|
|
|
|
Deferred Compensation Plan
|
|
1,111,818(7)
|
|
|
|
|
|
23,192(5)
|
|
|
|
|
2,261,726(8)
|
|
Tammy Romo
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael G. Van de Ven
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert E. Jordan
|
|
Excess Benefit Plan
|
|
|
|
|
15,500(1)
|
|
|
13,196(5)
|
|
|
|
|
145,581(9)(10)
|
|
Jeff Lamb
|
|
Excess Benefit Plan
|
|
|
|
|
15,500(1)
|
|
|
3,932(5)
|
|
|
|
|
68,726(11)(12)
|
|
|
|
Deferred Compensation Plan
|
|
538,997(13)
|
|
|
|
|
|
11,612(5)
|
|
|
|
|
1,075,520(14)
|
|
(1)
|
All of this amount is also reported for the named executive officer in the All Other Compensation column of the Summary Compensation Table for 2016. This amount was earned with respect to fiscal 2016, but
will not be contributed to the named executive officers account until 2017.
|
(2)
|
Includes the $40,638 disclosed in the Nonqualified Deferred Compensation Earnings column of the Summary Compensation Table for 2016.
|
(3)
|
This includes the $221,951 reported as nonqualified deferred compensation contributions earned for 2016, but that will not be contributed to Mr. Kellys account until 2017. Mr. Kellys actual cash
balance at December 31, 2016 was $1,162,926.
|
(4)
|
Of this amount, $885,979 has been required to be reported as compensation to Mr. Kelly in the Summary Compensation Table for previous years.
|
(5)
|
None of these earnings were above-market or preferential. Therefore, no portion of this amount has been reported as compensation to the named executive officer for the last completed fiscal year in the Summary
Compensation Table.
|
(6)
|
None of this amount has been required to be reported as compensation to Mr. Kelly in the Summary Compensation Table for previous years.
|
(7)
|
All of this amount is also reported for Mr. Kelly in the Bonus or
Non-Equity
Incentive Plan Compensation columns of the Summary Compensation Table for
2016. This amount was earned with respect to fiscal 2016, but was not contributed to Mr. Kellys account until 2017.
|
(8)
|
This consists of $1,111,818 deferred from Mr. Kellys
bonus/non-equity
incentive plan compensation earned for 2016, but that was not contributed to Mr. Kellys
account until 2017. Mr. Kellys actual cash balance at December 31, 2016 was $1,149,908. Of this amount, $1,126,716 has been required to be reported as compensation to Mr. Kelly in the Summary Compensation Table for previous
years.
|
(9)
|
Of this amount, $51,018 has been required to be reported as compensation to Mr. Jordan in the Summary Compensation Table for previous years.
|
(10)
|
This includes the $15,500 reported as excess benefit plan contributions earned for 2016, but that will not be contributed to Mr. Jordans account until 2017. Mr. Jordans actual cash balance at
December 31, 2016 was $130,081.
|
43
(11)
|
Of this amount, $30,363 has been required to be reported as compensation to Mr. Lamb in the Summary Compensation Table for previous years.
|
(12)
|
This includes the $15,500 reported as excess benefit plan contributions earned for 2016, but that will not be contributed to Mr. Lambs account until 2017. Mr. Lambs actual cash balance at
December 31, 2016 was $53,226.
|
(13)
|
This amount includes $72,833 that is also reported for Mr. Lamb in the Salary column of the Summary Compensation Table for 2016. This amount also includes $466,164 that is also reported for
Mr. Lamb in the Bonus or
Non-Equity
Incentive Plan Compensation columns of the Summary Compensation Table for 2016. The
bonus/non-equity
incentive plan compensation amounts were earned with respect to fiscal 2016, but were not contributed to Mr. Lambs account until 2017.
|
(14)
|
This includes $466,164 deferred from Mr. Lambs
bonus/non-equity
incentive plan compensation earned for 2016, but that was not contributed to Mr. Lambs
account until 2017. Mr. Lambs actual cash balance at December 31, 2016 was $609,356. Of this amount, $524,323 has been required to be reported as compensation to Mr. Lamb in the Summary Compensation Table for previous years.
|
Potential Payments Upon Termination or
Change-in-Control
Executive Service Recognition
Plan Executive Employment Agreements
In 1987, the Board of Directors of the Company established Executive Service Recognition Plan
Executive Employment Agreements (the executive
change-in-control
agreements). All of the named executive officers are, and were during 2016, parties to
executive
change-in-control
agreements with the Company. Although these agreements are titled Employment Agreements, their terms can only be invoked in the
event of a
change-in-control
of the Company, and they do not provide for any incremental compensation to be paid to the named executive officers unless,
subsequent
to
a
change-in-control,
an executives employment is terminated other than for cause or disability, or the executive resigns for good reason.
The executive
change-in-control
agreements provide that, in the
event of a
change-in-control
of the Company, the Company agrees to continue to employ the executives, and the executives agree to remain in the employ of the Company,
for one year after the occurrence of the
change-in-control
(the Employment Year). In such event, the executives would continue to be entitled to a base
salary in an amount at least equal to the highest salary received by them during the preceding
12-month
period. In addition, for any fiscal year that ends during the Employment Year, they would continue to be
entitled to an annual bonus in an amount at least equal to the highest bonus (the
Change-in-Control
Bonus Amount) paid or payable to them in respect of
either of the two fiscal years immediately prior to the fiscal year in which the
change-in-control
has occurred. If, during the Employment Year, an executives
employment is terminated other than for cause or disability, or the executive resigns for good reason, then the executive is entitled to a lump sum payment equal to:
|
(a)
|
a bonus, the maximum amount of which would be equal to the annual bonus paid to the executive for the last full fiscal year of the Company prior to the fiscal year of the date of termination, but which would be prorated
to reflect the actual portion of the year during which the executive has been employed;
|
|
(b)
|
an amount equal to the executives annual base salary in effect at the time of notice of termination; and
|
|
(c)
|
the
Change-in-Control
Bonus Amount paid to the executive for the last full fiscal year of the Company (being the year in which the
change-in-control
has occurred, but not the date of termination of employment) or, if no such bonus has been paid, the
Change-in-Control
Bonus Amount that would have been payable to the executive for the then current fiscal year (being the year in which the date of termination of employment has occurred).
