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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 ☒ Filed by a Party other than the Registrant ☐
Check the appropriate box:
| ☐ | Preliminary Proxy Statement | |
| ☐ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
| ☒ | Definitive Proxy Statement | |
| ☐ | Definitive Additional Materials | |
| ☐ | Soliciting Material Pursuant to §240.14a-12 | |
Southwest Airlines Co.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required. | |||
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Fee paid previously with preliminary materials. | |||
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Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a-6(i)(1) and 0-11 | |||
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SOUTHWEST AIRLINES CO.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, MAY 18, 2022
To the Shareholders:
The Annual Meeting of the Shareholders of Southwest Airlines Co. will be held on May 18, 2022. The Annual Meeting will be a completely virtual meeting. You may attend the Annual Meeting online at the following website address: www.virtualshareholdermeeting.com/LUV2022 and by entering the 16-digit control number included on the proxy card you received or in the instructions that accompanied your proxy materials. The Annual Meeting will begin at approximately 10:00 a.m., Central Daylight Time, with online login beginning at 9:50 a.m., Central Daylight Time, via a live webcast on the Internet.
The Annual Meeting is being held for the following purposes:
| (1) | to elect thirteen Directors; |
| (2) | to conduct an advisory (non-binding) vote to approve named executive officer compensation; |
| (3) | to approve the Southwest Airlines Co. Amended and Restated 1991 Employee Stock Purchase Plan; |
| (4) | to ratify the selection of Ernst & Young LLP as Southwest’s independent auditors for the fiscal year ending December 31, 2022; |
| (5) | if properly presented at the meeting, to consider and conduct an advisory (non-binding) vote on two Shareholder proposals, as described in the accompanying proxy statement; and |
| (6) | to transact such other business as may properly come before the meeting or any adjournment or postponement thereof. |
March 22, 2022, 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.
Your vote is important. As described in your electronic proxy materials notice or on the enclosed proxy or voting instruction card, please vote by: (1) accessing the Internet website; (2) calling the toll-free number; or (3) signing, dating, and mailing the enclosed proxy or voting instruction card. We encourage you to vote via the Internet, as this is the most cost-effective method. In addition, if you vote via the Internet, you may elect to have next year’s 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, more sustainable way for us to provide you with proxy materials and annual reports. Even if you plan to attend the virtual Annual Meeting, we recommend that you vote your shares in advance, so that your vote will be counted if you later decide not to attend online.
| By Order of the Board of Directors, |
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| Marilyn R. Post |
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| Corporate Secretary |
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April 8, 2022
| IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2022 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 18, 2022
Southwest’s Proxy Statement for the 2022 Annual Meeting of Shareholders and Annual Report to www.southwestairlinesinvestorrelations.com/financials
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Southwest Airlines Co.
P.O. Box 36611
Dallas, Texas 75235
(214) 792-4000
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
To be Held May 18, 2022
This Proxy Statement is being furnished in connection with the solicitation of proxies by and on behalf of the Board of Directors of Southwest Airlines Co. (the “Company” or “Southwest”) for use at the Annual Meeting of Shareholders of the Company to be held virtually on May 18, 2022, at approximately 10:00 a.m., Central Daylight Time, at www.virtualshareholdermeeting.com/LUV2022 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 8, 2022.
Participation. The Annual Meeting will be a completely virtual meeting. There will be no physical meeting location and the meeting will only be conducted via live webcast. The virtual Annual Meeting will be held on May 18, 2022, at approximately 10:00 a.m., Central Daylight Time. To participate in the meeting, visit www.virtualshareholdermeeting.com/LUV2022 and enter your 16-digit control number included on the proxy card you received or in the instructions that accompanied your proxy materials. Online login will begin at 9:50 a.m., Central Daylight Time. Please allow time for online login procedures.
Questions. Once logged in to the virtual meeting website, Shareholders may submit questions for the Annual Meeting through that site. Questions will be addressed as time permits and may be grouped, summarized, and answered together if related. If a question posed is not addressed during the Annual Meeting, or if a Shareholder has a question or remark not related to an agenda item, such matters may be raised after the Annual Meeting by contacting our Investor Relations Department at (214) 792-4415. Additional rules and procedures relating to the submission of questions and how questions will be addressed can be found in the Rules of Conduct for the Annual Meeting (“Rules of Conduct”). The Rules of Conduct will be posted and available for review upon login at www.virtualshareholdermeeting.com/LUV2022.
Technical Support. If you encounter any difficulties accessing the virtual Annual Meeting during login or in the course of the meeting, please contact the phone number found on the login page at www.virtualshareholdermeeting.com/LUV2022.
References in the Proxy Materials to the “Annual Meeting” also refer to any adjournments, postponements, or changes in location of the Annual Meeting, to the extent applicable.
A representative of Broadridge Financial Solutions, Inc. will tabulate votes and serve as Inspector of Election for the meeting. Each Shareholder will be entitled to one vote for each share 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 Shareholder’s name on the records of Southwest’s 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.
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Voting by Shareholders of Record. If you are a Shareholder of record, you may vote (i) through the Internet before or at the Annual Meeting, using the instructions on the proxy card and those posted at www.virtualshareholdermeeting.com/LUV2022; (ii) by telephone from the United States, using the number on the proxy card; or (iii) by completing and returning the enclosed proxy card. To help us keep our costs low and sustainably manage resources, please vote through the Internet, if possible. Shares represented by proxy will be voted during the meeting and may be revoked at any time prior to the time at which voting closes during the meeting 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 online at the virtual meeting. Please note that attending the meeting without casting a vote 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 Company’s 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 through the Internet or by telephone as described in the applicable instructions your broker has provided with these proxy materials. You may also vote by completing the voting instruction card the broker provides to you. To help us keep our costs low and sustainably manage resources, please vote through the Internet, if possible. You may change your vote by submitting new voting instructions to your broker in accordance with such broker’s 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 NYSE’s 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 at www.virtualshareholdermeeting.com/LUV2022 by entering the 16-digit control number provided by your broker (or bank or other nominee) and vote your shares online during the meeting.
In accordance with the Texas Business Organizations Code, a list of our Shareholders of record will be available and may be inspected for a period of at least 10 days prior to the Annual Meeting. If you want to inspect the Shareholder list, call our Investor Relations Department at (214) 792-4415 to schedule an appointment or request access. The list of Shareholders of record will also be available for review online during the virtual Annual Meeting.
Quorum; Effect of Abstentions and Broker Non-Votes
The presence at the meeting, online or by proxy, of the holders of a majority of the shares of the Company’s common stock entitled to vote at the meeting is necessary to constitute a quorum. Shareholders at the close of business on March 22, 2022, are entitled to vote at the meeting. As of that date, the Company had issued and outstanding 592,844,796 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, 3, 5, or 6, 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, thirteen Directors are nominated to be elected for terms expiring at the 2023 Annual Meeting of Shareholders or until their earlier death, retirement, resignation, or removal for cause in accordance with the provisions of the Company’s bylaws. Robert E. Jordan, 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.
| Name | Director Since |
Age* | ||
| David W. Biegler |
2006 | 75 | ||
| J. Veronica Biggins |
2011 | 75 | ||
| Douglas H. Brooks |
2010 | 69 | ||
| William H. Cunningham |
2000 | 78 | ||
| John G. Denison |
2008 | 77 | ||
| Thomas W. Gilligan |
2015 | 67 | ||
| David P. Hess |
2021 | 66 | ||
| Robert E. Jordan |
2022 | 61 | ||
| Gary C. Kelly |
2004 | 66 | ||
| Nancy B. Loeffler |
2003 | 75 | ||
| John T. Montford |
2002 | 78 | ||
| Christopher P. Reynolds |
— | 59 | ||
|
Ron Ricks |
2015 | 72 |
* As of February 28, 2022.
| David W. Biegler | Independent | Principal Occupation: Former Chairman of the Board, President, and Chief Executive Officer of Southcross Energy Partners GP, LLC |
David W. Biegler served as acting Chairman, President, and Chief Executive Officer of Southcross Energy Partners GP, LLC (“Southcross GP”) from March 2018 to September 2018, after previously serving as Southcross GP’s Chairman from August 2011 to January 2017, as its Chief Executive Officer from August 2011 to December 2014, and as its President from October 2012 to March 2014. Southcross GP acted as the general partner of Southcross Energy Partners, L.P., a limited partnership that owned, operated, developed, and acquired 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. 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. (1992-2018); Southcross Energy Partners, L.P. (since 2011); and Arcosa, Inc., a spin-off of Trinity Industries, Inc. (since 2018). Southcross Holdings LP, while he was serving as a director, filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in March 2016. Southcross Energy Partners, L.P. filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in April 2019.
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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. Biegler’s extensive experience as a Chief Executive Officer and Chief Operating Officer enable him to contribute significantly to the Board’s oversight responsibilities on matters relating to operational and financial strategies and risks, particularly in his roles as a member of the Board’s Audit Committee and Safety and Compliance Oversight Committee; (ii) Mr. Biegler’s senior management experience, as well as his experience from serving on multiple public company boards, enable him to contribute significantly with respect to the Board’s oversight of matters relating to executive compensation and compensation strategies, particularly in his role as Chair of the Board’s Compensation Committee; and (iii) Mr. Biegler’s broad-based knowledge in energy marketing is particularly pertinent in assisting the Board with its oversight of the Company’s fuel hedging program.
| J. Veronica Biggins | Independent | Principal Occupation: Managing Partner, Atlanta office of Diversified Search LLC |
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 one publicly traded company other than Southwest: Avnet, Inc. (1997-2018). Ms. Biggins also serves 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 Holdings, Inc., the former parent company of AirTran Airways, Inc., which was acquired by the Company in 2011; (ii) Ms. Biggins’ experience as Managing Partner of an executive and board search firm is valuable in her role as chair of the Board’s Nominating and Corporate Governance Committee, particularly with respect to that committee’s role in identifying candidates for Board membership; (iii) Ms. Biggins’ executive and board search firm experience is also beneficial to the Board and the Board’s Compensation Committee because of her perspectives on compensation and human capital matters; (iv) Ms. Biggins’ service on the compensation and nominating and corporate governance committees for other publicly traded companies enables her to bring extensive compensation and governance experience to the Board, particularly in her role on the Board’s Compensation Committee and as chair of the Board’s Nominating and Corporate Governance Committee; and (v) Ms. Biggins’ knowledge of the Atlanta market, along with her community involvement and charitable work, is valuable because of the Company’s significant focus on these areas.
| Douglas H. Brooks | Independent | Principal Occupation: Former Chairman of the Board, President, and Chief Executive Officer of Brinker International, Inc. |
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 Chili’s Grill & Bar. In March 2018, Mr. Brooks was appointed to the University of Houston System Board of Regents. During the past five years, Mr. Brooks has served as a Director of the following companies that are or were publicly traded other than Southwest: AutoZone, Inc. (since 2013) and ClubCorp Holdings, Inc. (2013-2017). Mr. Brooks also is a member
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of the Professional Advisory Board for St. Jude Children’s Research Hospital and serves on the Board of Directors of Limbs for Life.
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’ 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; (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 as Chief Executive Officer and President of a multi-national company is relevant to the Board and the Company in connection with the Company’s international operations.
| William H. Cunningham, Ph.D. |
Independent | Principal Occupation: Professor at The University of Texas at Austin |
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 University’s 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 one publicly traded company other than Southwest: Lincoln National Corporation (since 2006). 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 Lead Director and as a member of the Audit Committee; and (ii) Dr. Cunningham has served on over 25 corporate boards and has taught corporate governance at The University of Texas Schools of Law and Business, which enables him to bring valuable governance expertise to the Board, particularly in his roles as Lead Director and a member of the Nominating and Corporate Governance Committee.
| John G. Denison | Independent | Principal Occupation: Former Chairman of the Board of Global Aero Logistics Inc. |
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. Denison’s responsibilities included, among others, managing or supervising business plans, collective bargaining negotiations, restructurings, financings, and major contract negotiations.
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. Denison’s 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 Company’s operations and risks, particularly in his roles as a member of the Board’s Audit Committee and Chair of the Safety and Compliance Oversight Committee; and (iii) Mr. Denison’s experience with business plans, collective bargaining negotiations, and major contract negotiations are extremely valuable to the Board’s strategic discussions.
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| Thomas W. Gilligan, Ph.D. | Independent | Principal Occupation: Director and Senior Fellow Emeritus at the Hoover Institution on War, Revolution and Peace at Stanford University |
Thomas W. Gilligan, Ph.D. has been a Director and Senior Fellow Emeritus at the Hoover Institution on War, Revolution and Peace at Stanford University since August 2020. From September 2015 until August 2020, Dr. Gilligan served as the Tad and Dianne Taube Director of the Hoover Institution on War, Revolution and Peace at Stanford University. 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 of Business, 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 in connection with the Company’s international operations and governmental affairs; and (iii) Dr. Gilligan’s geographic presence on the West Coast is valuable in connection with the Company’s significant operations in that area.
| David P. Hess | Independent | Principal Occupation: Former Chief Executive Officer of Arconic Corporation |
David P. Hess most recently served as Chief Executive Officer of Arconic Corporation, a company that manufactures aluminum sheet, plate, extrusions, and architectural products, serving primarily the ground transportation, aerospace, building and construction, industrial, and packaging end markets, from April 2017 to January 2018. Prior to Arconic, Mr. Hess served in multiple executive leadership roles during his 38-year career at United Technologies Corporation (“UTC”), a company with significant business concentrations in aerospace products and services, including jet engines. Mr. Hess’ positions at UTC included Executive Vice President and Chief Customer Officer for UTC Aerospace, President of Pratt & Whitney, as well as President of Hamilton Sundstrand. During the past five years, Mr. Hess has served as a Director of the following companies that are publicly traded other than Southwest: Woodward, Inc. (since 2021), Allegheny Technologies Incorporated (since 2019), and Arconic Corporation (2017-2019).
The Board has concluded that Mr. Hess should serve as a Director for the Company for the following reasons, among others: (i) Mr. Hess’ extensive expertise and experience in the aerospace industry, both in leadership roles and serving on public company boards, add a unique aerospace technical expertise to the Board, which is particularly valuable in his role as a member of the Board’s Safety and Compliance Oversight Committee; (ii) Mr. Hess’ extensive leadership experience in the aerospace industry enables him to contribute to the Board’s oversight responsibilities on matters relating to regulation, operational strategies, and risks, particularly in his role as a member of the Board’s Safety and Compliance Oversight Committee; and (iii) Mr. Hess’ knowledge of the Midwestern and Northeastern U.S. markets adds perspectives to the Board in connection with the Company’s significant operations in those regions.
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| Robert E. Jordan | Principal Occupation: Chief Executive Officer of Southwest Airlines Co. |
Robert E. Jordan has served as the Company’s Chief Executive Officer since February 2022. Mr. Jordan also served as Executive Vice President & Incoming Chief Executive Officer from June 2021 to February 2022, Executive Vice President Corporate Services from July 2017 to June 2021, Executive Vice President & Chief Commercial Officer from September 2011 to July 2017, Executive Vice President Strategy & Planning from May 2008 to September 2011, Executive Vice President Strategy & Technology from September 2006 to May 2008, Senior Vice President Enterprise Spend Management from August 2004 to September 2006, Vice President Technology from 2002 to 2004, Vice President Purchasing from 2001 to 2002, Controller from 1997 to 2001, Director Revenue Accounting from 1994 to 1997, and Manager Sales Accounting from 1990 to 1994. Mr. Jordan joined the Company in 1988 as a programmer. During the past five years, Mr. Jordan has served as a Director for one publicly traded company other than Southwest: The Container Store Group, Inc. (since 2013).
The Board has concluded that Mr. Jordan should serve as a Director for the Company for the following reasons, among others: (i) he is the Company’s Chief Executive Officer and has been with the Company for over 30 years; (ii) the broad scope of his roles and experience with the Company over his long tenure with the Company enable him to bring invaluable strategic, financial, commercial, technologic, operational, supply chain, and cultural perspectives to the Board; (iii) Mr. Jordan’s experience as Chairman of the Board of The Container Store Group, Inc. enables him to bring valuable governance perspectives to the Board; and (iv) his role and his experience enable him to continually educate and advise the Board on the Company’s industry and related opportunities, issues, and challenges.
| Gary C. Kelly | Principal Occupation: Executive Chairman of the Board & Former Chief Executive Officer of Southwest Airlines Co. |
Gary C. Kelly has served as the Company’s Executive Chairman of the Board since February 2022 and has served as the Company’s Chairman of the Board since May 2008. Mr. Kelly also served as the Company’s Chief Executive Officer from July 2004 to February 2022, President from July 2008 to January 2017, Executive Vice President & Chief Financial Officer from June 2001 to July 2004, and Vice President Finance & Chief Financial Officer from 1989 to 2001. Mr. Kelly joined the Company in 1986 as its Controller. Mr. Kelly began a two-year term, commencing January 1, 2021, as Chairman of the Board of Directors of Airlines for America. During the past five years, Mr. Kelly has served as a Director of one publicly traded company other than Southwest: Lincoln National Corporation (since 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 served as the Company’s Chief Executive Officer for over 17 years 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 Company’s industry and related opportunities, issues, and challenges.
| Nancy B. Loeffler | Independent | Principal Occupation: Former Consultant for Frost Bank |
Nancy B. Loeffler served as a consultant for Frost Bank from July 2009 through December 2020, and served as a member of the Frost Bank Advisory Board from October 2008 through December 2020. A long-time advocate of volunteerism, Ms. Loeffler currently serves on the boards of The Briscoe Western Art Museum and The National Cowgirl Museum, and in May 2019, was named Chair of the San Antonio Stock Show & Rodeo Board. 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, and on the Board of Trustees for the Vice President’s Residence Foundation in Washington, D.C.
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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. Loeffler’s 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 Company’s significant focus on these areas.
| John T. Montford, J.D. | Independent | Principal Occupation: President and Chief Executive Officer of JTM Consulting, LLC |
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 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. Montford’s 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 Board’s Nominating and Corporate Governance Committee and Compensation Committee; and (iii) his experience as Chairman of the Senate Finance Committee (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 Board’s Audit Committee.
| Christopher P. Reynolds | Independent | Principal Occupation: Chief Administrative Officer, Corporate Resources for Toyota Motor North America |
Christopher P. Reynolds has served as the Chief Administrative Officer, Corporate Resources for Toyota Motor North America (“TMNA”), an automotive company, since 2016, and as deputy chief officer for the global functions of General Administration & Human Resources Group, Global Risk and Global Compliance for Toyota Motor Corporation, the parent company of TMNA, since 2014. Among other things, Mr. Reynolds is responsible for the North American functions of Accounting & Finance, Human Resources, Government Affairs, Corporate Communications, Corporate Strategy, Social Innovation/Diversity & Inclusion, and Legal. Previously, from 2007 to 2014, Mr. Reynolds headed up North American manufacturing operations and Corporate Shared Services for TMNA, and served as chief diversity officer for TMNA, general counsel and chief legal officer of TMNA, and as group vice president, chief environmental officer, and corporate secretary of Toyota Motor Sales, USA, Inc. Prior to joining Toyota in 2007, Mr. Reynolds was a partner at the law firm of Morgan, Lewis & Bockius in New York City, where Mr. Reynolds also worked as manager of the New York office’s labor and employment law group. He served as a member of the firm’s advisory board and as chair of the firm’s diversity committee.