|
44
For purposes of the executive
change-in-control
agreements:
|
|
|
a
change-in-control
is generally deemed to occur in the event a third party acquires 20 percent or more of the
Companys voting securities or a majority of the Directors of the Company are replaced as a result of a tender offer or merger, sale of assets, or contested election;
|
|
|
|
cause means (i) an act or acts of dishonesty taken by an executive and intended to result in substantial personal enrichment of the executive at the expense of the Company or (ii) violations by an
executive of the executives duties under the agreement that are (a) grossly negligent or (b) willful and deliberate on the executives part and that, in any case, result in material injury to the Company; and
|
|
|
|
good reason is generally defined as the assignment to the executive of duties inconsistent with the executives duties prior to the
change-in-control,
relocation, or a failure of the Company to abide by the provisions of the executives agreement.
|
2007 Equity Plan
Pursuant to the terms of the 2007 Equity Plan, in the event of the termination of a participants service as a result of death or
disability, (a) any of the participants outstanding RSUs or stock options that have not yet vested will fully vest as of the date of termination and (b) any of the participants performance-based RSUs will remain outstanding as
if the participants service has not terminated and shall otherwise be settleable in accordance with the terms of the grant. Disability means the inability of a participant to continue to perform services for the Company because of
the sickness or injury of the participant, as determined by the Companys Chief Executive Officer, Chief People Officer (or equivalent), Chief Financial Officer, and/or General Counsel. Such a determination will be made in good faith and in the
sole discretion of one or more of these officers, who shall also have sole discretion to determine the effective date of a participants termination of service as a result of disability.
Incremental amounts receivable by the named executive officers pursuant to the arrangements discussed above are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
|
|
Termination
by the
Company at
any time for
cause
($)
|
|
|
|
Change-
in-
control
($)
|
|
|
|
Termination after a
change-in-control (i)
by the executive for
good reason or (ii) by
the Company for
reasons other than
for cause, death, or disability
($)(1)
|
|
|
|
Estimated benefits
from termination due
to death or disability
($)(2)
|
Gary C. Kelly
|
|
|
|
|
|
|
|
|
|
|
|
2,987,550
|
|
|
|
6,934,289
|
Tammy Romo
|
|
|
|
|
|
|
|
|
|
|
|
1,501,440
|
|
|
|
1,960,905
|
Michael G. Van de Ven
|
|
|
|
|
|
|
|
|
|
|
|
1,751,896
|
|
|
|
3,772,489
|
Robert E. Jordan
|
|
|
|
|
|
|
|
|
|
|
|
1,724,336
|
|
|
|
3,624,066
|
Jeff Lamb
|
|
|
|
|
|
|
|
|
|
|
|
1,693,360
|
|
|
|
3,240.996
|
|
(1)
|
Represents amounts payable pursuant to the Executive Service Recognition Plan Executive Employment Agreements and assumes the triggering event took place on December 31, 2016.
|
|
(2)
|
Represents amounts payable with respect to the acceleration of RSUs under the 2007 Equity Plan. Also assumes the triggering event took place on December 31, 2016, and reflects the aggregate market value of unvested
RSUs that would become vested under the circumstances. The aggregate market value is computed by multiplying the number of RSUs by $49.84, which was the closing price per share of the Companys common stock on December 30, 2016 (the last
day of trading in 2016), on the NYSE. In the event of the termination of a participants service for any reason other than as a result of death or disability, the participants outstanding unvested RSUs would be forfeited.
|
Pursuant to the terms of all of the Companys equity incentive plans under which stock options have been granted, if
the Company is not the surviving entity in any merger or consolidation (or survives only as a
45
subsidiary of an entity other than a previously wholly-owned subsidiary of the Company) or if the Company is to be dissolved or liquidated and if the surviving corporation refuses to assume or
substitute new stock options for currently outstanding Company stock options, all unvested stock options then outstanding will fully vest and become exercisable in full on or before a date fixed by the Company, which date must be prior to the
effective date of the merger, consolidation, dissolution, or liquidation. Therefore, to the extent these amounts are payable, they will be payable prior to the effective date of a
change-in-control
and therefore will not be payable at the same time as the amounts shown in the table above. The Companys equity incentive plans do not provide
for acceleration of RSUs in the event of a
change-in-control.
The following table sets forth the estimated benefits to the named executive officers in the event the
surviving corporation refuses to assume or substitute new options for the named executive officers outstanding options.
|
|
|
|
|
|
|
Name
|
|
|
|
|
Estimated Benefits($)(1)
|
Gary C. Kelly
|
|
|
|
|
|
|
Tammy Romo
|
|
|
|
|
|
|
Michael G. Van de Ven
|
|
|
|
|
|
|
Robert E. Jordan
|
|
|
|
|
|
|
Jeff Lamb
|
|
|
|
|
|
|
(1)
|
Assumes the triggering event took place on December 31, 2016. None of the named executive officers held unvested stock options at December 31, 2016.
|
In addition to the amounts discussed above, in the event of termination of their employment for any reason other than for cause, each of the
named executive officers would be eligible to participate in any
non-contract
retiree medical benefit plan or program that the Company may then make available to its retirees generally on the same terms as
other retirees. In addition, these individuals would be entitled to the amounts credited to their accounts pursuant to the Companys qualified retirement plans, as well as nonqualified deferred compensation amounts credited to their accounts
pursuant to the Companys excess benefit plan and, with respect to Mr. Kelly, his individual deferred compensation arrangement, each as disclosed in more detail above under the heading Nonqualified Deferred Compensation in Fiscal
2016.
46
COMPENSATION OF DIRECTORS
Fiscal 2016 Director Compensation
The following table provides information with respect to compensation earned by the
non-Employee
members of the Board of Directors, and Mr. Ricks, for the year ended December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees Earned or
Paid in Cash
($)
|
|
Stock
Awards
($)(1)(2)
|
|
|
Option
Awards
($)(3)
|
|
All Other
Compensation
($)
|
|
Total ($)
|
David W. Biegler
|
|
130,500(4)
|
|
|
130,030
|
|
|
|
|
|
|
260,530
|
J. Veronica Biggins
|
|
97,000(5)
|
|
|
130,030
|
|
|
|
|
|
|
227,030
|
Douglas H. Brooks
|
|
100,000
|
|
|
130,030
|
|
|
|
|
|
|
230,030
|
William H. Cunningham
|
|
147,200
|
|
|
130,030
|
|
|
|
|
|
|
277,230
|
John G. Denison
|
|
128,700
|
|
|
130,030
|
|
|
|
|
|
|
258,730
|
Thomas W. Gilligan
|
|
97,000
|
|
|
130,030
|
|
|
|
|
|
|
227,030
|
Grace D. Lieblein
|
|
84,527(6)
|
|
|
130,030
|
|
|
|
|
|
|
214,557
|
Nancy B. Loeffler
|
|
98,500
|
|
|
130,030
|
|
|
|
|
|
|
228,530
|
John T. Montford
|
|
132,500
|
|
|
130,030
|
|
|
|
|
|
|
262,530
|
Ron Ricks
|
|
470,000(7)
|
|
|
499,984(8)
|
|
|
|
|
58,930(9)
|
|
1,028,914
|
(1)
|
Awards consist of shares of common stock for each of the Companys
non-Employee
members of the Board. Each received 3,031 shares of common stock on May 18, 2016. The
values included in this column represent the grant date fair value of these awards computed in accordance with FASB ASC Topic 718. Each amount is equal to the number of shares of common stock multiplied by $42.90, the closing price of the
Companys common stock on the date of the grant. Awards for Mr. Ricks, an Employee member of the Board during 2016, are described in Footnote 8.
|
(2)
|
Through May 2009,
non-Employee
members of the Board received annual grants of performance shares pursuant to the Companys Outside Director Incentive Plan, which terminated
effective March 18, 2010, with respect to future grants. The aggregate number of performance shares outstanding at December 31, 2016, for each of the
non-Employee
Directors listed in the table was as
follows: Mr. Biegler 5,000; Ms. Biggins 0; Mr. Brooks 0; Dr. Cunningham 6,750; Mr. Denison 0; Dr. Gilligan 0; Ms. Lieblein 0; Ms. Loeffler 5,250; and
Mr. Montford 6,000. Pursuant to the terms of the Outside Director Incentive Plan, on the 30
th
calendar day following the date on which a
non-Employee
Director ceases to serve as a Director of the Company for any reason, the
non-Employee
Director is entitled to an amount in cash equal to the average fair
market value of the Companys common stock during the 30 days preceding the Directors last date of service multiplied by the number of performance shares then held by such Director.
|
(3)
|
Prior to May 19, 2010, pursuant to the terms of the Companys 2007 Equity Plan,
non-Employee
members of the Board received automatic grants of stock options upon their
appointment or election to the Board. None of the Directors received option awards during 2016. The aggregate number of shares underlying stock options outstanding at fiscal
year-end
for each of the
non-Employee
Directors listed in the table was as follows: Mr. Biegler 0; Ms. Biggins 0; Mr. Brooks 10,000; Dr. Cunningham 0; Mr. Denison 10,000;
Dr. Gilligan 0; Ms. Lieblein 0; Ms. Loeffler 0; and Mr. Montford 0.
|
(4)
|
Of this amount, $70,000 (Board cash retainer fee earned with respect to 2016) and $20,000 (Compensation Committee Chair retainer fee earned with respect to 2016) were deferred pursuant to the Companys 2015
Deferred Compensation Plan.
|
(5)
|
Of this amount, $17,500 (a portion of Ms. Biggins Board cash retainer fee earned with respect to 2016) was deferred pursuant to the Companys 2015 Deferred Compensation Plan.
|
(6)
|
Ms. Lieblein was appointed to the Board of Directors, effective January 27, 2016. Her cash fees represent a prorated portion of her retainer fee for the period from January 27, 2016 to June 30, 2016.
|
(7)
|
The amount represents the salary paid to Mr. Ricks, an Employee member of the Board during 2016. Mr. Ricks did not receive a salary adjustment in 2016.
|
47
(8)
|
Award consists of RSUs that are settleable in shares of common stock and will vest with respect to
one-third
of the shares covered thereby annually, beginning on February 21,
2017. The value for Mr. Ricks represents the grant date fair value of this award computed in accordance with FASB ASC Topic 718 determined without regard to forfeitures. The Company does not pay dividends on unvested RSUs.
|
(9)
|
Includes (i) Company matching contributions to the Southwest Airlines Co. 401(k) Plan of $24,000; (ii) a Company contribution of $11,000 to be made to the Companys profit sharing plan in 2017, but that was
earned with respect to 2016; (iii) a cash amount of $8,430 (to be paid directly to Mr. Ricks in 2017), which amount was earned with respect to 2016 pursuant to the Companys profit sharing plan, representing the portion of the
Companys profit sharing paid in cash directly to participants; and (iv) a Company contribution of $15,500 to be made to the Companys excess benefit plan on behalf of Mr. Ricks in 2017, which amount was earned with respect to 2016
pursuant to the Companys profit sharing plan, but could not be contributed to the profit sharing plan because of IRS limits on amounts that may be contributed to
tax-qualified
plans.
|
Non-Employee
Directors cash retainer fees for Board membership and standing committees are paid
on an annual basis. Board of Director and committee fees paid and to be paid to
non-Employee
Directors are set forth in the table below:
|
|
|
|
|
|
|
July 2015
June 2016
|
|
July 2016
June 2017
|
|
|
|
Board of Directors:
|
|
|
|
|
Retainer Fee
|
|
$ 70,000
|
|
$ 70,000
|
Vice Chairman Retainer Fee (1)
|
|
$
|
|
$ 25,000
|
Presiding Director Retainer Fee
|
|
$ 25,000
|
|
$ 25,000
|
In-person
Meeting Attendance Fee Per Meeting
|
|
$ 1,500
|
|
$ 1,500
|
Telephonic Meeting Attendance Fee Per
Meeting
|
|
$ 1,500
|
|
$ 1,500
|
|
|
|
Audit Committee:
|
|
|
|
|
Chair Retainer Fee
|
|
$ 25,000
|
|
$ 25,000
|
In-person
Committee Meeting Attendance Fee Per Meeting
|
|
$ 1,500
|
|
$ 1,500
|
Telephonic Committee Meeting Attendance
Fee Per Meeting
|
|
$ 1,500
|
|
$ 1,500
|
|
|
|
Compensation Committee:
|
|
|
|
|
Chair Retainer Fee
|
|
$ 20,000
|
|
$ 20,000
|
In-person
Committee Meeting Attendance Fee Per Meeting
|
|
$ 1,500
|
|
$ 1,500
|
Telephonic Committee Meeting Attendance
Fee Per Meeting
|
|
$ 1,500
|
|
$ 1,500
|
|
|
|
Nominating and Corporate Governance Committee:
|
|
|
|
|
Chair Retainer Fee
|
|
$ 15,000
|
|
$ 15,000
|
In-person
Committee Meeting Attendance Fee Per Meeting
|
|
$ 1,500
|
|
$ 1,500
|
Telephonic Committee Meeting Attendance
Fee Per Meeting
|
|
$ 1,500
|
|
$ 1,500
|
|
|
|
Safety and Compliance Oversight Committee:
|
|
|
|
|
Chair Retainer Fee
|
|
$ 20,000
|
|
$ 20,000
|
In-person
Committee Meeting Attendance Fee Per Meeting
|
|
$ 1,500
|
|
$ 1,500
|
Telephonic Committee Meeting Attendance
Fee Per Meeting
|
|
$ 1,500
|
|
$ 1,500
|
|
|
|
Executive Committee:
|
|
|
|
|
Chair
Retainer Fee
|
|
$ 15,000
|
|
$ 15,000
|
Retainer
Fee for all
Non-Employee
Members of the Executive Committee
|
|
$ 7,200
|
|
$ 7,200
|
(1)
|
Set by the Board of Directors on March 16, 2017.