The Board has concluded that Mr. Reynolds should serve as a Director for the Company for the following reasons, among others: (i) Mr. Reynolds’ extensive expertise and experience in the areas of government affairs and legal add a unique expertise to the Board, which is particularly valuable with respect to a
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heavily-regulated company like Southwest; (ii) Mr. Reynolds’ extensive leadership experience enables him to contribute to the Board’s oversight responsibilities on matters relating to accounting, finance, communications, international operations, and global risk, as well as the Company’s operational strategies and risks; (iii) Mr. Reynolds’ extensive expertise and experience in human resources and labor and employment law are extremely valuable to the Board in employment law and collective-bargaining matters; (iv) Mr. Reynolds’ service in multiple leadership roles at a manufacturer of transportation machinery enables Mr. Reynolds to offer a unique and valuable perspective to the Board with respect to opportunities, issues, and challenges confronting the Company and the transportation industry generally; (v) Mr. Reynolds’ extensive experience in diversity and inclusion matters, as well as his understanding and appreciation of cultures of other countries and regions gained through his multiple leadership roles at a subsidiary of a large multinational organization, will add a unique expertise and perspective to the Board with respect to the Company’s plans and initiatives in these areas; and (vi) Mr. Reynolds’ experience as a chief environmental officer will be valuable to the Board and the Company in connection with the Company’s sustainability efforts and goals.
| Ron Ricks | Independent | Principal Occupation: Vice Chairman of the Board of Southwest Airlines Co. |
Ron Ricks has served as the Company’s Vice Chairman of the Board since July 2015. Mr. Ricks also served as the Company’s 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 and retired as an Employee of the Company in February 2017. Mr. Ricks is Chairman of the Board of Directors of the Methodist Health System of Dallas, a large not-for-profit healthcare provider operating numerous facilities in North Texas.
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 Company’s 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 Company’s former Chief Legal & Regulatory Officer is particularly valuable with respect to the Board’s related oversight responsibilities, particularly in his role as a member of the Board’s Safety and Compliance Oversight Committee; and (iii) Mr. Ricks’ leadership experience over airports and public affairs enables him to provide unique strategic perspectives with respect to the Company’s 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.
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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 Company’s business for the long-term benefit of the Company’s Shareholders, Employees, and Customers. These guidelines set forth policies concerning overall governance practices for the Company, including the following:
| • Qualifications of Directors |
• Resignation Policy | |
| • Independence of Directors |
• Ethics | |
| • Size of Board and Selection Process |
• Director and Senior Management Compensation | |
| • Board Leadership |
• Share Ownership | |
| • Board Meetings, Agendas, and Other Materials |
• Access to Management | |
| • Director Responsibilities |
• Access to Independent Advisors | |
| • Board Committees |
• Director Orientation and Continuing Education | |
| • Executive Sessions; Communications with |
• Public Communications | |
| • Other Practices | ||
| • Board Self-Evaluation |
The Company’s 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 Company’s website, www.southwestairlinesinvestorrelations.com/corporate-governance/board-committees. 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 Company’s Nominating and Corporate Governance Committee is responsible for recommending to the Board the criteria for Board membership, as set forth in the Company’s 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 Company’s 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 Director’s 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 Company’s Employees, Customers, and Shareholders. While the Board does not have a formal policy with regard to Board member diversity, the Board has committed to increasing its diverse representation by 2025. In considering diversity, the Board takes into account various types of diversity, including, for example, diversity of experience, geography, gender, ethnicity, and race, with the goals of obtaining diverse perspectives and promoting constructive debate. The Board’s primary consideration is to identify candidates with the background, experience, and skills that will best fulfill the Board’s and the Company’s 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 chiefly on gender, ethnicity, race, age, or similar factors. Currently, 60 percent of the Compensation Committee, and 40 percent of the Nominating
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and Corporate Governance Committee, including the Chair of the Nominating and Corporate Governance Committee, are ethnically and/or gender diverse. Of the thirteen nominees for election to the Board at the Annual Meeting, 23 percent are ethnically and/or gender diverse.
The Corporate Governance Guidelines prohibit non-Employee Directors from serving on more than five public company boards and prohibit Employee Directors from serving on more than two public company boards. The Corporate Governance Guidelines also require that the nature and time involved in a Director’s 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 Chair 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 seven meetings during 2021 (some of which spanned two days) and acted twice by unanimous written consent. During 2021, each of the Company’s current Directors attended at least 75 percent of the total number of Board and applicable committee meetings. It is the Board’s policy that every Director and nominee for Director should make every effort to attend the Company’s Annual Meeting of Shareholders. All of the Company’s Directors attended the 2021 virtual Annual Meeting of Shareholders, via the online live webcast.
Gary C. Kelly, the Company’s Chief Executive Officer throughout 2021, and until February 1, 2022, currently serves as the Company’s Executive Chairman of the Board. Robert E. Jordan became Chief Executive Officer and a member of the Board effective February 1, 2022. The Board of Directors believes this structure is in the best interests of the Company and its Shareholders because, among other factors, Mr. Kelly and Mr. Jordan are uniquely positioned to coordinate in (i) properly and timely identifying matters that should be brought to the Board’s attention, (ii) prioritizing Board agenda items, and (iii) identifying 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 Mr. Kelly’s efforts or (ii) requiring Mr. Jordan to relay communications through another, less accessible, member of the Board. In addition, the Board believes the following practices accomplish independent oversight of management without the need for an independent Director to serve as Chairman of the Board:
| • | Eleven of the thirteen members of the Board are independent, as defined by the rules of the NYSE. |
| • | The independent members of the Board select the Chairman of the Board annually. |
| • | The independent members of the Board review whether the role of Chairman of the Board should be held by an independent Director. |
| • | Each member of the Board is elected annually by the Company’s Shareholders. |
| • | All members of the Board’s Audit, Compensation, Nominating and Corporate Governance, and Safety and Compliance Oversight Committees are independent, as defined by the rules of the NYSE. |
| • | The Board meets, at a minimum, four times per year, and at each regular meeting of the Board, the Board is apprised of the Company’s operations and strategies through briefings by (i) the Chief Executive Officer, the President and Chief Operating Officer, and the Chief Financial Officer; (ii) other members of senior management with key responsibilities for the Company’s ongoing operations and current initiatives; and (iii) any other Employees or advisors requested by the Board. |
| • | In addition to scheduled updates, the Board and its committees also request updates from management regarding matters deemed significant by the Board or its committees at any given time. |
| • | The independent Board members hold executive sessions outside the presence of the Chief Executive Officer, the Executive Chairman, and other management. |
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| • | To the extent that, at any time, the Board’s composition includes non-management members of the Board who are not independent, 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 Company’s Corporate Governance Guidelines, if the Board selects a Director who is not independent to serve as Chairman of the Board, the independent members of the Board are required to appoint an independent member of the Board to serve as its Lead Director, who is the Board’s presiding director for purposes of the rules of the NYSE. The duties and functions of the Lead Director include the following:
| • | presiding over executive sessions of the non-management Directors; |
| • | presiding over executive sessions of the independent Directors at any time the non-management members of the Board of Directors include Directors who are not independent; |
| • | consulting with the Executive Chairman and the Chief Executive Officer concerning the Board’s agendas; |
| • | coordinating the activities of the non-management and independent Directors, as applicable, and the agenda for executive sessions; |
| • | communicating feedback to the Executive Chairman and Chief Executive Officer following executive sessions of the independent Directors; |
| • | fostering an environment of open dialogue and constructive feedback among independent Directors; |
| • | calling meetings of independent Directors; |
| • | serving as a liaison, along with Board committee chairs, between the independent Directors and the Executive Chairman of the Board; provided that this shall not in any way diminish the Chief Executive Officer’s accountability to the Board in its entirety or the ability of any individual Board member and the Chief Executive Officer to communicate directly with each other; |
| • | being available to the Chief Executive Officer for consultation on issues of corporate importance that may involve Board action, and in general serving as a resource to the Chief Executive Officer on an as-needed basis; |
| • | at the standing invitation of the Board’s committees, attending meetings of Board committees on which the Lead Director does not already serve; |
| • | assisting the Nominating and Corporate Governance Committee with its oversight of the annual evaluation of the Board and its committees and communicating results of any individual Director assessments to individual Board members; |
| • | consulting with the Nominating and Corporate Governance Committee with respect to recommendations for the assignment of Board members to the Board’s committees; |
| • | assisting with and communicating (along with the Chair of the Compensation Committee) the results of the Board’s evaluation of the Chief Executive Officer; |
| • | subject to the Company’s policies regarding public communications, when deemed appropriate, representing the independent Directors in engaging with Shareholders; and |
| • | performing such other duties as the Board may determine from time to time. |
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 Company’s 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 Company’s 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
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Directors. The Board’s Lead Director, Dr. William H. Cunningham, presides over these executive sessions. Shareholders and any other interested parties may communicate directly with the Lead Director or any or all of the non-management or independent Directors as a group or any other members of the Board by writing to such Director(s), c/o Southwest Airlines Co., Attn: Lead Director, P.O. Box 36611, Dallas, Texas 75235.
The Board is responsible for overseeing management’s assessments of major risks facing the Company and for reviewing options to mitigate such risks. The Board’s 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, the President and Chief Operating Officer, the Chief Financial Officer, members of senior management, and other personnel and advisors, as requested by the Board, report on the Company’s financial, operating, and commercial strategies, as well as any related risks, at every regularly scheduled 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 Company’s major financial risk exposures, its guidelines and 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 Company’s management, as well as the Company’s Internal Audit Department (including in executive sessions), the Company’s guidelines and 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 Company’s internal controls from the Company’s Internal Audit Department and members of management responsible for financial controls. In addition, the Audit Committee receives the independent auditor’s assessment of the Company’s internal controls and financial risks, which includes the independent auditor’s 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 (i) the Company’s technology and cyber security frameworks, policies, programs, opportunities, and risk profile at every regularly scheduled meeting; and (ii) the Company’s business continuity and disaster recovery plans and capabilities and the effectiveness of the Company’s escalation procedures.
The Safety and Compliance Oversight Committee
The Safety and Compliance Oversight Committee assists the Board with overseeing the Company’s activities with respect to safety and operational compliance. Pursuant to its Charter, the Safety and Compliance Oversight Committee is responsible for monitoring the Company’s activities in areas of safety and operational compliance taking into account applicable government and industry standards, materiality, legal and business trends, and public policy issues, as well as periodically assessing the Company’s 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 reviews with management input and information from reports received from regulators and other parties related to the Company’s safety and operational compliance activities, specifies areas to be addressed at its meetings, and requires that individuals from a variety of operational areas and 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 assists the Board in shaping the corporate governance of the Company. The Nominating and Corporate Governance Committee receives updates and advice from management and outside advisors regarding the Company’s procedures for complying with corporate
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governance regulations, as well as with respect to the Company’s governance structure and protections. This Committee also develops and annually reviews and recommends to the Board a set of Corporate Governance Guidelines to be adopted for the Company to further the goal of providing effective governance.
The Compensation Committee
The Compensation Committee assists the Board with its oversight of (i) compensation of the Company’s executives and other employees, as well as non-employee Directors; (ii) succession planning; and (iii) human resources policies and practices, including the Company’s diversity, equity, and inclusion (DEI) philosophy, practices, and initiatives. The Compensation Committee receives updates and advice on the ongoing advisability of the Company’s compensation practices both from management and from the Compensation Committee’s independent consultant.
The Compensation Committee is aware of the need to routinely assess the Company’s compensation policies and practices as they relate to the Company’s risk management and whether the structure and administration of the Company’s compensation and incentive programs could influence risk-taking throughout the organization. The Compensation Committee has determined that the compensation policies and practices for the Company’s Employees are not reasonably likely to have a material adverse effect on the Company for the following reasons, among others:
| • | The Compensation Committee’s bonus determinations take into account multiple general performance standards established by the Company corresponding with the Company’s business objectives and priorities and related strategic initiatives, 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 designing incentive structures, so that factors that are deemed significant to industry and operational performance are considered in addition to financial measures. The importance of the Compensation Committee’s philosophy became particularly evident in 2020 and 2021 when the Compensation Committee aligned short-term incentive metrics with the Company’s heightened focus on crisis response and business recovery in connection with the unprecedented challenges associated with the COVID-19 pandemic. The Compensation Committee’s approach reduces the risk that can be created when traditional financial results are the only drivers of incentive payments. |
| • | The Compensation Committee has historically exercised a certain amount of discretion in approving bonuses, in part to minimize the risk-taking that can result from a strict application of performance-based awards. |
| • | Incentive compensation is used responsibly, with appropriate focus on both Company performance and an individual’s contributions to Company performance to effectively balance risks and rewards. |
| • | 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. |
| • | The Company’s Insider Trading Policy prohibits Employees (including officers) and the Company’s Board members from entering into hedging transactions with respect to the Company’s securities. |
Environmental, Social, and Governance (“ESG”) Oversight
Recognizing the fundamental importance of the Company’s corporate responsibility practices, the Board and its committees provide oversight of the Company’s ESG-related initiatives, objectives, and progress. In 2021, the Board updated the Compensation Committee’s Charter to reflect the committee’s existing practice of assisting the Board with its oversight of human resources policies and practices, including the Company’s diversity, equity, and inclusion (DEI) philosophy, practices, and initiatives. In 2021, the Board also decided the Company, its Employees, and its Shareholders are best served if the full Board is entrusted to oversee and evaluate the
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Company’s other ESG issues. In February 2022, the Board reassessed this decision and reached the same conclusion that other ESG matters expand well beyond a single committee and that each Board member offers a unique perspective and valuable input critical in overseeing ESG matters. After reaching this conclusion, the Board updated the Company’s Corporate Governance Guidelines to formally reflect this oversight responsibility.
As part of its corporate responsibility efforts, the Company publishes the Southwest One Report describing the Company’s ESG-related goals, actions, initiatives, and strategies. Information contained in the Southwest One Report is not incorporated by reference into, and does not constitute a part of, this Proxy Statement.
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 Board’s current committee memberships and number of meetings held by each committee during 2021.
| Name | Audit Committee |
Compensation Committee |
Nominating and Corporate Governance Committee |
Safety and Compliance Oversight Committee |
Executive Committee | |||||
| David W. Biegler | X | Chair | X | |||||||
| J. Veronica Biggins | X | Chair | ||||||||
| Douglas H. Brooks | X | X | ||||||||
| William H. Cunningham | X | X | X | |||||||
| John G. Denison | X | Chair | X | |||||||
| Thomas W. Gilligan | X | X | ||||||||
| David P. Hess | X | |||||||||
| Robert E. Jordan | X | |||||||||
| Gary C. Kelly | Chair | |||||||||
| Grace D. Lieblein* | X | X | ||||||||
| Nancy B. Loeffler | X | X | ||||||||
| John T. Montford | Chair | X | X | |||||||
| Ron Ricks | X | X | ||||||||
| Number of Meetings in 2021 | 9 | 7 | 4 | 6 | 2 | |||||
* Ms. Lieblein has chosen to retire as a member of the Board following the Annual Meeting.
The primary functions of each of the Board’s standing Committees are discussed below.
Audit Committee
The primary functions of the Audit Committee include assisting the Board in its oversight of (i) the integrity of the Company’s financial statements, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, (iv) the performance of the Company’s internal audit function and independent auditors, and (v) cyber security and technology-related risks and management’s efforts to monitor and mitigate those risks. The Audit Committee has been established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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.
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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 Officer’s performance in light of those goals and objectives; (iii) either as a Committee or 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 Officer’s compensation level based on this evaluation; (iv) with the advice of the Executive Chairman of the Board and Chief Executive Officer, performing an annual review of the compensation structure of the Company’s officers and approving the salary, bonus, and other incentive and equity-related compensation for each of the Company’s executive officers who are subject to Section 16(b) of the Exchange Act (“Reporting Officers”); (v) reviewing and approving all equity-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; (vi) making recommendations to the Board with respect to non-CEO Reporting Officer compensation and incentive compensation plans that are subject to Board approval; (vii) reviewing, assessing, and making recommendations to the Board, as appropriate, on the Company’s diversity, equity, and inclusion (DEI) philosophy, practices, and initiatives; and (viii) reviewing, assessing, and making recommendations to the Board, as appropriate, on other key human resources policies and practices. 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 and responsibilities 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 NYSE’s rules governing Compensation Committee membership; and (ii) a “non-employee director” under Rule 16b-3 of the Exchange Act.
Role of executive officers in determining or recommending the amount or form of executive and Director compensation. At the Compensation Committee’s request, the Company’s Chief Executive Officer and the Company’s People Department leaders provide regular input regarding compensation designs and recommendations presented to the Compensation Committee. In connection with the Compensation Committee’s decisions, the Chief Executive Officer also reviews with the Compensation Committee the relative roles, scope of responsibilities, and performance of the Company’s other executive officers. The roles of the Chief Executive Officer and the People Department leaders in connection with the Compensation Committee’s determinations are discussed in more detail below under “Compensation of Executive Officers — Compensation Discussion and Analysis — Internal Equity; Role of Management.”
Use of consultants. The Compensation Committee is directly responsible for the appointment, compensation, and oversight of the work of any compensation consultant, independent legal counsel, or other advisor retained by the Compensation Committee. During 2021, the Compensation Committee continued to engage Pay Governance LLC, an independent executive compensation advisory firm, as the Compensation Committee’s independent consultant. With respect to executive compensation opportunities awarded for 2021, the Compensation Committee took into account (i) market data provided by its consultant, (ii) restrictions to which the Company was subject as a condition to the Company’s receipt of payroll support from the U.S. Department of the Treasury in connection with the COVID-19 pandemic, and (iii) resulting recommendations from the consultant with respect to the 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 2021, at the Compensation Committee’s request, its consultant also provided data and assessments related to the adequacy of the Company’s compensation program for non-Employee members of the Board. Based on the information provided in 2021, as well as the Compensation Committee’s related recommendation to the Board, effective October 1, 2021, the Board increased the non-Employee director annual cash retainer fees for the Vice Chairman, the Lead Director, all committee memberships, and the Committee Chairs for the Audit, Compensation, Nominating and Corporate Governance, and Executive Committees, to better align with market median.