|
48
During 2016, the Company provided free travel on Southwest Airlines on a reserved basis for Board
members and their spouses. In addition, for 2016, Board members were provided up to 25 free roundtrip flight passes, which they could give to anyone on an unrestricted basis (
e.g
., for charitable purposes).
The
non-Employee
Directors current compensation program provides for the following travel
privileges following a
non-Employee
Directors retirement from the Board: (a) if the Director has served on the Board for at least ten years, the Director and their spouse are eligible for lifetime
free travel on Southwest Airlines on a reserved basis; or (b) if the Director has served on the Board for less than ten years, the Director and their spouse are eligible for free travel on Southwest Airlines on a reserved basis for a period of
time equal to the number of years served.
Southwest Airlines Co. Severance Plan for Directors
. The Board of Directors adopted the
Southwest Airlines Co. Severance Plan for Directors in 2000. Pursuant to this plan, upon retirement from the Board of Directors, a
non-Employee
Director who has served at least five years as of the date of
retirement is entitled to a cash payment of $35,000, and a
non-Employee
Director who has served at least ten years is entitled to a cash payment of $75,000.
49
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed with management the audited financial statements of the Company for the year ended
December 31, 2016. In addition, the Audit Committee has discussed with Ernst & Young LLP, the Companys independent auditors, the matters required to be discussed by Auditing Standard No. 16,
Communications with Audit
Committees
, as adopted by the Public Company Accounting Oversight Board.
The Audit Committee has also received the written disclosures
and the letter from Ernst & Young required by applicable requirements of the Public Company Accounting Oversight Board regarding Ernst & Youngs communications with the Audit Committee concerning independence, and has
discussed with Ernst & Young its independence.
Based on the foregoing review and discussions and relying thereon, the Audit
Committee recommended to the Companys Board of Directors that the audited financial statements be included in the Companys Annual Report on Form
10-K
for the fiscal year ended December 31,
2016.
|
|
|
|
|
|
|
|
|
AUDIT COMMITTEE
|
|
|
|
|
John T. Montford, Chair
|
|
|
|
|
David W. Biegler
|
|
|
|
|
William H. Cunningham
|
|
|
|
|
John G. Denison
|
|
|
|
|
Thomas W. Gilligan
|
50
PROPOSAL 2
ADVISORY VOTE TO APPROVE THE COMPENSATION OF THE COMPANYS
NAMED EXECUTIVE OFFICERS
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), as well as Section 14A of
the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder, the Company is providing its Shareholders with the opportunity to cast a
non-binding
advisory vote on a resolution to
approve the compensation of the Companys named executive officers as disclosed in this Proxy Statement (the
Say-on-Pay
Resolution). This vote is not
intended to address any specific element of compensation, but instead is intended to address the overall compensation of the named executive officers as disclosed in this Proxy Statement.
As discussed in greater detail above under Compensation of Executive Officers Compensation Discussion and Analysis, the
Board and its Compensation Committee believe the compensation of the Companys named executive officers for 2016 was reasonable and appropriate for the following reasons, among many others:
|
|
|
The named executive officer compensation structure for 2016 reflects the Compensation Committees continuing efforts to provide compensation (i) that is appropriately linked to performance and (ii) that
is adequate for retention purposes. To link pay to performance, the Compensation Committee tied 80 percent of each named executive officers short-term incentive compensation opportunity to
pre-established,
multi-dimensional targets and metrics that related to the Companys Vision and related strategic initiatives. In the Compensation Committees view, the resulting short-term incentive
pay for 2016 was strongly tied to the Companys core objectives for creating long-term Shareholder value. The named executive officers long-term incentive awards reflected the Compensation Committees continued efforts to provide an
appropriate percentage of total pay in the form of equity in order to accomplish the purposes of (i) aligning a significant percentage of the named executive officers future compensation opportunities with the interests of other
Shareholders, (ii) providing appropriate total compensation opportunities relative to market, and (iii) providing a sufficient percentage of total pay at risk when combined with short-term incentive compensation. Additional detail
regarding the Compensation Committees rationale for its short-term incentive and long-term incentive determinations is provided above under Compensation of Executive Officers Compensation Discussion and Analysis
Determination of 2016 Executive Compensation; Analysis of Individual Compensation Elements.
|
|
|
|
During 2016, the Company provided minimal perquisites to the named executive officers and did not provide for tax
gross-ups
of executive compensation.
|
|
|
|
During 2016, none of the named executive officers was party to an employment contract with the Company.
|
|
|
|
The Compensation Committee has adopted a clawback policy, pursuant to which, to the extent permitted by governing law, the Company may seek to recoup certain incentive-based compensation in the event the Company is
required to restate its publicly reported financial statements due to material noncompliance with any financial reporting requirement under the securities laws as a result of misconduct.
|
|
|
|
None of the named executive officers has a severance arrangement related to termination of employment other than in connection with a
change-in-control,
and the
change-in-control
arrangements are double trigger
in that they require both a
change-in-control
and termination of employment prior to any payout.
|
Effect of the Proposal
Pursuant to the
provisions of the Dodd-Frank Act and the rules of the SEC, the vote on the
Say-on-Pay
Resolution set forth below (i) is advisory and is therefore not binding on the
Company, the Board, or the Compensation Committee; (ii) is not to be construed as overruling any decisions of the Company, the Board, or
51
the Compensation Committee; and (iii) does not create or imply any additional fiduciary duties or changes to fiduciary duties of the Company, the Board, or the Compensation Committee. The
Board believes that the Board and its Compensation Committee are in the best position to consider the extensive information that from time to time should be taken into consideration in determining named executive officer compensation. Nonetheless,
the Company, the Board, and the Compensation Committee value the opinions of the Companys Shareholders and will take into consideration the outcome of this vote as part of their future deliberations regarding named executive officer
compensation.
Current Frequency of Shareholder Advisory Votes to Approve the Compensation of the Companys Named Executive Officers
Based on the voting results at the Companys 2011 Annual Meeting of Shareholders with respect to the frequency (the Frequency
Vote) of Shareholder advisory votes to approve the compensation of the Companys named executive officers, the Company decided to include an advisory vote to approve the compensation of its named executive officers in its proxy materials
on an annual basis. See Proposal 3 for a discussion of the Frequency Vote in connection with the Companys 2017 Annual Meeting of Shareholders.
Text of the Resolution to be Adopted
RESOLVED, that the Shareholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in the
Companys Proxy Statement for the 2017 Annual Meeting of Shareholders pursuant to Item 402 of Regulation
S-K,
including the Compensation Discussion and Analysis, the compensation tables, and any related
narrative disclosures.
Vote Required
Provided a quorum is present at the meeting, the affirmative vote of the holders of a majority of the shares entitled to vote on, and voted for
or against, this proposal is required to approve this proposal.
Recommendation of the Board of Directors
The Board of Directors unanimously recommends a vote FOR the approval, on an advisory basis, of the compensation of the Companys named
executive officers, as disclosed in this Proxy Statement pursuant to Item 402 of Regulation
S-K,
including the Compensation Discussion and Analysis, the compensation tables, and any related narrative
disclosures. Proxies solicited by the Board of Directors will be so voted unless Shareholders specify a different choice.
52
PROPOSAL 3
ADVISORY VOTE ON FREQUENCY OF EXECUTIVE COMPENSATION ADVISORY VOTES
In accordance with the Dodd-Frank Act, as well as Section 14A of the Securities Exchange Act of 1934 and the rules promulgated thereunder, the
Company is providing its Shareholders with the opportunity to cast a
non-binding
advisory vote on how frequently the Company should seek an advisory vote on the compensation of the Companys named
executive officers, such as the advisory vote sought pursuant to Proposal 2 above. By voting on this frequency proposal, Shareholders may indicate whether they would prefer that the advisory vote on the compensation of the Companys named
executive officers occur every one, two, or three years. Shareholders may also abstain from voting on this proposal.
The Board is
recommending an annual advisory vote on executive compensation to allow the Companys Shareholders to provide timely, direct input on the Companys executive compensation practices, as disclosed in the proxy statement each year.
Effect of the Proposal
Pursuant to the
provisions of the Dodd-Frank Act and the rules of the SEC, (i) this Proposal 3 is advisory and is therefore not binding on the Company, the Board, or the Compensation Committee of the Board; and (ii) Shareholder approval of a one, two, or
three-year frequency vote will not require the Company to implement an advisory vote on executive compensation every one, two, or three years. Although the vote is
non-binding,
the Board and the Compensation
Committee value the opinions of the Companys Shareholders and will take into consideration the outcome of the vote when considering the frequency of future advisory votes on executive compensation.
Vote Required
Shareholders are being
provided with the opportunity to choose among four options: holding the advisory vote on named executive officer compensation every one, two, or three years, or abstaining. Therefore, Shareholders will not be voting to approve or disapprove the
recommendation of the Board of Directors. Generally, approval of matters presented to Shareholders requires the affirmative vote of the holders of a majority of the shares entitled to vote on, and voted for or against, the proposal; however, because
this vote is advisory and
non-binding,
if none of the frequency options receives a majority of the votes cast, the option receiving the greatest number of votes will be considered the frequency recommended by
the Companys Shareholders.
Recommendation of the Board of Directors
The Board of Directors unanimously recommends that Shareholders vote FOR the holding of an advisory vote with respect to the compensation of
the Companys named executive officers every year. Proxies solicited by the Board of Directors will be so voted unless Shareholders specify a different choice.
53
PROPOSAL 4
RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, independent auditors, has been selected by the Board of Directors to serve as the Companys
independent auditors for the fiscal year ending December 31, 2017. Shareholder ratification of the selection of Ernst & Young LLP as the Companys independent auditors is not required by the Companys Bylaws or otherwise.
However, the Board of Directors is submitting the selection of Ernst & Young to the Shareholders for ratification as a matter of good corporate practice. If the Shareholders fail to ratify the selection, the Audit Committee and Board of
Directors will reconsider whether or not to retain Ernst & Young. Even if the selection is ratified, the Board of Directors and its Audit Committee, in their discretion, may direct the selection of a different independent accounting firm at
any time during the year if the Board of Directors believes this change would be in the best interests of the Company and its Shareholders.
Vote
Required
Provided a quorum is present at the meeting, the affirmative vote of the holders of a majority of the shares entitled to vote
on, and voted for or against, this proposal is required to approve, on an advisory basis, this proposal.
Recommendation of the Board of Directors
The Board of Directors unanimously recommends a vote FOR the ratification of the selection of Ernst & Young LLP as the
Companys independent auditors for the fiscal year ending December 31, 2017. Proxies solicited by the Board of Directors will be so voted unless Shareholders specify a different choice.
RELATIONSHIP WITH INDEPENDENT AUDITORS
Ernst & Young LLP has served as the Companys independent auditors since the inception of the Company. A representative of
Ernst & Young is expected to be present at the Annual Meeting and will have the opportunity to make a statement if he so desires and to respond to appropriate questions.
The following table sets forth the various fees for services provided to the Company by Ernst & Young in 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AuditRelated
Fees
|
|
|
|
|
|
All Other
Fees
|
|
|
|
|
Year
|
|
Audit Fees(1)
|
|
|
|
Tax Fees(2)
|
|
|
|
Total Fees
|
|
2016
|
|
$
|
2,145,013
|
|
|
$
|
|
|
|
$
|
57,218
|
|
|
$
|
252,160(3)
|
|
|
$
|
2,454,391
|
|
2015
|
|
$
|
2,186,994
|
|
|
$
|
|
|
|
$
|
60,000
|
|
|
$
|
2,160(4)
|
|
|
$
|
2,249,154
|
|
(1)
|
Includes fees for the annual audit and quarterly reviews, SEC registration statements, accounting and financial reporting consultations, and research work regarding Generally Accepted Accounting Principles, passenger
facility charge audits, the attestation of managements Report on Internal Controls, and the audit of the Companys wholly-owned captive insurance company.
|
(2)
|
Includes services for tax compliance, tax advice, and tax planning.
|
(3)
|
Consists of fees for other permitted advisory services and products, including advisory services with respect to a systems readiness assessment for the Companys new reservations system and Ernst & Young
subscriptions.
|
(4)
|
Consists of fees for other permitted advisory services and products, including Ernst & Young subscriptions.
|
A copy of the Audit Committees Audit and
Non-Audit
Services Preapproval Policy is attached to
this Proxy Statement as Appendix A. All of the services rendered by the independent auditors during 2016 were
pre-approved
by the Audit Committee or by its Chairman pursuant to his delegated authority.