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The Compensation Committee uses the information provided by its independent consultant (i) for the purpose of informing, as opposed to determining, the Compensation Committee’s decisions; and (ii) to assist it in balancing between compensation that is appropriately linked to performance and compensation that is fair and adequate for retention purposes. Although the Compensation Committee generally considers any recommendations received from its consultant, the Compensation Committee’s decisions are ultimately based on its own assessment of the information provided to it in the context of the totality of the Company’s circumstances at any given point in time. Additional detail regarding the work performed by the independent consultant, as well as the Compensation Committee’s 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, if any; (ii) fees paid by the Company as a percentage of the consultant’s total revenue; (iii) policies and 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 Company’s 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 Company’s Board members and executive officers were also included in the Company’s annual Director and Executive Officer Questionnaires. The Compensation Committee has assessed the independence of Pay Governance LLC pursuant to SEC and NYSE rules and determined that no conflict of interest exists, or has existed, that would prevent Pay Governance from independently representing the Compensation Committee.
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 (which, among other things, include criteria for selection of new Directors and oversight of the evaluation of the Board and management); (ii) identifying and reviewing with the Board and the Chief Executive Officer possible candidates for Board membership, consistent with criteria approved by the Board; (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 Board’s Committees; (v) recommending to the Board a chairperson of each of the Board’s committees; and (vi) overseeing the evaluation of the Board and management.
The Nominating and Corporate Governance Committee is responsible for overseeing an evaluation at least annually of the performance of the Board and the Board’s committees and reporting its conclusions to the Board. The responses of the Board members are compiled on an anonymous basis and address such areas as Board structure, Board effectiveness, Board meetings, and Board committee structure and performance. The Nominating and Corporate Governance Committee makes appropriate recommendations to the Board following such evaluations, including areas in which the Board, including individual members of the Board, can better contribute to the governance and long-term success of the Company. The Nominating and Corporate Governance Committee may use the results of its evaluation in determining the criteria for Directors to be considered to fill any vacancies on the Board or on its committees and for inclusion in the slate of Directors to be recommended by the Board at the Annual Meeting of Shareholders. The Board believes this annual evaluation process supports the effectiveness and continuous improvement of the Board as a whole and of each of its committees.
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. With respect to Mr. Jordan, who was appointed to the Board effective February 1, 2022, in connection with becoming the Company’s Chief Executive Officer, all members of the Nominating and Corporate Governance Committee and the full Board, having personal knowledge of Mr. Jordan’s credentials and character, collectively discussed and approved his
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appointment to the Board. With respect to Mr. Hess, who was appointed to the Board effective November 18, 2021, (i) Mr. Kelly, Mr. Van de Ven, and the Nominating and Corporate Governance Committee identified him as a potential candidate for Board membership based on his extensive qualifications, as noted in Mr. Hess’ biography in “Proposal 1 – Election of Directors,” and knowledge of the aerospace industry; and (ii) after a thorough background review and based on extensive interviews of Mr. Hess by members of the Nominating and Corporate Governance Committee, as well as other Board members’ interactions with Mr. Hess, the Board unanimously approved Mr. Hess’ appointment to the Board. With respect to Mr. Reynolds, (i) Mr. Kelly and the Nominating and Corporate Governance Committee identified him during 2021 as a potential candidate for the Board based on his extensive qualifications, as noted in Mr. Reynolds’ biography in “Proposal 1 – Election of Directors,” and suitability for the Company’s Board; and (ii) after a thorough background review and based on extensive interviews of Mr. Reynolds by members of the Nominating and Corporate Governance Committee, as well as other Board members’ interactions with Mr. Reynolds, the Board unanimously approved Mr. Reynolds’s appointment to the Board, subject to approval of Shareholders, effective immediately after the Annual Meeting. The Board of Directors has determined that each of the members of the Nominating and Corporate Governance Committee is independent under the NYSE’s 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 Company’s Corporate Governance Guidelines; provided that such nominations are submitted in accordance with the requirements of the Company’s bylaws. These requirements are discussed below under “Other Matters — Submission of Shareholder Proposals.”
Safety and Compliance Oversight Committee
The primary functions of the Safety and Compliance Oversight Committee include: (i) monitoring the Company’s activities in the areas of safety and operational compliance; (ii) periodically assessing the Company’s safety and operational compliance obligations and associated risks and performance relative to those standards; (iii) reviewing such policies, programs, and procedures of the Company as it shall deem necessary, including the Company’s safety and operational compliance reporting systems; (iv) meeting regularly with Company management to assess the Company’s safety and operational compliance practices generally; and (v) periodically reporting to the Board on the adequacy and effectiveness of the Company’s safety and operational compliance programs.
Executive Committee
The primary function of the Executive Committee is to assist the Board in fulfilling its oversight responsibilities. The Executive Committee has the powers, authority, duties, and responsibilities of the Board on most matters during the intervals between Board meetings.
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, if any, 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 Company’s Internal Audit Department to identify related person transactions.
The Company requires all of its Directors and executive officers to 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 Company’s Internal Audit Department analyzes accounts payable records to search for payments involving (i) the Company’s Directors and executive officers, (ii) known relatives of the Company’s 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 Company’s common stock. The questionnaire for non-Employee Directors is also designed to elicit information that should be considered to determine that the
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Company satisfies the NYSE’s requirement that a majority of its Board members be independent within the meaning of the NYSE’s 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 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 NYSE’s 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, David P. Hess, Grace D. Lieblein, Nancy B. Loeffler, John T. Montford, and Ron Ricks. Additionally, the Board has determined that Christopher P. Reynolds, should he be elected by the Shareholders at the Annual Meeting, is independent under applicable NYSE standards.
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 Director’s or executive officer’s completion of his or her annual questionnaire.
The Company has adopted policies with respect to the purchase of financial instruments or engaging in transactions that hedge or offset a decrease in the market value of Company equity securities by Directors, officers, Employees, or consultants. Under the Company’s Insider Trading Policy and the Company’s Blackout and Pre-Clearance Procedures, which supplement its Insider Trading Policy, Directors, officers, Employees and consultants of the Company are prohibited from engaging in short sales of any Company securities and from purchasing financial instruments that hedge or offset or are designed to hedge or offset a decrease in the market value of the Company’s securities, including those involving option contracts, warrants, stock appreciation rights (or similar rights whose value is derived from the value of an equity security), straddles, collars, puts or calls, and other derivative securities involving Company equity securities (but excluding any instruments granted under any Company equity incentive plan, including options, restricted stock, restricted stock units, or other derivative securities). The policies’ restrictions also apply to designees and the spouse and household members of Directors, officers, Employees, or consultants. In addition, Directors and officers are prohibited from holding Company securities in a margin account or pledging Company securities as collateral for a loan.
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VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
At the close of business on March 22, 2022, the record date for determining Shareholders entitled to notice of and to vote at the meeting, there were outstanding 592,844,796 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, 2022, information with respect to persons who, to the Company’s knowledge, beneficially own more than five percent of the Company’s common stock.
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership |
Percent of Class(1) |
||||||||||||
|
|
|
|
|
|
||||||||||
| The Vanguard Group |
61,814,978(2) | 10.4% | ||||||||||||
| 100 Vanguard Blvd. Malvern, PA 19355 |
||||||||||||||
| PRIMECAP Management Company |
54,290,429(3) | 9.2% | ||||||||||||
| 177 E. Colorado Blvd., 11th Floor Pasadena, CA 91105 |
||||||||||||||
| State Street Corporation |
40,425,713(4) | 6.8% | ||||||||||||
| State Street Global Advisors Trust Company |
||||||||||||||
| 1 Lincoln Street |
||||||||||||||
| Boston, MA 02111(5) |
||||||||||||||
| BlackRock, Inc. |
32,756,987(6) | 5.5% | ||||||||||||
| 55 East 52nd Street New York, NY 10055 |
||||||||||||||
| (1) | Percentages are calculated based on the number of outstanding shares of the Company’s common stock as of February 28, 2022, which was 592,844,504. |
| (2) | Information is based on an Amendment to Schedule 13G filed with the SEC on January 10, 2022, by The Vanguard Group. The Vanguard Group reported no sole voting power with respect to shares beneficially owned, sole dispositive power with respect to 60,052,357 shares, shared voting power with respect to 694,734 shares, and shared dispositive power with respect to 1,762,621 shares. |
| (3) | Information is based on an Amendment to Schedule 13G filed with the SEC on February 10, 2022, by PRIMECAP Management Company. PRIMECAP Management Company reported sole voting power with respect to 52,224,753 shares, sole dispositive power with respect to 54,290,429 shares, and no shared voting or dispositive power. |
| (4) | Information is based on an Amendment to Schedule 13G filed with the SEC on February 11, 2022, by State Street Corporation, a parent holding company, and State Street Global Advisors Trust Company. Each of these Shareholders reported no sole voting or dispositive power over shares beneficially owned. State Street Corporation reported shared voting power with respect to 18,283,624 shares and shared dipositive power with respect to 40,420,711 shares; and State Street Global Advisors Trust Company reported shared voting power with respect to 12,418,713 shares and shared dispositive power with respect to 33,862,393 shares. Based on the Schedule 13G filing, State Street Global Advisors Trust Company beneficially owned 5.72 percent of the Company’s outstanding shares of common stock. |
| (5) | This address is listed in the Amendment to Schedule 13G filed with the SEC on February 11, 2022, as the address of both State Street Corporation and State Street Global Advisors Trust Company. |
| (6) | Information is based on a Schedule 13G filed with the SEC on February 1, 2022, by BlackRock, Inc. BlackRock, Inc., a parent holding company or control person, reported sole voting power with respect to 29,928,170 shares, sole dispositive power with respect to 32,756,987 shares, and no shared voting or dispositive power. |
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Security Ownership of Management
The following table sets forth, as of February 28, 2022, information regarding the beneficial ownership of the Company’s common stock by each of the members of the Company’s 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) |
59,939 | * | ||||||
| J. Veronica Biggins |
50,732 | * | ||||||
| Douglas H. Brooks |
60,232 | * | ||||||
| William H. Cunningham |
84,432 | * | ||||||
| John G. Denison |
61,732 | * | ||||||
| Thomas W. Gilligan |
8,056 | * | ||||||
| David P. Hess |
0 | * | ||||||
| Robert E. Jordan(3) |
116,040 | * | ||||||
| Gary C. Kelly(4) |
774,298 | * | ||||||
| Grace D. Lieblein |
19,624 | * | ||||||
| Nancy B. Loeffler |
50,190 | * | ||||||
| John T. Montford |
21,752 | * | ||||||
| Christopher P. Reynolds |
0 | * | ||||||
| Ron Ricks |
199,899 | * | ||||||
| Thomas M. Nealon ** |
106,563 | * | ||||||
| Tammy Romo(5) |
129,654 | * | ||||||
| Michael G. Van de Ven(6) |
195,784 | * | ||||||
| Andrew M. Watterson |
14,146 | * | ||||||
|
Current Executive Officers and Directors as a Group (18 persons)(7) |
1,901,516 | * | ||||||
| * | Less than 1% |
| ** | Mr. Nealon ceased to be an executive officer of the Company, effective September 13, 2021. |
| (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 (i) 4,707 shares held by Mr. Biegler’s spouse and (ii) 35,766 shares held by a family trust for which Mr. Biegler’s spouse serves as trustee. |
| (3) | Includes 11,586 shares held for Mr. Jordan’s account under the Company’s profit sharing plan, with respect to which he has the right to direct the voting. |
| (4) | Includes (i) shares deemed indirectly beneficially owned through a family trust with respect to which Mr. Kelly serves as trustee (the “Reporting Person Trust”), (ii) shares deemed indirectly beneficially owned through a family trust with respect to which Mr. Kelly’s spouse serves as trustee (the “Spousal Trust”), and (iii) shares deemed indirectly beneficially owned through a family limited partnership (the “Family Limited Partnership”). The sole general partner of the Family Limited Partnership is a limited liability company that is wholly owned by Mr. Kelly and his spouse (the “Family Limited Liability Company”). The sole limited partners of the Family Limited Partnership are the Reporting Person Trust, the Spousal Trust, Mr. Kelly through a separate limited partnership interest (“Mr. Kelly’s LP Interest”), Mr. Kelly through a community property limited partnership interest (“Mr. Kelly’s CP LP Interest”), and Mr. Kelly’s spouse through a community property limited partnership interest (“Mr. Kelly’s Spouse’s CP LP Interest”). The 774,298 shares reported in the table include (i) 47,011 shares held directly by Mr. Kelly; (ii) 351,596 shares held by the Reporting Person Trust, including 219,758 shares held directly and 131,838 |
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| shares held through the Reporting Person Trust’s limited partnership interest in the Family Limited Partnership; (iii) 307,718 shares held by the Spousal Trust, including 205,000 shares held directly and 102,718 shares held through the Spousal Trust’s limited partnership interest in the Family Limited Partnership; (iv) 12,369 shares held through Mr. Kelly’s LP Interest; (v) 26,289 shares held through Mr. Kelly’s CP LP Interest; (vi) 26,289 shares held through Mr. Kelly’s Spouse’s CP LP interest; and (vii) 3,025 shares held by the Family Limited Liability Company through its general partnership interest in the Family Limited Partnership. |
| (5) | Includes 3,606 shares held for Ms. Romo’s account under the Company’s profit sharing plan, with respect to which she has the right to direct the voting. |
| (6) | Includes 709 shares held for Mr. Van de Ven’s account under the Company’s profit sharing plan, with respect to which he has the right to direct the voting. |
| (7) | In addition to the amounts disclosed in footnotes (2) through (6), with respect to the other executive officers of the Company, includes 2,394 total shares held for two executive officers in their accounts under the Company’s profit sharing plan, with respect to which each executive officer has the right to direct the voting for their respective shares. |
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COMPENSATION OF EXECUTIVE OFFICERS
COMPENSATION DISCUSSION AND ANALYSIS
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| 2021 Long-Term Incentive Compensation – Equity and Cash Incentive Awards |
28 | |||
| 28 | ||||
| 28 | ||||
| COMPENSATION COMMITTEE’S CONSIDERATION OF 2021 SAY-ON-PAY VOTE |
29 | |||
| ROLE OF INDEPENDENT COMPENSATION CONSULTANT; BENCHMARKING; MARKET DATA | 29 | |||
| 30 | ||||
| DETERMINATION OF 2021 EXECUTIVE COMPENSATION; ANALYSIS OF INDIVIDUAL COMPENSATION ELEMENTS | 30 | |||
| 30 | ||||
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| Performance-Based Short-Term Incentive Compensation Opportunities under the Incentive |
32 | |||
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| Individual Equity Determinations for the Named Executive Officers |
37 | |||
| 37 | ||||
| 37 | ||||
| 38 | ||||
| 38 | ||||
| Individual Long-Term Cash Incentive Award Determinations for the Named Executive Officers |
38 | |||
| 38 | ||||
| 38 | ||||
| 38 | ||||
| 38 | ||||
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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 2021, and one former executive officer who would have been among the three next most highly compensated executive officers had he been serving as an executive officer on December 31, 2021. For 2021, 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, President & Chief Operating Officer; (iv) Robert E. Jordan, Executive Vice President & Incoming Chief Executive Officer; (v) Andrew M. Watterson, Executive Vice President & Chief Commercial Officer; and (vi) Thomas M. Nealon, former President. Effective February 1, 2022, Robert E. Jordan became the Company’s Chief Executive Officer and Mr. Kelly became Executive Chairman of the Board. For purposes of this Compensation Discussion and Analysis, the Compensation Committee will be referred to as the “Committee.”
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|
Retention; Internal Equity. To address retention, the Committee has historically sought 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 and relevant market data both within and outside of the airline industry. The Committee has used this information as a point of reference when assessing the appropriateness of the Company’s executive compensation. To address internal equity, the Committee has also traditionally taken into account the relative roles, responsibilities, performance, and tenure of the named executive officers. For 2021, the Committee was also required to take into account the PSP Pay Restrictions as part of its executive compensation planning and decisions. As a result, the Company faced an increasing risk of losing talent to companies that were not subject to PSP Pay Restrictions or otherwise harmed to a significant financial extent as a result of the COVID-19 pandemic. This in turn intensified the Committee’s focus on retention. For purposes of this Compensation Discussion and Analysis, references to the adequacy, appropriateness, and competitiveness of compensation (and similar references), as well as comparisons to market, should be interpreted in the context of the information and challenges addressed in this paragraph. The market data considered by the Committee is discussed below under “Role of Independent Compensation Consultant; Benchmarking; Market Data.” |
Summary of 2021 Executive Compensation
As a condition to the Company’s receipt of Payroll Support, in April 2020 the Company committed to limiting the total compensation of certain of its Employees (“Total PSP Compensation”). For these purposes, Total PSP Compensation is calculated in accordance with the SEC’s rules for calculating the total compensation included in the Summary Compensation Table, but excludes severance pay or other benefits in connection with a termination of employment. Employees (other than Employees subject to collective bargaining agreements that govern their compensation structure (referred to as “contract Employees”)) who received Total PSP Compensation greater than $425,000 for 2019 are subject to the following Total PSP Compensation limits during any 12 months of the period beginning on March 24, 2020, and ending April 1, 2023 (the “PSP Limitation Period”):
| PSP Pay Restrictions | ||
| Employees with 2019 Total PSP Compensation greater than $425,000 |
Employees with 2019 Total PSP Compensation greater than $3,000,000 | |
| May not exceed Total PSP Compensation received by the Employee in calendar year 2019 | May not exceed the sum of:
$3,000,000
and
50 percent of the excess over $3,000,000 of the Total PSP Compensation received by the Employee in calendar year 2019 | |
With the exception of Mr. Watterson, each of the named executive officers received more than $3,000,000 in Total PSP Compensation for 2019 and are therefore subject to the limit in the second column above. Mr. Watterson received more than $425,000, but less than $3,000,000, in Total PSP Compensation for 2019 and is therefore subject to the limit in the first column above. In addition, during the PSP Limitation Period, any Employee subject to the PSP Pay Restrictions may not receive severance pay or other benefits in connection with a termination of employment in excess of two times the maximum Total PSP Compensation received by such Employee for 2019. In order to comply with the PSP Pay Restrictions, the Committee reduced the aggregate dollar value of each of the named executive officer’s 2021 equity grants compared with 2020 (the 2020 grants occurred prior to the PSP Limitation Period and were therefore not subject to the PSP Pay Restrictions). In addition, the Committee reduced the named executive officers’ aggregate short-term incentive compensation payouts for 2021.
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2021 Base Pay. During 2020, in light of the negative impacts of the pandemic on the Company, the following named executive officers took voluntary reductions in the base pay amounts previously approved for them by the Committee: Mr. Kelly, Ms. Romo, Mr. Nealon, Mr. Van de Ven, and Mr. Jordan. By January 2021, the Company had determined it would not need to impose pay cuts on the rest of the Company’s Employee population. Therefore, the Committee deemed it equitable and appropriate for retention purposes to restore all of these named executive officers’ base pay amounts to the amounts originally approved for 2020. Nevertheless, at Mr. Kelly’s request, the Committee only restored his base pay to $600,000, or 80% of his 2020 level of $750,000, the base pay amount that had previously been in place for Mr. Kelly since February 2017. Mr. Kelly’s base pay was eventually reinstated to $750,000, effective July 1, 2021, after the Company had experienced improvements in travel demand and bookings. In February 2021, Mr. Watterson, who was not a named executive officer for 2020, received a moderate base pay increase of 3.0 percent year-over-year on an annualized basis, which was consistent with the Company’s merit structure for its other non-contract Employees during 2021.