54
OTHER MATTERS
Submission of Shareholder Proposals
To permit the Company and its Shareholders to deal with Shareholder proposals in an informed and orderly manner, the Companys Bylaws
establish an advance notice procedure with regard to the nomination (other than by or at the direction of the Board of Directors) of candidates for election to the Board of Directors and with regard to certain other matters to be brought before an
Annual Meeting of Shareholders.
Shareholder Proposals for Inclusion in 2018 Proxy Statement
. Any Shareholder who wishes to submit a
proposal for inclusion in the Companys Proxy Statement and Proxy relating to the 2018 Annual Meeting of Shareholders must comply with and follow the procedures required by SEC Rule
14a-8
and must forward
such proposal to the Corporate Secretary of the Company, at the address indicated on page 1 of this Proxy Statement, so that the Corporate Secretary receives it no later than December 12, 2017.
Shareholder Director Nominations for Inclusion in 2018 Proxy Statement
. Under the Companys Bylaws, written notice of Shareholder
nominations to the Board of Directors that are to be included in the proxy statement pursuant to the proxy access provisions in Article II, Section 13 of the Companys Bylaws must be delivered to the Corporate Secretary of the Company
no later than 120 and no earlier than 150 days prior to the first anniversary of the date that the Company mailed its proxy statement for the prior years annual meeting of Shareholders; provided, however, that if the annual meeting is not
scheduled to be held within a period that commences 30 days before the first anniversary date of the prior years annual meeting of Shareholders and ends 60 days after such anniversary date, the written notice shall be given by the later of the
close of business on the date that is 180 days prior to the date of such annual meeting or the tenth day following the date the annual meeting date is first publicly announced or disclosed. Accordingly, based on a 2018 Annual Meeting date no
more than 30 days before or more than 60 days after the first anniversary date of this years annual meeting date, any eligible Shareholder who wishes to have a nomination considered at the 2018 Annual Meeting and included in the Companys
proxy statement must deliver a written notice (containing the information specified in the Companys Bylaws regarding the Shareholder and the proposed nominee) to the Corporate Secretary of the Company between November 12, 2017 and
December 12, 2017.
Shareholder Director Nominations and Other Shareholder Proposals for Presentation at the 2018 Annual Meeting
Not Included in 2018 Proxy Statement
. The Companys Bylaws provide that, in order for a proposal that is not intended to be included in the Companys Proxy Statement to be properly and timely submitted as business to come before the
Companys 2018 Annual Meeting of Shareholders, the proposal must be received by the Corporate Secretary of the Company at the principal office of the Company no later than the close of business on the 60
th
day and no earlier than the close of business on the 90
th
day prior to the first anniversary of the prior years annual meeting; provided,
however, that in the event the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, to be properly brought, notice by the Shareholder must be received (a) no later than the close of business
on the 90
th
day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, the
tenth day following the day on which public announcement of the date of the annual meeting is first made by the corporation and (b) no earlier than the close of business on the 120
th
day
prior to such annual meeting. Any Shareholder proposal or nomination must contain the information specified in the Companys Bylaws concerning the matter to be brought before the meeting or the person to be nominated and the Shareholder
submitting the proposal. Based on a 2018 Annual Meeting date no more than 30 days before or more than 60 days after the first anniversary date of this years annual meeting date, if the Company does not receive notice of a proposal between
February 16, 2018 and March 18, 2018, it will be considered untimely, and the proxy committee may properly use its discretionary authority to vote for or against the proposal. A copy of the applicable Bylaw provisions may be
obtained, without charge, upon written request to the Corporate Secretary of the Company at the address set forth on page 1 of this proxy statement.
55
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys executive officers, Directors, and persons who
beneficially own more than ten percent of the Companys common stock to file reports of ownership and changes in ownership of Company common stock with the SEC and the NYSE. These persons are also required by SEC regulation to furnish the
Company with copies of all such reports they file. To the Companys knowledge, based solely on its review of its copies of such reports, or written representations from such persons, the Company believes that all filing requirements applicable
to its Directors, executive officers, and beneficial owners of more than ten percent of the Companys common stock have been satisfied.
Conduct of Meeting and Discretionary Authority
The Chairman has broad responsibility and authority to conduct the annual meeting
in an orderly and timely manner. This authority includes establishing rules for Shareholders who wish to address the meeting. Only Shareholders as of the record date for the meeting or their valid proxy holders may address the meeting. Copies of
these rules will be available at the meeting. The Chairman may exercise broad discretion in recognizing Shareholders who wish to speak and in determining the extent of discussion on each item of business. The Chairman may also exercise broad
discretion regarding disruptions or disorderly conduct to provide that the meeting is conducted in a manner that is fair to all Shareholders. Further, in the event a quorum is not present at the meeting, the Chairman may adjourn the meeting in order
to solicit the required quorum.
In the event a quorum is present at the meeting, but sufficient votes to approve any of the items proposed
by the Board of Directors have not been received, the persons named as proxies may propose one or more adjournments of the meeting to permit further solicitation of proxies. A Shareholder vote may be taken on one or more of the proposals in this
Proxy Statement prior to such adjournment if sufficient proxies have been received and it is otherwise appropriate. Any adjournment will require the affirmative vote of the holders of a majority of those shares of common stock represented at the
meeting in person or by proxy. If a quorum is present, the persons named as proxies will vote the proxies they have been authorized to vote on any other business properly before the meeting in favor of such an adjournment.
The Board of Directors does not know of any other matters that are to be presented for action at the meeting. However, if other matters
properly come before the meeting, it is intended that the enclosed Proxy will be voted in accordance with the judgment of the persons voting the Proxy.
Householding
In some cases, only one copy of the Companys Proxy Statement and Annual Report to Shareholders is being delivered to multiple
Shareholders sharing an address unless the Company has received contrary instructions from one or more of the Shareholders. Upon written or oral request at the address or phone number indicated on the first page of this Proxy Statement, the Company
will promptly deliver a separate copy of these documents to a Shareholder at a shared address to which a single copy has been delivered. A Shareholder can notify the Company at the address or phone number indicated on the first page of this Proxy
Statement if the Shareholder wishes to receive separate copies in the future. In addition, Shareholders sharing an address who are currently receiving multiple copies may also notify the Company at such address or phone number if they wish to
receive only a single copy.
56
Costs of Solicitation
The Company will pay the costs of solicitation of proxies by the Board. In addition to solicitation through distribution of these proxy
materials, solicitation of proxies may be made personally or by telephone by the Companys regular Employees, and arrangements will be made with brokerage houses or other custodians nominees and fiduciaries to send proxies and proxy
material to their principals.
A copy of the Companys Annual Report on Form
10-K
for the
fiscal year ended December 31, 2016, including the financial statements and the financial statement schedules, if any, but not including exhibits, will be provided at no charge to each person to whom this Proxy Statement is delivered upon the
written request of such person addressed to Southwest Airlines Co., Attn: Investor Relations,
HDQ-6IR,
P.O. Box 36611, Dallas, Texas 75235.
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By Order of the Board of Directors,
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Gary C. Kelly
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Chairman of the Board
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April 11, 2017
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TO: Participants in the Southwest Airlines Co. ProfitSharing Plan
The Accompanying Notice of Annual Meeting of Shareholders and Proxy Statement are related to shares of common stock of Southwest Airlines Co.
held by the Trustee for your ProfitSharing Plan account, as well as any shares you may own in your own name.
Under the ProfitSharing Plan,
each participant has the right to direct the Trustee to vote stock credited to his or her account. If you do not direct the Trustee to vote stock credited to your account, the ProfitSharing Plan provides that the Trustee will vote your shares in the
same proportion as the shares for which the Trustee receives voting instruction from other participants.
The Trustee is required to vote
the shares held for your account in accordance with your instructions or, if you do not provide instructions, in accordance with the ProfitSharing Plan. If you wish to instruct the Trustee on the vote of shares held for your account, you should vote
via telephone or the Internet or complete and sign the form enclosed and return it in the addressed, postage-free envelope. Your vote must be received by May 15, 2017.
58
APPENDIX A
Southwest Airlines Co.
Audit and
Non-Audit
Services Preapproval Policy
Adopted March 20, 2003
I. Purpose
Under the
Sarbanes-Oxley Act of 2002 (the Act) and the rules of the Securities and Exchange Commission (the SEC), the Audit Committee of the Board of Directors is responsible for the appointment, compensation, and oversight of the work
of the independent auditor. The Audit Committee is required to
pre-approve
the audit and
non-audit
services performed by the independent auditor in order to assure that
they do not impair the auditors independence from the Company. Accordingly, the Audit Committee has adopted, and the Board of Directors of Southwest Airlines Co. (the Company or Southwest) has ratified, this Audit and
Non-Audit
Services Preapproval Policy (the Policy), which sets forth the procedures and the conditions pursuant to which services proposed to be performed by the independent auditor may be preapproved.
The SECs rules provide that proposed services may be preapproved without consideration of specific
case-by-case
services by the Audit Committee (general preapproval) or may require the specific preapproval of the Audit Committee (specific preapproval). The Audit Committee believes
that the combination of these two approaches in this Policy will result in an effective and efficient procedure to
pre-approve
services performed by the independent auditor. Accordingly, unless a type of
service has received general preapproval, it will require specific preapproval by the Audit Committee if it is to be provided by the independent auditor. Any proposed services exceeding preapproved cost levels or budgeted amounts will also require
specific preapproval by the Audit Committee.
For each preapproval, the Audit Committee will consider whether the services are consistent
with the SECs rules on auditor independence. The Audit Committee will also consider whether the independent auditor is best positioned to provide the most effective and efficient service, for reasons such as its familiarity with the
Companys business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance the Companys ability to manage or control risk or improve audit quality. All such factors will be considered as
a whole, and no one factor will necessarily be determinative.
The independent auditor has reviewed this Policy and believes that
implementation of the policy will not adversely affect the auditors independence.
II. Delegation
The Act and the SECs rules permit the Audit Committee to delegate preapproval authority to one or more of its members. The member to whom
such authority is delegated must report, for informational purposes only, any preapproval decisions to the Audit Committee at its next scheduled meeting.
III. Audit Services
The
annual Audit Services Engagement Terms and Fees will be subject to the specific preapproval of the Audit Committee. The Audit Committee will monitor the Audit services engagement as necessary, but no less than on a quarterly basis, and will also
approve, if necessary, any changes in terms, conditions and fees.
In addition to the annual Audit services engagement approved by the
Audit Committee, the Audit Committee may grant preapproval to other Audit services, which are those services that only the independent auditor reasonably can provide. Other Audit services may include services associated with SEC registration
statements or other documents issued in connection with securities offerings.
IV. Audit-related Services
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the
Companys financial statements or that are traditionally performed by the independent auditor. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent
with the SECs rules on auditor independence, the Audit Committee may grant general preapproval to Audit-related services. Audit-related services include, among others, due diligence services pertaining to potential business
acquisitions/dispositions; accounting consultations
A-1
related to accounting, financial reporting or disclosure matters not classified as Audit services; assistance with understanding and implementing new accounting and financial
reporting guidance from rulemaking authorities; financial audits of Employee benefit plans; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or
regulatory reporting matters; and assistance with internal control reporting requirements.
V. Tax Services
The Audit Committee believes that the independent auditor can provide Tax services to the Company such as tax compliance, tax planning and tax
advice without impairing the auditors independence and the SEC has stated that the independent auditor may provide such services. The Audit Committee believes it may grant general preapproval to those Tax services that have historically been
provided by the auditor, that the Audit Committee has reviewed and believes would not impair the independence of the auditor, and that are consistent with the SECs rules on auditor independence. The Audit Committee will not permit the
retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the sole business purpose of which may be tax avoidance and the tax treatment of which may not be supported in the Internal
Revenue Code and related regulations. The Audit Committee will consult with the Chief Financial Officer or Vice President Finance to determine that the tax planning and reporting positions are consistent with this policy.
The Audit Committee must preapprove tax services to be provided by the independent auditor to any Executive Officer or Director of the Company,
in his or her individual capacity, where such services are paid for by the Company.
VI. All Other Services
The Audit Committee believes, based on the SECs rules prohibiting the independent auditor from providing specific
non-audit
services, that other types of
non-audit
services are permitted. Accordingly, the Audit Committee believes it may grant general preapproval to those permissible
non-audit
services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor, and are consistent with the SECs rules on auditor
independence.