Additional detail regarding 2021 base pay is provided below under “Determination of 2021 Executive Compensation; Analysis of Individual Compensation Elements – Base Pay.”
2021 Short-Term Incentive Compensation. In first quarter 2021, consistent with its historic practices, the Committee established a target short-term incentive opportunity (the “STI Target Opportunity”) for each of the named executive officers, and each STI Target Opportunity was established as a percentage of the named executive officer’s base pay. In addition, total short-term incentive payouts could range from zero to 150 percent of a named executive officer’s STI Target Opportunity based on a combination of Company and individual performance. The Committee did not approve any year-over-year increases in the named executive officers’ STI Target Opportunities, but chose to remain consistent with the STI Target Opportunities established for 2020 in an attempt to maintain internal and external equity to the extent feasible and thereby mitigate retention risks. Therefore, (i) Mr. Kelly’s STI Target Opportunity remained at 200 percent of base, (ii) Mr. Nealon’s and Mr. Van de Ven’s STI Target Opportunities remained at 150 percent of base, (iii) Ms. Romo’s and Mr. Jordan’s STI Target Opportunities remained at 135 percent of base, and (iv) Mr. Watterson’s STI Target Opportunity remained at 120 percent of base.
Also consistent with prior years, for 2021, 80 percent of each named executive officer’s STI Target Opportunity was based on the Company’s performance relative to performance metrics set forth in the Company’s “Management Short-Term Incentive Scorecard.” The amounts earned were based on Company performance at 98.0 percent of target; however, the amounts actually paid to the named executive officers were reduced to comply with the PSP Pay Restrictions and are disclosed in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table. Additional detail regarding calculation of the non-equity incentive plan payouts is included in Note 2 to the Summary Compensation Table. In establishing 2021 performance metrics and related targets, the Committee took into account the continued uncertainty associated with the COVID-19 pandemic and the related imperative that the Company direct its focus on operational and financial recovery. The specific performance metrics and targets, the Committee’s associated rationales, and the Company’s performance results, are each disclosed below under “Determination of 2021 Executive Compensation; Analysis of Individual Compensation Elements – Short-Term Incentive Compensation.”
The other 20 percent of each named executive officer’s STI Target Opportunity was subjectively determined, based on the impact of the named executive officer’s individual performance and contributions to the Company’s results. The amount earned by each of the named executive officers was based on individual performance at 100 percent of target; however, the amounts actually paid to the named executive officers were reduced to comply with the PSP Pay Restrictions and are disclosed in the “Bonus” column of the Summary Compensation Table. Additional detail regarding the calculation of the bonus payouts is included in Note 2 to the Summary Compensation Table. In addition, the Committee’s rationales for bonus amounts earned are discussed in more detail below under “Determination of 2021 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 the “Bonus” column and the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
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2021 Long-Term Incentive Compensation – Equity and Cash Incentive Awards.
Equity Awards. The Committee believes that equity should constitute a strong component of overall compensation and a significant percentage of base pay; however, reflecting the PSP Pay Restrictions, equity as a percentage of total compensation for each of the named executive officers decreased from 2020 to 2021 as follows:
| 2020 | 2021 | |||
| Gary C. Kelly |
77.15% | 67.80% | ||
| Tammy Romo |
68.96% | 63.84% | ||
| Michael G. Van de Ven |
70.23% | 62.00% | ||
| Robert E. Jordan |
68.97% | 64.08% | ||
| Andrew M. Watterson |
66.68% | 63.76% | ||
| Thomas M. Nealon |
70.23% | 62.00% |
Consistent with prior years, each of the named executive officers received a portion of their equity award in the form of time-vesting RSUs and a portion in the form of performance-based RSUs. The performance-based RSUs will vest, if at all, depending on the Company’s financial performance over multiple years. Additional detail regarding these equity grants is included below under “Determination of 2021 Executive Compensation; Analysis of Individual Compensation Elements – Long-Term Incentive Compensation.”
Cash Incentive Awards. During 2021, taking into account the PSP Pay Restrictions, the Committee introduced long-term cash incentive awards as an additional element of the named executive officers’ long-term incentive compensation. Like the performance-based RSUs, the payout of the long-term cash incentive awards will be dependent upon the Company’s financial performance over multiple years. As shown below, the introduction of long-term cash incentive awards enabled the Committee to maintain consistency with its historical emphasis on long-term incentive opportunities, including a significant percentage granted as performance-based opportunities:
|
Value of Time- Vesting LTI |
Value of Performance- Based LTI Opportunity Performance-Based |
Performance- Percentage of |
LTI as a Base Pay |
|||||||||||||
| Gary C. Kelly |
$3,562,518 | $3,562,498 | 50% | 950% | ||||||||||||
| Tammy Romo |
$1,535,359 | $1,172,251 | 43% | 520% | ||||||||||||
|
Michael G. Van de Ven |
$1,864,746 | $1,422,498 | 43% | 578% | ||||||||||||
| Robert E. Jordan |
$1,521,859 | $1,158,737 | 43% | 521% | ||||||||||||
| Andrew M. Watterson |
$1,262,576 | $978,603 | 44% | 458% | ||||||||||||
| Thomas M. Nealon |
$1,864,746 | $1,422,498 | 43% | 578% | ||||||||||||
Additional detail regarding 2021 cash incentive awards is included below under “Determination of 2021 Executive Compensation; Analysis of Individual Compensation Elements – Long-Term Incentive Compensation.”
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COMPENSATION COMMITTEE’S CONSIDERATION OF 2021 SAY-ON-PAY VOTE
At its 2021 Annual Meeting of Shareholders, votes in favor of approving the Company’s named executive officer compensation constituted over 93 percent of the shares voted either for or against the proposal. The Committee interpreted the results of the Company’s 2021 say-on-pay vote as a continued endorsement of (i) the Committee’s overall compensation philosophy and structure, (ii) the Company’s executive pay levels generally, and (iii) the Committee’s 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 2021, the data provided by the independent consultant included reviews of the named executive officers’ base salaries, annual bonus/short-term incentive compensation opportunities, total cash compensation opportunities (base salary plus annual bonus/short-term incentive compensation), long-term incentive compensation opportunities (equity), and total direct compensation opportunities (total cash compensation plus long-term incentive compensation) relative to similar positions reported in the databases below.
| General Industry – Comparable Companies |
Willis Towers Watson 2020 General Industry Executive Compensation Database(1)
From this database, the compensation consultant identified 33 comparable companies that were considered to be a representative sample of a select group of companies focused on transportation, brand, hospitality, and consumer-oriented businesses. | |
| General Industry – Total Sample |
Willis Towers Watson 2020 General Industry Executive Compensation Database (492 companies) | |
| Airline Data | American Airlines Group Inc.; Delta Air Lines, Inc.; United Airlines Holdings, Inc.; Alaska Air Group, Inc.; and JetBlue Airways Corporation(2) |
| (1) | Where possible, the data was adjusted by the independent consultant to take into account differences in company size. |
| (2) | The independent consultant considered these five airlines to be the most relevant (e.g., from a competitive hiring standpoint). The airline data was based on 2019 compensation data reported in these airlines’ 2020 proxy statements and was not aged. The independent consultant provided the Committee with data representing the average for the largest three airlines (American Airlines Group Inc.; Delta Air Lines, Inc.; and United Airlines Holdings, Inc.), a smaller carrier average (Alaska Air Group, Inc. and JetBlue Airways Corporation), and the midpoint between the largest three airline average and the smaller carrier average. |
When monitoring the data regarding the Company’s peer groups, the Committee reviewed information on comparable companies in transportation, brand, hospitality, and consumer-oriented businesses (General Industry – Comparable Companies), a group historically viewed by the independent consultant and the Committee as representative of organizations that have been particularly relevant for monitoring the adequacy of the Company’s executive pay levels and enabling the Committee to identify potential retention risks. Other airlines are constituents of this group, and for 2021, the independent consultant called out practices of select airlines for additional context on key positions and pay practices. In addition, to provide broader market context, the independent consultant provided the Committee with general industry data (General Industry – Total Sample).
The Committee does not directly target named executive officer compensation to specific market data, but instead views market data as an input, as opposed to a determinant of appropriate pay. In addition, (i) available market data is not necessarily comprehensive; and (ii) in particular with respect to airlines, the amount of available data is limited and does not always include good matches to the Company’s 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, for 2021, the Committee was also required to take into account the PSP Pay Restrictions and therefore was at an increased risk of losing talent to companies
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that were not subject to PSP Pay Restrictions or otherwise harmed to a significant financial extent as a result of the COVID-19 pandemic. Therefore, the Committee also referenced the broader compensation data provided by general industry surveys, which can serve as indicators of the named executive officers’ potential value to other organizations who might seek to hire them.
INTERNAL EQUITY; ROLE OF MANAGEMENT
Because approximately 82 percent of the Company’s 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 total direct compensation opportunities with internal equity. For 2021, the Committee was also required to take into account the PSP Pay Restrictions. The Committee evaluates 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 takes into account a named executive officer’s tenure with the Company generally and in his or her current role. For purposes of this Compensation Discussion and Analysis, references to “internal equity” should be interpreted in this context.
In connection with compensation decisions for 2021, at the Committee’s request:
| • | Mr. Kelly and the Company’s People Department leaders provided regular input regarding overall compensation designs and recommendations presented to the Committee; |
| • | Mr. Kelly reviewed with the Committee the relative performance of each of the Company’s other executive officers and provided input with respect to (i) their relative roles, scope of responsibilities, and performance; (ii) their compensation generally; and (iii) their compensation relative to each other; and |
| • | The Company’s People Department leaders worked with the Committee Chair and the Committee’s independent consultant to provide market data and recommendations with respect to Mr. Kelly’s compensation. |
The input from Mr. Kelly and the Company’s People Department leaders aided the Committee with its compensation determinations, in particular with respect to the challenges presented by the PSP Pay Restrictions and related retention concerns. Although the Committee was not obligated to accept any of Mr. Kelly’s recommendations, the Committee gave considerable weight to such recommendations because of Mr. Kelly’s ability to directly observe, on a day-to-day basis, each executive officer’s contributions and performance. In addition, Mr. Kelly regularly traveled to visit with Employees at all levels in varying locations and was able to relay Employee concerns he believed should be considered by the Committee in connection with its assessments related to internal equity. Additional information regarding management’s role with respect to executive compensation determinations is included below.
DETERMINATION OF 2021 EXECUTIVE COMPENSATION; ANALYSIS OF INDIVIDUAL COMPENSATION ELEMENTS
Set forth below is a discussion of (i) each of the elements of the Company’s compensation program for all non-contract Employees, including the Company’s named executive officers; (ii) the purposes and objectives associated with each element; (iii) the manner in which each element fits within the Company’s overall compensation objectives and decisions with respect to other elements; (iv) the Committee’s determinations regarding the amounts paid to each of the named executive officers for 2021; and (v) where applicable, the involvement of the Committee’s independent consultant and members of management in compensation decisions.
Objective of Base Pay. The Committee’s objective with respect to base pay is to provide a reasonable base level of monthly income relative to an Employee’s job responsibilities, skills, tenure with the Company,
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tenure in his or her current position with the Company, performance, and the market for the Employee’s skills (both within and outside of the airline industry).
Approach to 2021 Base Pay; Individual Base Pay Determinations for the Named Executive Officers and Pay Relative to Each Other. During 2020, all of the officers who were named executive officers at the time took voluntary 20 percent base pay reductions in response to the financial difficulties experienced by the Company as a result of the COVID-19 pandemic. In addition, Mr. Kelly requested a further reduction in his base pay to zero, effective November 1, 2020. By January 2021, the Company had determined it would not need to impose pay cuts on the rest of the Company’s Employee population and, in fact, would be returning to its normal merit increase practices. Therefore, the Committee deemed it equitable to restore the base pay of all of these named executive officers to the levels originally approved by the Committee for 2020. In addition, recognizing the Company’s relatively modest base pay levels for these named executive officers, even before the voluntary pay reductions in 2020, the Committee deemed it important to fully restore their base pay to mitigate against the increasing pay compression that would otherwise result for Employees at lower levels and associated retention risks. At Mr. Kelly’s request, his base pay was initially only restored to $600,000, or 80 percent of his 2020 level of $750,000, the base pay amount in place for Mr. Kelly since February 2017. His base pay was eventually fully reinstated, effective July 1, 2021, after the Company had experienced improvements in demand. In February 2021, Mr. Watterson, who was not a named executive officer for 2020, received a moderate base pay increase of 3.0 percent year-over-year on an annualized basis, reflecting internal equity considerations and consistency with the Company’s merit structure for its other non-contract Employees.
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 supervisor level and above, as well as other targeted positions where short-term incentive compensation opportunities are prevalent in the market in which the Company competes with respect to these positions. The Committee believes short-term incentive compensation opportunities are particularly important at the officer level in order to remain competitive in attracting and retaining qualified executive talent. The short-term incentive opportunities at this level are intended to (i) reflect the additional time, responsibility, and accountability associated with these positions, in particular senior executive positions; (ii) help create total compensation opportunities that are within a reasonable range of median in the marketplace; and (iii) further incentivize management to contribute to the Company’s overall performance.
Approach to 2021 Short-Term Incentive Compensation.
General. In 2021, the Committee continued to apply a structured and transparent approach to establishing the named executive officers’ short-term incentive opportunities, pursuant to which:
| • | 80 percent of each of the named executive officer’s STI Target Opportunity (the “Incentive Plan Opportunity”) was awarded pursuant to the Company’s 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; and |
| • | 20 percent of each of the named executive officer’s STI Target Opportunity (the “Individual Opportunity”) would be based on the Committee’s subjective determinations regarding the named executive officer’s performance and individual contributions to the Company’s results. |
The Committee established STI Target Opportunities for each of the named executive officers in first quarter 2021. The STI Target Opportunities were equal to a percentage of each of the named executive officer’s respective base pay amounts (assuming full restoration of base pay), with differences in percentages generally reflecting differences in levels of responsibility. The STI Target Opportunities, which are shown in the table below, were applicable to both the 80 percent Incentive Plan Opportunity and the 20 percent Individual Opportunity. As shown below, the Committee desired to maintain consistency with its historic practices as much as possible and therefore did not increase or decrease the STI Target Opportunity for any of the named executive officers compared with 2020.
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|
2020 STI Target (Percentage of Base Salary) |
2021 STI Target (Percentage of Base Salary) | |||
| Gary C. Kelly |
200% | 200% | ||
| Michael G. Van de Ven Thomas M. Nealon |
150% | 150% | ||
| Tammy Romo Robert E. Jordan |
135% | 135% | ||
| Andrew M. Watterson |
120% | 120% |
The short-term incentive payout for each of the named executive officers could range from zero to 150 percent of the named executive officer’s STI Target Opportunity shown above (applicable to both the 80 percent Incentive Plan Opportunity and the 20 percent Individual Opportunity).
Performance-Based Short-Term Incentive Compensation Opportunities under the Incentive Plan and Related Payouts. Pursuant to the Incentive Plan, since 2013, the Committee has established the performance metrics and targets for the named executive officers’ 80 percent Incentive Plan Opportunity pursuant to the Company’s Management Incentive Scorecard (the “Scorecard”). The Committee believes the Scorecard mechanism has remained relevant and effective despite the significant and varying challenges faced by the Company over the years, including the challenges posed by pandemic. In addition, the Committee believes there is value in maintaining a consistent structure for assessing short-term incentive payouts. In designing the Scorecard for 2021, the Committee deemed it of paramount importance to emphasize business recovery by establishing metrics and targets related to core cash burn improvement, COVID-related crisis response, operational and commercial performance, and the Company’s strategic initiatives associated with each. The Committee also chose these metrics because of their relevance to the Company’s Shareholders, Employees, and Customers for 2021. The Committee applied the heaviest weighting to core cash burn improvement because it was widely understood as the Company’s primary financial objective during the pandemic and was a measure of how the Company was managing its business. Because of the continued uncertainty associated with the COVID-19 pandemic at the time the Committee established the performance metrics and targets, the Committee deemed it both necessary and prudent to build in subjectivity and retain the discretion to appropriately assess the Company’s performance with respect to its strategic initiatives and COVID-19 response.
The specific 2021 Scorecard metrics, targets, and weightings, as well as the results and payout percentages for 2021, are set forth in the table below.
2021 Management Incentive Scorecard
| Category and Metric | Metric Weight |
0% Threshold |
50% Award |
75% Award |
100% Target |
150% Max |
2021 Final |
% of Target(4) |
||||||||||
|
Strategic Initiatives |
20.0% | Subjective (0%-150%) | 100.0% | 100.0% | ||||||||||||||
|
COVID-19 Response |
20.0% | Subjective (0%-150%) | 100.0% | 100.0% | ||||||||||||||
|
Average daily core cash burn improvement versus 2020 (in $M/day)(1) |
30.0% | $— | $2 | $3 | $8 | $10 | $14 | 150.0% | ||||||||||
|
Ontime Performance(2) |
15.0% | 76.4% | 78.7% | 80.1% | 81.0% | 83.0% | 75.8% | 0.0% | ||||||||||
|
Net Promoter Score(3) |
15.0% | 35.3% | 39.4% | 43.5% | 56.7% | 63.0% | 49.5% | 86.4% | ||||||||||
|
Southwest Airlines Short-Term Enterprise Performance (Percent of Target) |
98.0% | |||||||||||||||||
| (1) | 2020 average daily core cash burn was $17 million based on “normalized” 2020 results calculated using second through fourth quarter 2020 average daily core cash burn results. 2021 average daily core cash burn is defined as the total core cash burn/intake for 2021, divided by 365 days. |
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| (2) | Number of scheduled flights that arrived less than 15 minutes after scheduled arrival time divided by total scheduled flights. |
| (3) | (Total promoters-total detractors) divided by total survey participants. |
| (4) | Payout percentage based on reported rounded results. |
As noted above, the Committee continues to believe in the efficacy and relevance of the Scorecard structure, despite the significant variance in the types of challenges faced by the airline industry, for the following reasons, among others:
| • | the Committee aligns the Scorecard metrics and targets to the Company’s business objectives and priorities, and the importance of this alignment was particularly evident during 2020 and 2021 when shifts in the Company’s focus were critical to the Company’s ability both to withstand the devastating financial and operational impacts of the COVID-19 pandemic and to begin to enable stability and recovery; |
| • | the Committee also aligns the Scorecard metrics and targets with shifting Shareholder, Customer, and Employee priorities; |
| • | because the Scorecard goals are designed to be highly relevant to the Company and its Shareholders, Customers, and Employees, there is a strong correlation between the Scorecard and the manner in which the Company manages and measures its own performance; and |
| • | the use of a multi-dimensional and balanced guide for short-term incentives mitigates the risk that can be created when financial results are the only drivers of incentive payments. |
The Committee believes the Company’s achievement of the following results, notwithstanding the continuing and significant challenges faced by the Company during 2021, evidences alignment of the Scorecard results with Shareholder, Customer, and Employee interests:
| • | the Company had significant average daily cash flow improvement in 2021, as compared with 2020, and ended 2021 with liquidity of $16.5 billion, well in excess of debt outstanding; |
| • | the Company preserved the strength of its balance sheet and maintained its investment grade ratings with Fitch, Moody’s, and Standard & Poor’s, remaining the only U.S. airline with an investment-grade credit rating by all three rating agencies; |
| • | the Company ended 2021 with its first quarterly profit, excluding special items, since fourth quarter 2019, before the COVID-19 pandemic began; |
| • | the Company carried 83 percent more revenue passengers and recorded a 74.5 percent increase in operating revenues in 2021 versus 2020; |
| • | the Company completed the extensive prerequisites required to return the Boeing 737 MAX aircraft to commercial service; |
| • | the Company supplemented its agreements with Boeing to provide the Company with increased flexibility to adjust its aircraft orders and thereby better enable it to (i) take advantage of potential growth opportunities, (ii) restore its network closer to pre-pandemic levels, (iii) lower operating costs, (iv) and further modernize its fleet with more fuel efficient and less carbon-intensive aircraft; |
| • | the Company implemented key technology initiatives, including, in particular, the transition to a single system for aircraft maintenance, planning, and record-keeping; |
| • | the Company was named among the highest ranking carriers for customer satisfaction in the J.D. Power 2021 North American Satisfaction Study (ranked #2); |
| • | the Company was named to Fortune’s World’s Most Admired Companies List; |
| • | the Company was able to aggressively and opportunistically pursue new revenue streams by adding service to 14 new destinations, completing its launch of participation in all three global distribution system (GDS) platforms, and entering into a new co-brand credit card agreement; |
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| • | the Company was named as one of Forbes’ 2021 America’s Best Employers; |
| • | the Company was named a Top 100 Company by BetterInvesting Magazine; |
| • | the Company was named to Glassdoor’s Best Places to Work list for the 12th consecutive year; |
| • | the Company was ranked #1 for Newsweek’s America’s Best Customer Service in the low-cost Airlines category; |
| • | the Company was named a Best Employer for Women 2021 by Forbes; and |
| • | the Company was named a Best Place to Work for Disability Inclusion after achieving a top score on Disability:IN’s 2021 Disability Equality Index. |
Subjective Short-Term Incentive Determinations for the Named Executive Officers and Pay Relative to Each Other; Use of Discretion. In approving individual named executive officer subjective short-term incentive amounts, the Committee traditionally takes into account (i) the named executive officer’s individual contributions to the Company’s performance (including individual performance relative to the factors covered by the Scorecard); (ii) the nature and extent of the Company’s 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 deems significant.
The Committee believes 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 short-term incentive payouts. For 2021, this enabled the Committee to place significant weight on management’s collective and relentless work to strategically respond to the multitude of ongoing and evolving challenges associated with the COVID-19 pandemic. The Committee believes these collective and coordinated efforts not only enabled the Company to withstand the pandemic during 2020 and 2021, but also positioned the Company well to remain competitive post-pandemic. Therefore, the Committee deemed it would be fair and equitable to reward each of the named executive officers, including Mr. Kelly, with a discretionary payout equal to 100 percent of his or her Individual Opportunity. In assessing the size of the payouts 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 Company’s overall results, as well as the most accountability for the Company’s results. Nevertheless, taking into account the PSP Pay Restrictions, the Committee reduced the amount payable to each of the named executive officers in order to comply with the PSP Pay Restrictions. The related calculations are shown in Note 2 to the Summary Compensation Table.
Chief Executive Officer. The Committee deemed Mr. Kelly’s bonus to be fair and equitable based on (i) his continued and unwavering overall leadership of the Company’s strategic responses to the challenges and risks presented by the COVID-19 pandemic; (ii) his simultaneous focus on the Company’s post-pandemic strategies, initiatives, and preparedness; and (iii) his tireless and strategic oversight of the contributions of each of the other named executive officers.
Other Named Executive Officers.
As noted above, the subjective portion of the other named executive officers’ short-term incentive awards reflected, in particular, these executive officers’ coordinated efforts to proactively and effectively address the challenges discussed above. In addition, the amount of their awards was supported by these officers’ specific leadership and contributions with respect to the Company’s performance, which included, among others:
| • | the contributions of Mr. Watterson and his teams with respect to the assessment, determination, and implementation of the ongoing and critical adjustments necessary to (i) better optimize the Company’s network in reaction to the significant fluctuations in consumer demand for air travel and (ii) at the same time continue to pursue new revenue streams through the opportunistic identification of new destinations; |
| • | the contributions of Mr. Van de Ven and Mr. Jordan and their teams in swiftly responding to the multitude of varying regulatory and other directives associated with the COVID-19 pandemic; |
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| • | the contributions of Ms. Romo and her teams to the Company’s ability to maintain the strongest balance sheet in the U.S. airline industry, despite the ongoing and fluctuating pandemic-related financial and operational challenges; |
| • | the contributions of Mr. Watterson and Mr. Nealon and their teams with respect to the Company’s participation in global distribution systems (GDS), including the addition of the Sabre GDS platform, to further enable future growth in the Company’s share of corporate travelers; |
| • | the contributions of Mr. Watterson and Mr. Nealon and their teams with respect to securing a new co-brand credit card agreement with Chase Bank USA, N.A.; |
| • | the contributions of Mr. Van de Ven and Ms. Romo and their teams with respect to the ongoing fleet and order book adjustments necessary to support the Company’s network and capacity adjustments during 2021, as well as to support future fleet flexibility; |
| • | the contributions of Mr. Van de Ven and his teams with respect to the work necessary to enable the return to service of the Boeing 737 MAX aircraft; |
| • | the contributions of Mr. Van de Ven and Mr. Nealon and their teams with respect to the introduction of key technology initiatives, including the Company’s maintenance, planning, and record-keeping system; |
| • | the contributions of Ms. Romo and her teams with respect to the critical, continual, and tireless financial planning and strategic analysis necessary to enable the Company to quickly and continually adjust its strategic plans and initiatives in response to ongoing and fluctuating pandemic-related financial and operational challenges; |
| • | the strategic management by Ms. Romo and her teams of the Company’s capital and liquidity positions, which resulted in the Company ending 2021 with approximately $15.5 billion in cash and short-term investments, unencumbered assets with an estimated value of $11.0 billion, a fully available $1.0 billion revolving line of credit, and investment grade credit ratings from Fitch, Moody’s, and Standard & Poor’s; |
| • | the contributions of Mr. Van de Ven and his teams with respect to Southwest’s continued delivery of its acclaimed Customer Service and hospitality; |
| • | the contributions of Mr. Jordan and his teams with respect to management of the Company’s voluntary separation and time-off programs, which contributed to the Company’s continued ability in 2021 to avoid involuntary furloughs or layoffs; and |
| • | the contributions of Mr. Jordan and his teams that led to the Company’s continued recognition as a best place to work. |
Long-Term Incentive Compensation
During 2021, the Committee granted long-term incentive awards in the form of RSUs, performance-based RSUs, and performance-based cash awards. As discussed further below, the Committee continued to believe long-term incentive compensation should constitute a significant percentage of total compensation and thereby serve as (i) the primary method for bringing total direct compensation opportunities in line with market, (ii) a driver of the Company’s long-term performance through alignment of compensation opportunities with the Company’s long-term objectives, and (iii) a significant retention vehicle. For 2021, to address these objectives, the named executive officers other than Mr. Kelly received a year-over-year increase in the value of their time-vesting RSU awards, and, with respect to both performance-based RSUs and performance-based cash awards, all of the named executive officers were provided with a 300 percent maximum payout opportunity should the Company achieve extraordinary results for the performance period. In addition, time-vesting RSUs granted in 2021 increased significantly as a percentage of total RSUs for each of the named executive officers compared with 2020; however, to remain relatively consistent with recent years:
| • | for Mr. Kelly, the performance-based components of his aggregate long-term incentive award remained at 50 percent of his total long-term incentive opportunity; and |
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| • | for each of the other named executive officers, the performance-based components of their aggregate long-term incentive award constituted over 43 percent their total long-term incentive opportunity. |
The Committee believes these structures aligned the named executive officers’ long-term incentive compensation with Shareholder interests without unnecessarily reducing the retention value of these awards.
Objectives of Equity Compensation. Equity awards are used by the Company to (i) further align the interests of the Company’s senior leadership with the interests of the Company’s Shareholders, (ii) serve as a performance-based method to address the competitiveness of the Company’s compensation, and (iii) also serve as a long-term retention vehicle by incentivizing and rewarding achievement of the Company’s long-term objectives. In 2021, the Committee awarded equity incentive opportunities to attract and retain Employees at the assistant manager level and above, as well as other targeted positions where equity awards are prevalent in the market in which the Company competes for those positions. With respect to other Employees, the Company has typically placed more emphasis on cash compensation.
Approach to Equity Compensation. The Committee has a long-held and consistent view that equity should constitute a strong component of overall compensation and a significant percentage of base pay. The Committee applies its judgment in determining the size of equity awards, which involves (i) informing itself of practices and levels of equity pay in the market for a given position and (ii) thereby also informing itself of potential retention risks. For 2021, however, the Committee was also required to take into account the PSP Pay Restrictions. Because equity is valued at its full grant date fair value for purposes of calculating Total PSP Compensation, to comply with the PSP Pay Restrictions, the aggregate value of each of the named executive officer’s equity awards for 2021 was lower than would have otherwise been granted by the Committee for 2021. The Committee was not limited by the PSP Pay Restrictions with respect to its equity decisions in January 2020. As a result, equity as a percentage of both annualized base pay and total compensation for each of the named executive officers decreased for 2021, compared with 2020.
RSUs. The RSUs granted to the named executive officers in 2021 are settleable in shares of common stock and are scheduled to vest with respect to one-third of the shares covered thereby annually, which vesting began on February 21, 2022. Other than in connection with death, disability, or a “qualified retirement,” vesting is subject to the individual’s continued service as an Employee, Board member, or advisor from the date of grant through the vesting date. In the event of an individual’s termination of service as a result of death or disability, any of the individual’s RSUs that have not yet vested will fully vest as of the date of termination. If an individual’s service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” any outstanding unvested RSUs will remain outstanding as if the individual’s service has not terminated and will continue to vest in accordance with the vesting schedule set forth in the notice of the grant. An individual’s termination of service will be considered a “qualified retirement” if (a) the individual has completed at least 10 years of continuous service, (b) the individual’s age plus completed years of continuous service equal at least 65 at the time of the individual’s termination of service, and (c) the individual has not been terminated for cause.
Performance-Based RSUs. Performance-based RSUs are also settleable in shares of common stock and will vest, if at all, on February 21, 2024. As shown in the table below and the Grants of Plan-Based Awards in Fiscal 2021 table, the number of shares that will be received by each of the named executive officers, as of the vesting date, will be determined based on the achievement of the cumulative Adjusted EBITDA targets set forth in the table below; provided that, in the event the Company’s ROIC (pre-tax) exceeds the median (i.e., 50th percentile) ROIC (pre-tax) of the specified peer group (“Relative ROIC”), the minimum number of performance-based RSUs that will vest and the minimum number of shares of common stock to be issued as of the vesting date will be equal to the grant amount times 50 percent.
The Committee’s determination of the appropriate metrics and targets for the performance-based RSUs encompassed considerations of what would drive extraordinary performance while also serving as a retention vehicle. The Committee chose cumulative Adjusted EBIDTA as the primary long-term performance metric to further align the Company’s incentive compensation with the Company’s publicly-reported change in primary focus to liquidity, reflecting what the Company believed would be most important to Shareholders at the time.
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The Committee also included a Relative ROIC component as a performance measure to retain some consistency with the Company’s prior long-term equity incentive awards and to continue to acknowledge the significance to the Company and its Shareholders of the Company’s effectiveness in generating returns to its Shareholders. The maximum 300 percent payout opportunity is designed to motivate and retain existing talent while aligning executive incentives with Shareholder interests.
| Performance Period |
Vesting Date |
2022 – 2023 Cumulative Adjusted |
Number of Performance-Based RSUs Vesting and Settleable in Common Stock as of the Vesting | |||
| January 1, 2022 through December 31, 2023 |
February 21, 2024(3) |
$0.0 | Grant Amount x 10% | |||
| $1.7 | Grant Amount x 100% | |||||
| $3.4 | Grant Amount x 200% | |||||
| $5.3 or greater | Grant Amount x 300% |
| (1) | “Adjusted EBITDA” means earnings before interest, taxes, depreciation, and amortization, as adjusted to exclude the impact of special items, as disclosed from time to time in the Company’s earnings releases and filings with the SEC, other than any proceeds received from Payroll Support or similar government programs. The percentage of performance-based RSUs that will vest, if any, based on cumulative Adjusted EBITDA, will be interpolated between the cumulative Adjusted EBITDA targets set forth above only after the minimum performance level has been achieved. |
| (2) | In the event the Company’s ROIC (pre-tax) exceeds the median (i.e., 50th percentile) ROIC (pre-tax) of the Company’s peer group of domestic mainline carriers subject to the SEC’s reporting requirements, the minimum number of performance-based RSUs that will vest, as of the vesting date, will be equal to the grant amount times 50%. “ROIC (pre-tax)” means pre-tax operating income divided by Average Invested Capital. “Average Invested Capital” means an average of the most recent two year-end balances of net debt, operating lease liability, and stockholders’ equity, and any unfunded pension liability. ROIC (pre-tax) for the Performance Period will be the average of the ROIC (pre-tax) over the two full fiscal years within the Performance Period. |
| (3) | Other than in connection with death, disability, or a “qualified retirement,” vesting is subject to the individual’s continuous service as an Employee, Board member, or advisor from the date of grant through the vesting date. In the event of an individual’s death or disability, the individual’s performance-based RSUs will remain outstanding as if the individual’s service had not terminated. If the individual’s service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” such individual’s performance-based RSUs will remain outstanding as if the individual’s service has not terminated and will otherwise be settleable in accordance with the notice of grant and applicable terms and conditions; however, the number of shares received upon settlement will be prorated based on the individual’s number of days of service between the date of grant and the end of the Performance Period. An individual’s termination of service will be considered a “qualified retirement” if (a) the individual has completed at least 10 years of continuous service; (b) the individual’s age plus completed years of continuous service equal at least 65 at the time of the individual’s termination of service; and (c) the individual has not been terminated for cause. |
Individual Equity Determinations for the Named Executive Officers.
Chief Executive Officer. Although the Committee has historically emphasized equity as a percentage of an individual’s total direct compensation opportunity, taking into account the PSP Pay Restrictions, Mr. Kelly’s aggregate equity award decreased as a percentage of his base pay from 950 percent of his original $750,000 base pay amount for 2020 to 526 percent of his fully restored $750,000 base pay amount for 2021. The decrease was driven solely by the PSP Pay Restrictions. Because of the Committee’s placement of significant importance on equity, the Committee did not desire to further reduce Mr. Kelly’s equity grant for 2021.
Other Named Executive Officers. Also in accordance with the Committee’s philosophy that equity should constitute a strong component of total compensation, but taking into account the PSP Pay Restrictions, as
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shown in the table below, each of the other named executive officer’s equity as a percentage of their base pay also decreased for 2021 compared with 2020.
| Aggregate Equity Award Opportunities as a Percentage of Base Pay | ||||||||
| January 2020 Aggregate Equity Grant(1) |
February 2021 Aggregate Equity Grant(2) |
|||||||
| Michael G. Van de Ven Thomas M. Nealon |
544% | 369% | ||||||
| Tammy Romo |
482% | 376% | ||||||
| Robert E. Jordan |
482% | 379% | ||||||
| Andrew M. Watterson |
435% | 368% | ||||||
| (1) | Calculation is based on the base pay amounts as originally approved for the named executive officers for 2020 on an annualized basis. |
| (2) | Calculation is based on the named executive officers’ fully-restored base pay amounts for 2021 on an annualized basis. |
All of the decreases above were driven solely by the PSP Pay Restrictions. Because of Committee’s placement of significant importance on equity, the Committee did not desire to further reduce the aggregate value of these named executive officers’ equity grants for 2021.
During 2021, taking into account the PSP Pay Restrictions, the Committee introduced long-term cash incentive awards as an element of the named executive officers’ long-term incentive compensation. The payout of these awards will be dependent upon the same metrics and targets as are discussed above with respect to the named executive officers’ performance-based RSUs; however, in accordance with SEC rules, these awards are not included within the calculation of total compensation in the Summary Compensation Table for 2021. Therefore, they are also not included in the calculation of Total PSP Compensation. The grant of these awards is, however, shown in the Grants of Plan-Based Awards table. Amounts earned pursuant to these awards, if any, will be reported in the Summary Compensation Table for the year ending December 31, 2023.
Objectives of Cash Incentive Awards. As discussed above, the introduction of long-term cash incentive awards enabled the Committee to maintain consistency with its historical emphasis on providing fair compensation opportunities in the form of long-term incentive compensation, including a significant percentage granted as performance-based opportunities. In addition, these awards enabled the Committee to deliver what it believed to be fair long-term compensation opportunities in an attempt to mitigate retention risks while driving behavior designed to be in the best interests of Shareholders. The Committee deemed it prudent to position the Company to retain its current leaders while navigating through a future that remained uncertain.
Individual Long-Term Cash Incentive Award Determinations for the Named Executive Officers.
Chief Executive Officer. The potential value of Mr. Kelly’s long-term cash incentive was designed to achieve a fair future total direct compensation opportunity for Mr. Kelly, while addressing Shareholder interests by retaining an equal mix of time-based and performance-based long-term incentive awards. Reflecting these goals, the target value of Mr. Kelly’s long-term cash incentive award, when combined with his equity awards, resulted in a target value equal to 950 percent of his base.
Other Named Executive Officers. As with Mr. Kelly, the addition of long-term cash incentive awards as an element of long-term incentive compensation enabled the Committee to provide each of the other named executive officers with what the Committee believed to be a fair future total direct compensation opportunity, while addressing Shareholder interests. Furthermore, the addition of these awards enabled the Committee to maintain internal equity for the named executive officers relative to each other and also relieve some of the pay compression that would have otherwise resulted with respect to the rest of the Company’s employee population.