A list of the SECs prohibited
non-audit
services is attached in this policy as
Exhibit 1. The SECs rules and relevant guidance should be consulted to determine the precise definitions of these services and the applicability of exceptions to certain of the prohibitions.
VII. Preapproval Fee Levels or Budgeted Amounts
Preapproval fee levels for all services to be provided by the independent auditor will be established by the Audit Committee. Any proposed
services exceeding these levels or amounts will require specific preapproval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and
non-audit
services in
determining whether to
pre-approve
any such services.
VIII. Procedures
All requests or applications for services to be provided by the independent auditor that do not require specific approval by the Audit
Committee will be submitted to the Chief Financial Officer and must include a detailed description of the services to be rendered. The Chief Financial Officer will determine whether such services are included within the list of services that have
received the general preapproval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the independent auditor.
Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by
both the independent auditor and the Chief Financial Officer and must include a joint statement as to whether, in their view, the request or application is consistent with the SECs rules on auditor independence.
A-2
Exhibit 1
Prohibited
Non-Audit
Services
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Bookkeeping or other services related to the accounting records or financial statements of the audit client
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Financial information systems design and implementation
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Appraisal or valuation services, fairness opinions or
contribution-in-kind
reports
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Internal audit outsourcing services
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Broker-dealer, investment adviser or investment banking services
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Expert services unrelated to the audit
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A-3
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SOUTHWEST AIRLINES
CO.
2702 LOVE FIELD DRIVE
DALLAS, TEXAS 75235
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VOTE BY INTERNET -
www.proxyvote.com
Use the Internet to transmit your voting instructions until 11:59 P.M. Eastern Time on May 16, 2017 (May 15, 2017 for participants in the Southwest
Airlines Co. ProfitSharing Plan). Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS
If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy
cards, and annual reports electronically via
e-mail
or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you
agree to receive or access proxy materials electronically in future years.
VOTE BY PHONE -
1-800-690-6903
Use any
touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time on May 16, 2017 (May 15, 2017 for participants in the Southwest Airlines Co. ProfitSharing Plan). Have your proxy card in hand when you call and then
follow the instructions.
VOTE BY MAIL
Mark, sign, and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51
Mercedes Way, Edgewood, NY 11717.
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TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
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E19819-P89260
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KEEP THIS PORTION FOR YOUR RECORDS
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DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
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SOUTHWEST
AIRLINES CO.
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The Board of Directors recommends a vote
FOR
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all of the nominees listed below:
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1.
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Election of Directors
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For
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Against
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Abstain
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1a.
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David W. Biegler
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☐
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☐
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☐
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1b.
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J. Veronica Biggins
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The Board of Directors recommends a vote
FOR the following proposal:
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For
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Against
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Abstain
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1c.
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Douglas H. Brooks
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2. Advisory vote to approve named executive officer
compensation.
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☐
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1d.
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William H. Cunningham
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☐
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The Board of Directors recommends a vote for
1 YEAR with respect to the following proposal:
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1 Year
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2 Years
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3 Years
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Abstain
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1e.
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John G. Denison
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3. Advisory vote on frequency of votes on named
executive officer compensation.
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1f.
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Thomas W. Gilligan
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The Board of Directors recommends a vote
FOR the following proposal:
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For
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Abstain
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1g.
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Gary C. Kelly
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4. Ratification of the selection of
Ernst & Young LLP as the Companys independent auditors for the fiscal year ending December 31, 2017.
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1h.
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Grace D. Lieblein
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1i.
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Nancy B. Loeffler
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1j.
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John T. Montford
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1k.
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Ron Ricks
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For address changes and/or comments, please check
this box and write them on the reverse side where indicated.
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☐
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Please sign exactly as your name(s) appear(s) hereon.
When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership
name by authorized individual.
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Signature [PLEASE SIGN WITHIN BOX]
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Date
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Signature (Joint Owners)
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Date
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SOUTHWEST AIRLINES CO.
ANNUAL MEETING OF SHAREHOLDERS
Wednesday,
May 17, 2017
10:00 a.m. Mountain Standard Time
Kimpton Hotel Palomar Phoenix
2 East Jefferson
Street
Phoenix, Arizona
DIRECTIONS
TO THE ANNUAL MEETING
From Phoenix Sky Harbor Airport (PHX), go East on E. Sky Harbor Blvd. Turn right onto 24
th
Street North. Turn left onto E. Washington Street.
Turn left onto 1
st
Avenue. Turn left onto East Jefferson Street. Hotel is immediately
on left.
Valet and self parking are available at the hotel.
Alternatively from PHX, take the PHX Sky Train from Level 3 of Terminal 4 to the 44th Street PHX Sky Train Station
for the Phoenix Metro Light Rail. Take the Westbound light rail train towards Downtown Phoenix. Exit at the Washington/Central Ave. Station.
Head South on Central Ave. towards Washington St. and cross it. Turn left onto East Jefferson Street
and the hotel is on left.
Please note the admission requirements on the front of the Proxy Statement if you plan
to attend this years meeting in person.
Our Annual Meeting will be broadcast live on the Internet. To
listen to the broadcast, log on to www.southwestairlinesinvestorrelations.com.
E19820-P89260
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PROXY
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SOUTHWEST AIRLINES CO.
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2702 LOVE FIELD DRIVE
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DALLAS, TEXAS 75235
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This proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoints Gary C. Kelly, Tammy Romo, and Mark R. Shaw, and each of them, as proxies, each with full
power of substitution, and hereby authorizes each of them to represent and to vote, as designated on the reverse side of this form, all shares of Common Stock of Southwest Airlines Co. that the undersigned is entitled to vote at the Annual Meeting
of Shareholders of Southwest Airlines Co. to be held at the Kimpton Hotel Palomar Phoenix, 2 East Jefferson Street, Phoenix, Arizona on May 17, 2017, at 10:00 a.m., Mountain Standard Time, or at any adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE NOMINEES LISTED IN PROPOSAL 1; FOR PROPOSALS 2 AND 4; FOR 1 YEAR WITH RESPECT TO PROPOSAL 3; AND AT THE DISCRETION OF THE PROXY HOLDERS WITH REGARD TO
ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
YOUR
VOTE IS IMPORTANT. PLEASE SIGN, DATE, AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE TO ENABLE THE SHARES TO BE REPRESENTED AT THE MEETING.
YOU MAY ALSO VOTE VIA THE TELEPHONE OR THE INTERNET.
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Address Changes/Comments:
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(If you noted any Address Changes and/or Comments above, please mark the corresponding box on the reverse side.)
Continued and to be signed on reverse side
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