Retirement and Related Benefits
401(k) and Profit Sharing. The Committee does not specifically consider the value of its tax-qualified retirement plans when establishing other compensation elements and amounts for the named executive officers because of the broad-based nature of these benefits. Southwest offers tax-qualified 401(k) and profit sharing
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plans to all eligible Employees, including the named executive officers. Southwest’s Company 401(k) and profit sharing plans are intended to be competitive in the market and include five-year graded vesting provisions that are designed to contribute to Employee loyalty and retention. Southwest’s Company 401(k) plan provides for a dollar-for-dollar match on contributions made to the 401(k) plan by non-Pilot Employees, subject to limits specified by the Board and the Internal Revenue Code and applicable U.S. Treasury Regulations. Southwest also sponsors a Pilots’ 401(k) plan that gives each eligible Pilot a fully-vested non-elective Company contribution equal to 15.0 percent of such Pilot’s eligible compensation, whether or not the Pilot makes his or her own contributions to the plan.
Southwest’s profit sharing plan provides for a discretionary annual Company contribution to Employee accounts equal to an amount determined by the Board in its sole discretion. With respect to the 2021 plan year, for all Employees, the Company allocated approximately 4.26 percent of each Employee’s 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, in part, fluctuations in profit sharing contributions based on fluctuations in the Company’s profitability for the three years covered by the table, as well as the number of total Employees eligible to participate in the plan. No contributions were made to the profit sharing plan for the 2020 plan year due to the Company’s 2020 annual net loss.
Nonqualified Deferred Compensation. Southwest offers nonqualified deferred compensation arrangements to a select group of 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 Company’s excess benefit plan is available to a select group of Employees with Company contribution amounts that cannot be contributed to the 401(k) or profit sharing plans due to the qualified plan contribution limits of Section 415(c) of the Internal Revenue Code. Individuals eligible to participate in the excess benefit plan, including the named executive officers, but who do not elect to participate, receive payment in the form of cash equal to the contribution the individual would have otherwise been entitled to receive under the profit sharing and 401(k) plans, but for the application of the limits of Section 415(c) of the Internal Revenue Code. The cash payment is made at the same time as the individual 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 2021.”
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 “SMC Deferred Compensation Plan”). Under the SMC Deferred Compensation Plan, officers of the Company who are not eligible to participate in the Company’s 2005 Deferred Compensation Plan for Pilots may, before the beginning of each plan year, irrevocably elect to defer up to 50 percent of their salary otherwise payable to them for such plan year and 100 percent of any bonus amounts they earn for such plan year. Under the SMC Deferred Compensation Plan, non-Employee members of the Board also may, before the beginning of each plan year, irrevocably elect to contribute all or a portion of their annual cash retainer fees otherwise payable to them for such plan year. The SMC Deferred Compensation Plan is discussed in more detail below under “Nonqualified Deferred Compensation in Fiscal 2021.” 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, through January 31, 2022, Mr. Kelly had an individual deferred compensation arrangement (the “Prior Letter Agreement”), which was originally established in 2004, pursuant to which the Company credited to Mr. Kelly’s account an amount equal to any Company contributions that would have otherwise been made on his behalf to the Company’s qualified 401(k) and profit sharing plans, but that exceeded the limits under Sections 415(c) and 401(a)(17) of the Internal Revenue Code for qualified plans. Under the Prior Letter Agreement, Mr. Kelly’s deferred compensation bore interest at a rate of ten percent, the interest rate established in 1982 when the first arrangement of this type was put into place with respect to the Company’s former Chairman and Chief Executive Officer, Mr. Herbert D. Kelleher. Effective February 1, 2022, Mr. Kelly entered into a new letter agreement (the “New Letter Agreement”), and the Prior Letter Agreement was terminated. Under the New Letter Agreement, deferred compensation contributions to Mr. Kelly’s account will cease after the 2022 plan year. In addition,
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beginning January 1, 2023, interest on the balance of deferred compensation credited to Mr. Kelly’s account will be equal to 120 percent of the Applicable Federal Long-Term Rate for January 2023, compounded annually. Mr. Kelly’s deferred compensation arrangement is discussed in more detail below under “Nonqualified Deferred Compensation in Fiscal 2021.”
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 named executive officers, are parties to the Company’s 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. The Company does not expect that the PSP Pay Restrictions will affect the terms of the Company’s Executive Service Recognition Plan Executive Employment Agreements for the named executive officers. The terms of these arrangements are discussed in detail below under “Potential Payments Upon Termination or Change-in-Control.” The remainder of the Company’s Employees are provided change-in-control benefits through the Company’s 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 Company’s change-in-control arrangements were all put in place in the 1980s and do not have any impact on the Company’s 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 Company’s 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 Company’s 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 Company’s 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 qualified dependent children are eligible to fly free on Southwest Airlines on a reserved seat basis. In addition, during 2021, officers of the Company were entitled, at their election, to an annual deposit of 245,000 Rapid Rewards points to their Rapid Rewards account. During 2021, the Company’s 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. Also, from time to time, the Company prefers officers use a car service in the interest of safety and efficiency. The Committee believes these benefits are commensurate with the benefits offered by others in the market in which the Company competes for executive talent.
The named executive officers, like the Company’s 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 paid time off, which are not taken into account when establishing the named executive officers’ salary and short-term incentive 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 Company’s executive officers and Board members. The Company’s Chief Executive Officer is expected to meet
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a share ownership level with a value equal to or exceeding five times his annual base salary, and all other 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 Company’s common stock (including shares held in the Company’s profit sharing plan), unvested RSUs, and performance shares held pursuant to the Company’s Outside Director Incentive Plan. The Company’s 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 Company’s executive officers, including the named executive officers, and all of the Company’s Board members meet the requirements of the Company’s share ownership guidelines. In addition to the Company’s share ownership guidelines, (i) the Company’s Insider Trading Policy prohibits Employees (including officers) and the Company’s Board members from entering into hedging transactions with respect to the Company’s securities; and (ii) the Company’s Blackout and Pre-Clearance Procedures, which supplement its Insider Trading Policy, prohibit the Company’s officers and Board members from holding Company securities in a margin account or pledging Company securities as collateral for a loan.
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The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with the Company’s management. Based on such review and discussion and relying thereon, we have recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis contained in this Proxy Statement be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and in this Proxy Statement.
| COMPENSATION COMMITTEE |
| David W. Biegler, Chair |
| J. Veronica Biggins |
| Grace D. Lieblein |
| Nancy B. Loeffler |
| John T. Montford |
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The following table provides information with respect to compensation earned by the named executive officers for the years ended December 31, 2021, 2020, and 2019.
| 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 ($)(6) |
Total ($) |
||||||||||||||||||||||||
| Gary C. Kelly |
2021 | 643,750 | 201,016 | 3,945,578 | 787,984 | 128,205 | 113,223 | 5,819,756 | ||||||||||||||||||||||||
| Executive Chairman of the Board & former Chief Executive Officer*
|
|
2020 2019 |
|
|
562,500 750,000 |
|
|
300,000 300,000 |
|
|
7,125,017 6,374,951 |
|
|
1,104,000 967,200 |
|
|
107,221 89,191 |
|
|
36,365 289,782 |
|
|
9,235,103 8,771,124 |
| ||||||||
| Tammy Romo |
2021 | 516,658 | 104,898 | 1,957,521 | 411,199 | — | 76,048 | 3,066,324 | ||||||||||||||||||||||||
| Executive Vice President & Chief Financial Officer |
2020 | 445,192 | 140,670 | 2,509,532 | 517,666 | — | 26,000 | 3,639,060 | ||||||||||||||||||||||||
| 2019 | 503,125 | 121,200 | 2,019,969 | 390,749 | — | 154,330 | 3,189,373 | |||||||||||||||||||||||||
| Michael G. Van de Ven |
2021 | 564,258 | 129,948 | 2,100,988 | 509,396 | — | 84,062 | 3,388,652 | ||||||||||||||||||||||||
| President & Chief Operating Officer** |
2020 | 486,267 | 170,700 | 3,092,540 | 628,176 | — | 26,000 | 4,403,683 | ||||||||||||||||||||||||
| 2019 | 549,875 | 149,040 | 2,484,028 | 480,505 | — | 175,540 | 3,838,988 | |||||||||||||||||||||||||
| Robert E. Jordan |
2021 | 510,709 | 103,481 | 1,954,029 | 405,645 | — | 75,472 | 3,049,336 | ||||||||||||||||||||||||
| Chief Executive Officer*** |
2020 | 440,167 | 139,050 | 2,482,452 | 511,704 | — | 26,000 | 3,599,373 | ||||||||||||||||||||||||
| 2019 | 498,125 | 120,000 | 1,999,962 | 386,880 | — | 152,088 | 3,157,055 | |||||||||||||||||||||||||
| Andrew M. Watterson |
2021 | 487,512 | 94,668 | 1,800,089 | 371,098 | — | 69,650 | 2,823,017 | ||||||||||||||||||||||||
| Executive Vice President & Chief Commercial Officer(7)
|
||||||||||||||||||||||||||||||||
| Thomas M. Nealon |
2021 | 564,258 | 129,948 | 2,100,988 | 509,396 | — | 84,062 | 3,388,652 | ||||||||||||||||||||||||
| Strategic Advisor & Former President**** |
2020 | 486,267 | 170,700 | 3,092,540 | 628,176 | — | 26,000 | 4,403,683 | ||||||||||||||||||||||||
| 2019 | 549,875 | 149,040 | 2,484,028 | 480,505 | — | 175,540 | 3,838,988 | |||||||||||||||||||||||||
*Mr. Kelly served as Chairman of the Board and Chief Executive Officer through January 31, 2022, and became Executive Chairman of the Board effective February 1, 2022.
**Mr. Van de Ven served as Chief Operating Officer throughout 2021, and also became President effective September 13, 2021.
***Mr. Jordan served as Executive Vice President Corporate Services until June 30, 2021, after which he served as Executive Vice President and Incoming Chief Executive Officer until February 1, 2022, when he became Chief Executive Officer.
****Mr. Nealon served as President until September 13, 2021, when he resigned as President and ceased to be an executive officer of the Company.
| (1) | The table below shows annual base salaries effective during 2020 and 2021. Differences between the annualized numbers and the salaries reported in the table above reflect the fact that salary adjustments were not always in effect for the full year periods. |
| Base Salary Effective Dates | ||||||||||||||||
| 2020 | 2021 | |||||||||||||||
| Name | February 1 |
March 1 |
April 1 |
November 1 |
January 1 |
February 1 |
July 1 |
|||||||||
| Gary C. Kelly |
$750,000 | $675,000 | $600,000 | $0 | $600,000 | — | $750,000 | |||||||||
| Tammy Romo |
$521,000 | — | $416,800 | — | $521,000 | — | — | |||||||||
| Michael G. Van de Ven |
$569,000 | — | $455,200 | — | $569,000 | — | — | |||||||||
| Robert E. Jordan |
$515,000 | — | $412,000 | — | $515,000 | — | — | |||||||||
| Andrew M. Watterson |
$475,000 | — | — | — | — | $489,300 | — | |||||||||
| Thomas M. Nealon |
$569,000 | — | $455,200 | — | $569,000 | — | — | |||||||||
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| (2) | In accordance with the SEC’s rules, for each year, the amount disclosed reflects bonuses/non-equity incentive plan compensation paid with respect to such year, whether or not actually paid in such year. The “Bonus” and “Non-Equity Incentive Plan Compensation” amounts set forth in the Summary Compensation Table take into account the PSP Pay Restrictions and reflect the Compensation Committee’s reductions to the amounts it otherwise would have deemed earned by the named executive officers for 2021. These amounts were reduced as follows: |
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | |||||||||||||||||||||||||
| Name | Bonus Earned |
Non-Equity Incentive Plan Compensation Earned |
Total ((a)+(b)) |
PSP Overage |
PSP (d)/(c) |
Percentage Allowable |
Bonus ((a)x(f)) |
Non-Equity |
||||||||||||||||||||||||
| Gary C. Kelly |
$ | 300,000 | $ | 1,176,000 | $ | 1,476,000 | $ | 487,000 | 32.99 | % | 67.01 | % | $ | 201,016 | $ | 787,984 | ||||||||||||||||
| Tammy Romo |
$ | 140,670 | $ | 551,426 | $ | 692,096 | $ | 176,000 | 25.43 | % | 74.57 | % | $ | 104,898 | $ | 411,199 | ||||||||||||||||
| Michael G. Van de Ven |
$ | 170,700 | $ | 669,144 | $ | 839,844 | $ | 200,500 | 23.87 | % | 76.13 | % | $ | 129,948 | $ | 509,396 | ||||||||||||||||
| Robert E. Jordan |
$ | 139,050 | $ | 545,076 | $ | 684,126 | $ | 175,000 | 25.58 | % | 74.42 | % | $ | 103,481 | $ | 405,645 | ||||||||||||||||
| Andrew M. Watterson |
$ | 117,432 | $ | 460,333 | $ | 577,765 | $ | 112,000 | 19.39 | % | 80.61 | % | $ | 94,668 | $ | 371,098 | ||||||||||||||||
| Thomas M. Nealon |
$ | 170,700 | $ | 669,144 | $ | 839,844 | $ | 200,500 | 23.87 | % | 76.13 | % | $ | 129,948 | $ | 509,396 | ||||||||||||||||
| (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 2021 are included in Note 10 to the Company’s financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021. |
The ultimate value of each of the named executive officer’s performance-based RSUs granted in 2021, and the number of shares to be issued, if any, as of the vesting date will be based on (a) the Company’s cumulative Adjusted EBITDA for the performance period from January 1, 2022, through December 31, 2023 and (b) the Company’s pre-tax ROIC for the same performance period, but relative to the Company’s peers. The maximum potential value of each of the named executive officer’s performance-based RSUs is set forth in the table below; however, the value of these performance-based RSUs is completely at risk.
| Name |
Value ($) | ||||
| Gary C. Kelly |
1,149,180 | ||||
| Tammy Romo |
1,266,486 | ||||
| Michael G. Van de Ven |
708,724 | ||||
| Robert E. Jordan |
1,296,511 | ||||
| Andrew M. Watterson |
1,612,539 | ||||
| Thomas M. Nealon |
708,724 | ||||
| (4) | Amounts consist of short-term incentive compensation earned based upon performance measures and targets established pursuant to the Company’s Senior Executive Short Term Incentive Plan. This plan and the awards earned thereunder are discussed in detail above under “Compensation Discussion and Analysis – Short-Term Incentive Compensation.” |
| (5) | Consists of above-market earnings on deferred compensation provided pursuant to a deferred compensation arrangement between the Company and Mr. Kelly, which was in effect through January 31, 2022 (“Prior Letter Agreement”). Mr. Kelly’s deferred compensation arrangement is discussed in more detail above under “Compensation Discussion and Analysis – Retirement and Related Benefits” and below under “Nonqualified Deferred Compensation in Fiscal 2021.” |
| (6) | This column includes the following types of compensation, which are discussed in more detail above under “Compensation Discussion and Analysis – Retirement and Related Benefits” and below under “Nonqualified Deferred Compensation in Fiscal 2021”: (i) Company contributions to the Southwest Airlines Co. 401(k) Plan (“Company 401(k) Match”); (ii) Company profit sharing allocations earned with respect to 2021 and contributed to eligible Employees’ profit sharing plan accounts in 2022 (“Profit Sharing Contribution”); (iii) with respect to officers other than Mr. Kelly, a cash payout equal to the Company’s total profit sharing allocation rate times their eligible earnings above the Internal Revenue Code Section 401(a)(17) limit for tax-qualified plans (each referred to as a “401(a)(17) Excess Payout”); and (iv) with respect to Mr. Kelly, a Company contribution made pursuant to his Prior Letter Agreement, which amount was earned with respect to 2021 and contributed in 2022. |
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| Name |
Company 401(k) Match ($) |
Profit Sharing Contribution ($) |
401(a)(17) Excess Payout ($) |
Contribution Pursuant to Mr. Kelly’s Prior Letter Agreement ($) | ||||||||||
| Gary C. Kelly |
26,000 | 12,352 | — | 74,871 | ||||||||||
| Tammy Romo |
26,000 | 12,352 | 37,696 | — | ||||||||||
| Michael G. Van de Ven |
26,000 | 12,352 | 45,710 | — | ||||||||||
| Robert E. Jordan |
26,000 | 12,352 | 37,120 | — | ||||||||||
| Andrew M. Watterson |
26,000 | 12,352 | 31,298 | — | ||||||||||
| Thomas M. Nealon |
26,000 | 12,352 | 45,710 | — | ||||||||||
| (7) | In accordance with SEC rules, 2021 was the first year for which Mr. Watterson was required to be included in the proxy statement executive compensation tables. |
The Compensation Committee’s 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.”
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the rules of the SEC, the Company is providing the following information about the relationship of the median of the total annual compensation of all Employees of the Company and the total annual compensation of Mr. Kelly, the Company’s Chief Executive Officer for 2021 (“CEO”).
For 2021, the Company’s last completed fiscal year:
| • | the total annual compensation of the Company’s median Employee was $84,872; |
| • | the total annual compensation of the Company’s CEO, as reported in the above Summary Compensation Table, was $5,819,756; and |
| • | based on this information, for 2021, the ratio of the total annual compensation of the Company’s CEO to the median Employee’s total annual compensation was reasonably estimated to be 68.6 to 1 (the “2021 Pay Ratio”). |
The Company calculated 2021 compensation for the median Employee using the same methodology used to calculate the total annual compensation of the Company’s CEO, as reported in the above Summary Compensation Table.
To identify the median of the total annual compensation of all Employees of the Company, as well as to determine the annual total compensation of the Company’s median Employee and its CEO, the Company took the following steps:
| • | The Company determined that, as of October 10, 2021, its Employee population, for purposes of determining the median Employee under the SEC’s rules, consisted of approximately 58,313 individuals, whether employed on a full-time, part-time, or temporary basis. |
| • | The Company used a consistently applied compensation measure to identify its median Employee by comparing the amount of compensation reflected in its payroll records, as reported to the Internal Revenue Service (“IRS”) on Form W-2 for 2021. |
| • | The Company identified its median Employee by consistently applying this compensation measure to all of its Employees included in its analysis. The Company did not make any cost of living adjustments in identifying the median Employee. The Company annualized the compensation for its permanent Employees that were not employed for all of 2021. |
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Grants of Plan-Based Awards in Fiscal 2021
The following table provides information with respect to grants of plan-based awards to the named executive officers in 2021.
| Name |
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards
|
Estimated Future Payouts Under Equity Incentive Plan Awards(3)
|
All Other Stock Awards: Number of Shares of Stock or Units (#)(4) |
Grant Date Fair Value of Stock Awards ($)(5) | ||||||||||||||
| Grant Date | Threshold ($) |
Target ($) |
Maximum ($) |
Threshold (#) |
Target (#) |
Maximum (#) | ||||||||||||
| Gary C. Kelly |
— (1) | N/A | 1,200,000 | 1,800,000 | — | — | — | — | — | |||||||||
| — (2) | 317,944 | 3,179,438 | 9,538,314 | — | — | — | — | — | ||||||||||
| 2/3/2021 | — | — | — | 822 | 8,229 | 24,687 | — | 383,060 | ||||||||||
| 2/3/2021 | — | — | — | — | — | — | 76,531 | 3,562,518 | ||||||||||
| Tammy Romo |
— (1) | N/A | 562,680 | 844,020 | — | — | — | — | — | |||||||||
| — (2) | 75,009 | 750,089 | 2,250,267 | — | — | — | — | — | ||||||||||
| 2/3/2021 | — | — | — | 906 | 9,069 | 27,207 | — | 422,162 | ||||||||||
| 2/3/2021 | — | — | — | — | — | — | 32,983 | 1,535,359 | ||||||||||
| Michael G. Van de Ven |
— (1) | N/A | 682,800 | 1,024,200 | — | — | — | — | — | |||||||||
| — (2) | 118,626 | 1,186,257 | 3,558,771 | — | — | — | — | — | ||||||||||
| 2/3/2021 | — | — | — | 507 | 5,075 | 15,225 | — | 236,241 | ||||||||||
| 2/3/2021 | — | — | — | — | — | — | 40,059 | 1,864,746 | ||||||||||
| Robert E. Jordan |
— (1) | N/A | 556,200 | 834,300 | — | — | — | — | — | |||||||||
| — (2) | 72,657 | 726,567 | 2,179,701 | — | — | — | — | — | ||||||||||
| 2/3/2021 | — | — | — | 928 | 9,284 | 27,852 | — | 432,170 | ||||||||||
| 2/3/2021 | — | — | — | — | — | — | 32,693 | 1,521,859 | ||||||||||
| Andrew M. Watterson |
— (1) | N/A | 469,728 | 704,592 | — | — | — | — | — | |||||||||
| — (2) | 44,109 | 441,090 | 1,323,270 | — | — | — | — | — | ||||||||||
| 2/3/2021 | — | — | — | 1,154 | 11,547 | 34,641 | — | 537,513 | ||||||||||
| 2/3/2021 | — | — | — | — | — | — | 27,123 | 1,262,576 | ||||||||||
| Thomas M. Nealon |
— (1) | N/A | 682,800 | 1,024,200 | — | — | — | — | — | |||||||||
| — (2) | 118,626 | 1,186,257 | 3,558,771 | — | — | — | — | — | ||||||||||
| 2/3/2021 | — | — | — | 507 | 5,075 | 15,225 | — | 236,241 | ||||||||||
| 2/3/2021 | — | — | — | — | — | — | 40,059 | 1,864,746 | ||||||||||
| (1) | This row shows cash incentive awards granted under the Company’s Senior Executive Short Term Incentive Plan (the “STI Plan”) with respect to the performance period from January 1, 2021 through December 31, 2021. This row shows the potential amounts to be paid 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 Compensation Committee determined payout for 2021, beginning at zero percent of the target payout, was interpolated between performance targets. The business metrics and targets used to determine the amounts of the awards paid are described above under “Compensation Discussion and Analysis.” |
| (2) | This row shows performance-based cash awards granted under the STI Plan with respect to the performance period from January 1, 2022 through December 31, 2023. These performance-based cash awards are scheduled to vest, if at all, on February 21, 2024 (the “Cash Award Vesting Date”), and are settleable in cash. This row shows the potential amounts to be paid upon vesting of the performance-based cash awards 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 risk. The amount of performance-based cash awards that will vest and the amount of cash to be paid, if any, as of the Cash Award |
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| Vesting Date will be determined based on the achievement of cumulative Adjusted EBITDA and ROIC (pre-tax) targets. The percentage of performance-based cash awards vesting will be interpolated between cumulative Adjusted EBITDA targets only after a minimum cumulative Adjusted EBITDA level has been achieved as follows: |
| 2022-2023 Cumulative Adjusted EBIDTA
(in billions) |
Cash Amount Payable
| |
| $0.0 | Target Value x 10% | |
| $1.7 | Target Value x 100% | |
| $3.4 | Target Value x 200% | |
| $5.3 or greater | Target Value x 300% |
| In the event the Company’s ROIC (pre-tax) exceeds the median ROIC (pre-tax) of a specified peer group, the minimum amount of cash that will become payable pursuant to this award, if any, as of the vesting date will be equal to the target value times 50 percent. |
| “Adjusted EBITDA” means earnings before interest, taxes, depreciation, and amortization, as adjusted to exclude the impact of special items, as disclosed from time to time in the Company’s earnings releases and filings with the SEC, other than any proceeds received from Payroll Support or similar governmental programs. |
| “ROIC (pre-tax)” means pre-tax operating income divided by Average Invested Capital. |
| “Average Invested Capital” means an average of the most recent two year-end balances of net debt, operating lease liability, and stockholders’ equity, and any unfunded pension liability. |
| ROIC (pre-tax) for the performance period will be the average of the ROIC (pre-tax) over the two full fiscal years within the performance period. |
| (3) | The awards consist of performance-based RSUs granted under the Company’s Amended and Restated 2007 Equity Incentive Plan (the “2007 Equity Plan”) with respect to the performance period from January 1, 2022 to December 31, 2023 (the “Performance Period”). The performance-based RSUs are scheduled to vest, if at all, on February 21, 2024 (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 risk. The number of performance-based RSUs that will vest and the number of shares of the Company’s common stock to be issued, if any, as of the Vesting Date will be determined based on the achievement of cumulative Adjusted EBITDA and ROIC (pre-tax) targets. The percentage of performance-based RSUs vesting will be interpolated between cumulative Adjusted EBITDA performance targets only after a minimum cumulative Adjusted EBITDA level has been achieved as follows: |
| 2022-2023 Cumulative Adjusted EBITDA
(in billions) |
Number of Performance-Based RSUs Vesting and Settleable
in Common Stock as of the Vesting Date
| |
| $0.0 | Grant Amount x 10% | |
| $1.7 | Grant Amount x 100% | |
| $3.4 | Grant Amount x 200% | |
| $5.3 or greater | Grant Amount x 300% |
| In the event the Company’s ROIC (pre-tax) exceeds the median ROIC (pre-tax) of a specified peer group, the minimum number of performance-based RSUs that will vest pursuant to this award and the number of shares of the Company’s common stock to be issued, if any, as of the vesting date will be equal to the grant amount times 50 percent. |
| “Adjusted EBITDA” means earnings before interest, taxes, depreciation, and amortization, as adjusted to exclude the impact of special items, as disclosed from time to time in the Company’s earnings releases and filings with the SEC, other than any proceeds received from Payroll Support or similar governmental programs. |
| “ROIC (pre-tax)” means pre-tax operating income divided by Average Invested Capital. |
| “Average Invested Capital” means an average of the most recent two year-end balances of net debt, operating lease liability, and stockholders’ equity, and any unfunded pension liability. |
| ROIC (pre-tax) for the Performance Period will be the average of the ROIC (pre-tax) over the two full fiscal years within the performance period. The Company does not pay dividends on unvested performance-based RSUs. |
| (4) | The awards consist of RSUs granted under the 2007 Equity Plan. The RSUs are settleable in shares of common stock and are scheduled to vest with respect to one-third of the shares covered thereby annually, which vesting began on February 21, 2022. The Company does not pay dividends on unvested RSUs. |
| (5) | 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 2021 are included in Note 10 to the Company’s financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021. |
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Outstanding Equity Awards at Fiscal 2021 Year-End
The following table provides information with respect to RSUs (including performance-based RSUs) held by the named executive officers as of December 31, 2021. RSUs (including performance-based RSUs) were the only types of equity awards outstanding for the named executive officers at fiscal 2021 year-end.
| Stock Awards | ||||||||
| Name |
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 |
136,759(4) | 5,858,756 | 70,850(5) | 3,035,214 | ||||
| Tammy Romo |
53,543(6) | 2,293,782 | 31,125(7) | 1,333,395 | ||||
| Michael G. Van de Ven |
65,380(8) | 2,800,879 | 32,255(9) | 1,381,804 | ||||
| Robert E. Jordan |
53,036(10) | 2,272,062 | 31,102(11) | 1,332,410 | ||||
| Andrew M. Watterson |
44,463(12) | 1,904,795 | 29,696(13) | 1,272,177 | ||||
| Thomas M. Nealon |
65,380(8) | 2,800,879 | 32,255(9) | 1,381,804 | ||||
| (1) | The awards consist of RSUs that are settleable in shares of common stock. |
| (2) | Market value is computed by multiplying the number of RSUs or performance-based RSUs by $42.84, which was the closing price per share of the Company’s common stock on December 31, 2021 on the NYSE. |
| (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 29, 2020, with respect to the performance period from January 1, 2020 to December 31, 2022, and that are scheduled to vest on February 21, 2023; and (ii) performance-based RSUs that were granted on February 3, 2021, with respect to the performance period from January 1, 2022 to December 31, 2023, and that are scheduled to vest on February 21, 2024. In accordance with SEC rules, the number represents the target number of performance-based RSUs that may vest on the February 21, 2023 and February 21, 2024 vesting dates. The potential payouts are performance-driven and therefore completely at risk. The number of performance-based RSUs that are scheduled to vest and the number of shares of the Company’s common stock to be issued, if any, as of the February 21, 2023 vesting date will be determined based on the achievement of ROIC (after-tax) targets during the three-year performance period ending December 21, 2022. The number of shares of the Company’s common stock to be issued, if any, as of the February 21, 2024 vesting date will be determined based on (i) the Company’s cumulative Adjusted EBITDA for the performance period from January 1, 2022 through December 31, 2023; and (ii) the Company’s ROIC (pre-tax) for the same performance period, but in relation to the Company’s peers. |
| (4) | Of these RSUs, (i) 64,866 vested on February 21, 2022; (ii) 46,383 are scheduled to vest on February 21, 2023; and (iii) 25,510 are scheduled to vest on February 21, 2024. |
| (5) | Of these performance-based RSUs, the target number that may vest on February 21, 2023 is 62,621; and the target number that may vest on February 21, 2024 is 8,229. |
| (6) | Of these RSUs, (i) 24,203 vested on February 21, 2022; (ii) 18,346 are scheduled to vest on February 21, 2023; and (iii) 10,994 are scheduled to vest on February 21, 2024. |
| (7) | Of these performance-based RSUs, the target number that may vest on February 21, 2023 is 22,056; and the target number that may vest on February 21, 2024 is 9,069. |
| (8) | Of these RSUs, (i) 29,614 vested on February 21, 2022; (ii) 22,413 are scheduled to vest on February 21, 2023; and (iii) 13,353 are scheduled to vest on February 21, 2024. |
| (9) | Of these performance-based RSUs, the target number that may vest on February 21, 2023 is 27,180; and the target number that may vest on February 21, 2024 is 5,075. |
| (10) | Of these RSUs, (i) 23,969 vested on February 21, 2022; (ii) 18,170 are scheduled to vest on February 21, 2023; and (iii) 10,897 are scheduled to vest on February 21, 2024. |
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| (11) | Of these performance-based RSUs, the target number that may vest on February 21, 2023 is 21,818; and the target number that may vest on February 21, 2024 is 9,284. |
| (12) | Of these RSUs, (i) 20,332 vested on February 21, 2022; (ii) 15,090 are scheduled to vest on February 21, 2023; and (iii) 9,041 are scheduled to vest on February 21, 2024. |
| (13) | Of these performance-based RSUs, the target number that may vest on February 21, 2023 is 18,149; and the target number that may vest on February 21, 2024 is 11,547. |
Option Exercises and Stock Vested During Fiscal 2021
The following table provides information with respect to stock awards vested for the named executive officers during 2021. None of the named executive officers had stock options outstanding during 2021.
| Stock Awards | ||||||||
| Name |
Number of Shares Acquired on Vesting (#) |
Value Realized on Vesting ($)(1) |
||||||
| Gary C. Kelly |
119,068 | 6,287,981 | ||||||
| Tammy Romo |
42,967 | 2,269,087 | ||||||
| Michael G. Van de Ven |
52,814 | 2,789,107 | ||||||
| Robert E. Jordan |
42,527 | 2,245,851 | ||||||
| Andrew M. Watterson |
24,591 | 1,298,651 | ||||||
| Thomas M. Nealon |
52,814 | 2,789,107 | ||||||
| (1) | Calculated by multiplying the number of shares acquired upon the February 21, 2021 vesting of RSUs and/or performance-based RSUs by $52.81, the closing price of the Company’s common stock on February 19, 2021, the last day of trading before the date of vesting. |
Nonqualified Deferred Compensation in Fiscal 2021
As discussed above under “Compensation Discussion and Analysis – Retirement and Related Benefits,” the Company maintains tax-qualified 401(k) and profit sharing plans for its eligible Employees. The 401(k) plan for non-Pilot Employees provides for a Company match on non-Pilot Employee contributions. The Company also sponsors a Pilots’ 401(k) plan pursuant to which each eligible Pilot received a fully-vested non-elective Company contribution equal to 15.0 percent of such Pilot’s eligible compensation for 2021, whether or not the Pilot made his or her own contributions to the plan. As discussed in more detail above under “Compensation Discussion and Analysis – Retirement and Related Benefits,” the profit sharing plan provides for a discretionary annual Company contribution to Employee accounts equal to an amount determined by the Board in its sole discretion. The Company also offers a non-qualified excess benefit plan. This plan enables eligible Employees to defer Company contributions (“excess amounts”) that cannot be contributed to the 401(k) or profit sharing plans due to the qualified plan contribution limits of Section 415(c) of the Internal Revenue Code. The plan only allows contributions above the Code Section 415(c) limits and prohibits other Employee contributions to the plan. Under the excess benefit plan, Employees, including the named executive officers, with excess amounts of at least $1,000 may defer payment of their excess amounts. 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. Before the beginning of each plan year, participants may select a rate of return to
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apply to the amounts to be deferred to the excess benefit plan for the upcoming plan year. In 2021, the excess benefit plan allowed participants to select a rate of return equal to returns in one or more of the following investment options:
| Fund Name |
Ticker | 2021 Rate of Return |
||||||
| Vanguard Institutional Target Retirement Income Fund Institutional Shares |
VITRX | 5.34% | ||||||
| Vanguard Institutional Target Retirement 2015 Fund Institutional Shares |
VITVX | 5.81% | ||||||
| Vanguard Institutional Target Retirement 2020 Fund Institutional Shares |
VITWX | 8.29% | ||||||
| Vanguard Institutional Target Retirement 2025 Fund Institutional Shares |
VRIVX | 9.95% | ||||||
| Vanguard Institutional Target Retirement 2030 Fund Institutional Shares |
VTTWX | 11.52% | ||||||
| Vanguard Institutional Target Retirement 2035 Fund Institutional Shares |
VITFX | 13.12% | ||||||
| Vanguard Institutional Target Retirement 2040 Fund Institutional Shares |
VIRSX | 14.74% | ||||||
| Vanguard Institutional Target Retirement 2045 Fund Institutional Shares |
VITLX | 16.29% | ||||||
| Vanguard Institutional Target Retirement 2050 Fund Institutional Shares |
VTRLX | 16.59% | ||||||
| Vanguard Institutional Target Retirement 2055 Fund Institutional Shares |
VIVLX | 16.54% | ||||||
| Vanguard Institutional Target Retirement 2060 Fund Institutional Shares |
VILVX | 16.56% | ||||||
| Vanguard Institutional Target Retirement 2065 Fund Institutional Shares |
VSXFX | 16.56% | ||||||
| Vanguard Institutional Index Fund Institutional Plus Shares |
VIIIX | 28.69% | ||||||
| Payden Absolute Return Bond Fund SI Class |
PYAIX | 1.35% | ||||||
Amounts deferred to the excess benefit plan before 2018 received a rate of return equal to one or more of the following, in accordance with the participants’ elections:
| Fund Name |
Ticker | 2021 Rate of Return |
||||||
| Vanguard 500 Index Fund Admiral Shares |
VFIAX | 28.66% | ||||||
| Fixed Income Fund Plus 2 Percent |
N/A | 2.05% | ||||||
Once an excess amount is credited to a participant’s account, the participant may not change that investment election for that amount or transfer amounts between funds, but participants may change investment elections during annual enrollment for new excess amounts deferred. Participants may receive their accounts upon separation from service with the Company. They must elect the time and form of distribution of their accounts before their first year of participation in the excess benefit plan. Distribution may be in a lump sum payout or equal annual installments over a period of up to five years. It 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 nonqualified deferred compensation plan, the SMC Deferred Compensation Plan, which is designed to provide benefits with respect to Employee contributions that cannot be contributed to the Company’s 401(k) plans due to qualified plan limits established by the IRS. Under the SMC Deferred Compensation Plan, officers of the Company who are not eligible to participate in the Company’s 2005 Deferred Compensation Plan for Pilots may, before the beginning of each plan year, irrevocably elect to defer up to 50 percent of their salary otherwise payable to them for such plan year and 100 percent of any bonus amounts they earn for such plan year. In 2021, the SMC Deferred Compensation Plan provided a rate of return equal to one or more of the investment options shown in the table above for the excess benefit plan. Participant benefits are unsecured obligations of the Company in the event of its bankruptcy or insolvency. Participants may receive their accounts upon separation from service with the Company. They must elect the time and form of distribution of their accounts before their first year of participation in the SMC Deferred Compensation Plan. Distribution
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may be in a lump sum payout or equal annual installments over a period of up to five years. It 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.
Through January 31, 2022, Mr. Kelly had an individual deferred compensation letter agreement (the “Prior Letter Agreement”), pursuant to which the Company made contributions to Mr. Kelly’s account to the extent such amounts could not be contributed to the Company’s tax-qualified 401(k) and profit sharing plans due to contribution limits and compensation limits established by the IRS. The Prior Letter Agreement provided for accrual and crediting to Mr. Kelly’s 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. Effective February 1, 2022, Mr. Kelly entered into a new letter agreement (the “New Letter Agreement”), and the Prior Letter Agreement was terminated. Under the New Letter Agreement, deferred compensation contributions to Mr. Kelly’s account will cease after the 2022 plan year. In addition, beginning January 1, 2023, simple interest on the balance of the deferred compensation credited to Mr. Kelly’s account will be equal to 120 percent of the Applicable Federal Long-Term Rate for January 2023, compounded annually. Subject to any applicable requirements of Section 409A of the Internal Revenue Code, the deferred compensation credited to Mr. Kelly’s account will be paid to him at the rate of $200,000 per calendar year, beginning the calendar year following the year in which his separation from service occurs.
The following table provides information with respect to nonqualified deferred compensation earned by the named executive officers for 2021.
| Nonqualified Deferred Compensation for Fiscal 2021 | ||||||||||||||||
| Name |
Plan |
Executive Contributions in Last Fiscal Year ($) |
Southwest Contributions in Last Fiscal Year ($) |
Aggregate Earnings in Last Fiscal Year ($) |
Aggregate Withdrawals/ Distributions in Last Fiscal Year ($) |
Aggregate Balance at December 31, 2021 ($) |
||||||||||
| Gary C. Kelly |
Prior Letter Agreement | — | 74,871(1) | 255,899 | (2) | — | 2,889,755(3)(4) | |||||||||
| Excess Benefit Plan | — | — | 1,493 | (5) | — | 73,627(6) | ||||||||||
| SMC Deferred Compensation Plan | — | — | 442,061 | (5) | — | 7,715,068(7) | ||||||||||
| Tammy Romo |
— | — | — | — | — | — | ||||||||||
| Michael G. Van de Ven |
— | — | — | — | — | — | ||||||||||
| Robert E. Jordan |
Excess Benefit Plan | — | — | 94,611 | (5) | — | 424,664(8) | |||||||||
| Andrew M. Watterson |
— | — | — | — | — | — | ||||||||||
| Thomas M. Nealon |
— | — | — | — | — | — | ||||||||||
| (1) | All of this amount is also reported for Mr.Kelly in the “All Other Compensation” column of the Summary Compensation Table for 2021. This amount was earned with respect to fiscal 2021, but was not contributed to Mr. Kelly’s account until 2022. |
| (2) | This includes the $128,205 disclosed in the “Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table for 2021. |
| (3) | This includes the $74,871 reported in the “Southwest Contributions in the Last Fiscal Year” column of this table as contributions pursuant to Mr. Kelly’s Prior Letter Agreement earned for 2021, but that were not contributed to Mr. Kelly’s account until 2022. Mr. Kelly’s actual cash balance at December 31, 2021, was $2,814,885. |
| (4) | Of this amount, $1,996,598 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. |
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| (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) | Of this amount, $6,110,634 has been required to be reported as compensation to Mr. Kelly in the Summary Compensation Table for previous years. |
| (8) | Of this amount, $113,111 has been required to be reported as compensation to Mr. Jordan 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”). Each of the named executive officers are, and were during 2021, 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 executive’s 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 executive’s 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 executive’s 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). |
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 Company’s 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 executive’s duties under the agreement that are (a) grossly negligent or (b) willful and deliberate on the executive’s 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 executive’s duties prior to the change-in-control, relocation, or a failure of the Company to abide by the provisions of the executive’s change-in-control agreement. |
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2007 Equity Plan
Pursuant to the terms of the 2007 Equity Plan, in the event of the termination of a participant’s service as a result of death or disability, (a) any of the participant’s outstanding RSUs or stock options that have not yet vested will fully vest as of the date of termination and (b) any of the participant’s performance-based RSUs will remain outstanding as if the participant’s service has not terminated and will 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 Company’s Chief Executive Officer, Chief People Officer (or equivalent), Chief Financial Officer, and/or General Counsel (or equivalent). 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 participant’s termination of service as a result of disability.
Beginning with equity incentive plan awards granted in 2021, provided the participant’s service has terminated no earlier than 12 months after the date of the grant, in the event of termination of a participant’s service as a result of a “qualified retirement,” (a) any of the participant’s outstanding RSUs that have not yet vested will remain outstanding as if the participant’s service has not terminated and will continue to vest in accordance with the vesting schedule set forth in the notice of the grant and (b) any of the participant’s performance-based RSUs will remain outstanding as if the participant’s service has not yet terminated and will otherwise be settleable in accordance with the terms of the grant; however, the number of shares received upon settlement of the performance-based RSUs will be pro-rated based on the participant’s number of days of service between the date of the grant and the end of the performance period. A participant’s termination of service will be considered a “qualified retirement” if (a) the participant has completed at least 10 years of continuous service, (b) the participant’s age plus completed years of continuous service equal at least 65 at the time of the participant’s termination of service, and (c) the participant has not been terminated for cause. Because the “qualified retirement” provision was new for 2021, it did not become effective with respect to any of the named executive officers’ grants during 2021 for purposes of the table below.
The Company also granted performance-based cash awards in 2021, for the performance period from January 1, 2022 to December 31, 2023. In the event of the termination of the participant’s service as a result of death or disability, any of these outstanding performance-based cash awards for a participant will remain outstanding as if the participant’s service has not terminated and will otherwise be settleable in accordance with the terms of the grant. In addition, provided the participant’s service has terminated no earlier than 12 months after the date of the award, in the event of termination of a participant’s service as a result of a “qualified retirement,” any of these performance-based cash awards for a participant will remain outstanding as if the participant’s service has not yet terminated and will otherwise be settleable in accordance with the terms of the grant; however, the amount of cash received upon settlement of the performance-based cash awards will be pro-rated based on the participant’s number of days of service between the date of the grant and the end of the performance period.
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Incremental amounts receivable by the named executive officers pursuant to the executive change-in-control agreements or the 2007 Equity Plan 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 |
— | — | 3,558,000 | 5,858,756 | ||||||||
| Tammy Romo |
— | — | 1,837,672 | 2,293,782 | ||||||||
| Michael G. Van de Ven |
— | — | 2,166,752 | 2,800,879 | ||||||||
| Robert E. Jordan |
— | — | 1,816,508 | 2,272,062 | ||||||||
| Andrew M. Watterson |
— | — | 1,556,340 | 1,904,795 | ||||||||
| Thomas M. Nealon |
— | — | 2,166,752 | 2,800,879 | ||||||||
| (1) | Represents amounts payable pursuant to the executive change-in-control agreements and assumes the triggering event took place on December 31, 2021. |
| (2) | Represents amounts payable with respect to the acceleration of time-vesting RSUs under the 2007 Equity Plan in the event of death or disability only. Also assumes the triggering event took place on December 31, 2021, and reflects the aggregate market value of unvested RSUs that would become vested under the circumstances. In the event of death or disability, performance-based RSUs and performance-based cash awards will remain outstanding and will vest if, and only if, the requisite performance criteria are eventually achieved. The aggregate market value is computed by multiplying the number of RSUs by $42.84, which was the closing price per share of the Company’s common stock on December 31, 2021 on the NYSE. The 2007 Equity Plan does not provide for acceleration of RSUs in the event of a change-in-control. In the event of the termination of a participant’s service for any reason other than as a result of (i) death or disability, or (ii) a “qualified retirement” on or after February 3, 2022, the participant’s outstanding unvested RSUs would be forfeited. |
In addition to the amounts discussed above, in the event of termination of their employment for any reason other than for cause, each of the named executive officers would be eligible to participate in any non-contract retiree medical benefit plan or program that the Company may then make available to its retirees generally on the same terms as other retirees. In addition, these individuals would be entitled to the amounts credited to their accounts pursuant to the Company’s qualified retirement plans, as well as nonqualified deferred compensation amounts credited to their accounts pursuant to the Company’s excess benefit plan, SMC Deferred Compensation Plan, and, with respect to Mr. Kelly, his individual deferred compensation letter agreement, each as disclosed in more detail above under the heading “Nonqualified Deferred Compensation in Fiscal 2021.”
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Fiscal 2021 Director Compensation
The following table provides information with respect to compensation earned by the non-Employee members of the Board of Directors for the year ended December 31, 2021.
| Name | Fees Earned or Paid in Cash ($) |
Stock Awards
($)(1)(2) |
Total ($) | |||
| David W. Biegler |
138,150 | 160,034 | 298,184 | |||
| J. Veronica Biggins |
106,972 | 160,034 | 267,006 | |||
| Douglas H. Brooks |
102,382 | 160,034 | 262,416 | |||
| William H. Cunningham |
153,836 | 160,034 | 313,870 | |||
| John G. Denison |
136,260 | 160,034 | 296,294 | |||
| Thomas W. Gilligan |
108,130 | 160,034 | 268,164 | |||
| David P. Hess |
10,247 | — | 10,247 | |||
| Grace D. Lieblein |
103,012 | 160,034 | 263,046 | |||
| Nancy B. Loeffler |
101,890 | 160,034 | 261,924 | |||
| John T. Montford |
142,028(3) | 160,034 | 302,062 | |||
| Ron Ricks |
129,902 | 160,034 | 289,936 | |||
| (1) | Awards consist of shares of common stock for each of the Company’s non-Employee members of the Board. Other than Mr. Hess, who did not join the Board until November 18, 2021, each non-Employee member of the Board received 2,650 shares of common stock on May 19, 2021. 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 $60.39, the closing price of the Company’s common stock on the date of the grant. |
| (2) | Through May 2009, non-Employee members of the Board received annual grants of performance shares pursuant to the Company’s 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, 2021, for each of the non-Employee Directors listed in the table above was as follows: Mr. Biegler — 5,000; Ms. Biggins — 0; Mr. Brooks — 0; Dr. Cunningham — 6,750; |
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| Mr. Denison — 0; Dr. Gilligan — 0; Mr. Hess — 0; Ms. Lieblein — 0; Ms. Loeffler — 5,250; Mr. Montford — 6,000; and Mr. Ricks — 0. Pursuant to the terms of the Outside Director Incentive Plan, on the 30th 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 Company’s common stock during the 30 days preceding the Director’s last date of service multiplied by the number of performance shares then held by such Director. |
| (3) | Thirty percent of this amount (representing Mr. Montford’s cash retainer fees earned with respect to 2021) was deferred pursuant to the Company’s SMC Deferred Compensation Plan. |
Non-Employee Directors’ cash retainer fees for Board membership and standing committees are generally paid on an annual basis. Board of Director and committee fees earned by the non-Employee Directors on an annualized basis with respect to 2021 are set forth in the table below:
| Board of Directors: | As of January 1, 2021 |
As of October 1, 2021 |
||||||
| Retainer Fee |
$ | 85,000 | $ | 85,000 | ||||
| Vice Chairman Retainer Fee |
$ | 25,000 | $ | 35,000 | ||||
| Lead Director Retainer Fee |
$ | 25,000 | $ | 35,000 | ||||
| Audit Committee: | ||||||||
| Chair Retainer Fee |
$ | 25,000 | $ | 30,000 | ||||
| Member Retainer Fee |
$ | 13,500 | $ | 15,000 | ||||
| Compensation Committee: | ||||||||
| Chair Retainer Fee |
$ | 20,000 | $ | 25,000 | ||||
| Member Retainer Fee |
$ | 7,500 | $ | 12,500 | ||||
| Nominating and Corporate Governance Committee: | ||||||||
| Chair Retainer Fee |
$ | 15,000 | $ | 20,000 | ||||
| Member Retainer Fee |
$ | 7,500 | $ | 10,000 | ||||
| Safety and Compliance Oversight Committee: | ||||||||
| Chair Retainer Fee |
$ | 20,000 | $ | 20,000 | ||||
| Member Retainer Fee |
$ | 9,000 | $ | 10,000 | ||||
| Executive Committee: | ||||||||
| Chair Retainer Fee |
$ | 15,000 | $ | 20,000 | ||||
| Retainer Fee for all Non-Employee Members of the Executive Committee |
$ | 7,500 | $ | 10,000 | ||||
|
Meetings in excess of regularly scheduled Board and Committee Meetings |
||||||||
| In-person or Telephonic Attendance Fee Per Meeting |
$ | 1,500 | $ | 1,500 | ||||
During 2021, the Company provided free travel on Southwest Airlines on a reserved basis for Board members and their spouses. In addition, for 2021, Board members were provided up to 50 free oneway 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 Director’s retirement from the Board: (a) if the Director has served on the
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Board for at least ten years, the Director and his or her 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 his or her 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 as of the date of retirement is entitled to a cash payment of $75,000.
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The Audit Committee has reviewed and discussed with management the audited financial statements of the Company for the year ended December 31, 2021. In addition, the Audit Committee has discussed with Ernst & Young LLP, the Company’s independent auditors, the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”) and the SEC.
The Audit Committee has also received the written disclosures and the letter from Ernst & Young required by applicable requirements of the PCAOB regarding Ernst & Young’s 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 Company’s Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
AUDIT COMMITTEE
John T. Montford, Chair
David W. Biegler
William H. Cunningham
John G. Denison
Thomas W. Gilligan
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ADVISORY VOTE TO APPROVE THE COMPENSATION OF THE COMPANY’S
NAMED EXECUTIVE OFFICERS
In accordance with the Dodd-Frank Act, as well as Section 14A of the Exchange Act, 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 Company’s 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 Company’s named executive officers for 2021 was reasonable and appropriate for the following reasons, among many others:
| • | The named executive officer compensation structure for 2021 reflects the Compensation Committee’s goal to balance the following objectives, while maintaining compliance with the PSP Pay Restrictions discussed above under “Compensation Discussion and Analysis – Summary of PSP Pay Restrictions”: (i) providing fair pay for performance, while maintaining a view from the perspective of the Company’s Shareholders; and (ii) retaining talent, while treating Employees consistently to the extent feasible. To link pay to performance and Shareholder interests, the Compensation Committee tied 80 percent of each named executive officer’s short-term incentive compensation opportunity to pre-established performance metrics intended to drive business recovery from the COVID-19 pandemic. In the Compensation Committee’s view, the resulting short-term incentive payouts for 2021 were fairly and appropriately aligned with Shareholder interests, as discussed in more detail above in “Compensation Discussion and Analysis – Determination of 2021 Executive Compensation; Analysis of Individual Compensation Elements.” The named executive officers’ long-term incentive awards, which were granted in February 2021, reflected the Compensation Committee’s belief that long-term incentive awards, including equity, should constitute a strong component of overall compensation in order to (i) align a significant percentage of the named executive officers’ compensation opportunities with the interests of the Company’s Shareholders; (ii) serve as a performance-based method to provide appropriate total compensation opportunities relative to market, while also serving as a retention mechanism; and (iii) provide a sufficient percentage of total pay at risk when combined with short-term incentive compensation. Additional detail regarding the Compensation Committee’s rationale for its short-term incentive and long-term incentive determinations is provided above under “Compensation Discussion and Analysis – Determination of 2021 Executive Compensation; Analysis of Individual Compensation Elements.” |
| • | During 2021, the Company provided minimal perquisites to the named executive officers and did not provide for tax gross-ups of executive compensation. |
| • | During 2021, 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. |
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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 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 Company’s 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 Company’s Named Executive Officers
Based on the voting results at the Company’s 2017 Annual Meeting of Shareholders with respect to the frequency (the “Frequency Vote”) of Shareholder advisory votes to approve the compensation of the Company’s 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. The next required Frequency Vote is scheduled for the Company’s 2023 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 Company’s Proxy Statement for the 2022 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 Company’s 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.
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APPROVAL OF THE SOUTHWEST AIRLINES CO. AMENDED AND RESTATED
1991 EMPLOYEE STOCK PURCHASE PLAN
At the Annual Meeting, Shareholders will be asked to approve the Southwest Airlines Co. Amended and Restated 1991 Employee Stock Purchase Plan (the “Plan”). The Board of Directors approved the Plan on February 2, 2022, subject to approval by the Company’s Shareholders. If approved by the Shareholders at the Annual Meeting, the Plan, as amended and restated, will become effective as of the date of Shareholder approval. As amended and restated, the Plan would provide the same benefits to Employees as are currently provided under the Company’s current employee stock purchase plan, except that the maximum aggregate number of shares of the Company’s common stock that may be issued under the Plan would increase from 28,750,000 to 43,750,000.
The Board of Directors believes an employee stock purchase plan provides an incentive for Employees to acquire or increase their proprietary interests in the Company and thereby provides an additional mechanism for aligning Employee interests with those of other Shareholders. The Company’s Shareholders have previously authorized an aggregate of 28,750,000 shares of the Company’s common stock for issuance under the current plan. As of March 7, 2022, approximately 24,211,500 shares had been purchased under the Plan. Therefore, only approximately 4,538,500 shares remained available for purchase under the current plan. The Board therefore believes additional shares will be needed under the Plan to provide appropriate incentives to Employees and that the proposed Plan is in the best interests of the Company, its Employees, and its Shareholders.
Description of the Plan
The following summary of the Plan should be read in conjunction with, and is qualified in its entirety by reference to, the complete text of the Plan, which is attached to this proxy statement as Appendix A.
General. The Plan is intended to qualify as an “employee stock purchase plan” under section 423 of the Internal Revenue Code. Each participant in the Plan is granted the right (an “Option”) to purchase shares of the Company’s common stock on the last trading day of each month at a price equal to 90 percent of the mean between the highest and lowest quoted selling prices of the common stock on the NYSE on such date (the “Option Price”). On March 25, 2022, the closing price of the Company’s common stock on the NYSE was $44.38.
Eligibility. Any common law Employee of the Company (or any of its designated subsidiaries) who has completed six months of continuous service with the Company (or a designated subsidiary) may participate in the Plan, except for (i) any Employee who would, immediately upon receipt of the right to purchase common stock under the Plan, own, directly or indirectly, or hold options or rights to acquire, an aggregate of five percent or more of the total combined voting power or value of all outstanding shares of all classes of stock of the Company or any corporation related to the Company; (ii) any Employee whose customary employment is for not more than five months in any calendar year; and (iii) any Employee who is a citizen or resident of a foreign jurisdiction if the grant of an option under the Plan to such person would be prohibited under the laws of such jurisdiction or compliance with the laws of the foreign jurisdiction would cause the Plan to fail the requirements of Internal Revenue Code section 423. As of March 7, 2022, 56,572 Employees were eligible to participate in the current plan, of which 20,352 were participating.
Administration. The Plan is administered by the Board of Directors or a duly appointed committee of the Board (the “Administrator”). The Administrator has the power to administer and interpret the Plan, and all decisions of the Administrator will be final and binding on all participants.
Participation. To participate in the Plan, eligible Employees must authorize payroll deductions from salary or wages. The Administrator may adopt rules and procedures for the implementation and administration of payroll deduction elections, including any minimum or maximum dollar or percentage limitations that apply to a participant’s payroll deduction election; provided that no Employee will be permitted to purchase stock under all employee stock purchase plans of the Company and any related corporations at a rate that exceeds $25,000 in fair market value of the stock for each calendar year in which any Option granted to the Employee is outstanding at any time. Once an Employee becomes a participant in the Plan, that Employee will automatically continue to participate until such time as the Employee suspends his or her payroll deduction election, becomes ineligible to
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participate, or terminates employment. An Employee’s suspension of his or her payroll deduction election will not affect his or her eligibility to participate in the Plan in the future.
Purchases of Shares. On the last trading day of each month in which a participant has made a payroll deduction, the Company will apply the participant’s payroll deductions to the purchase of shares, including fractional shares, of common stock. The number of shares purchased will be determined by dividing a participant’s total payroll deductions for a given month by the Option Price.
Capital Changes. In the event of any reorganization, recapitalization, stock split, reverse stock split, stock dividend, combination of shares, merger, consolidation, offering of rights or other similar change in the capital structure of the Company, the Administrator will make such adjustment as it deems appropriate in the number of shares available for purchase under the Plan.
Nonassignability. Each Option is assignable or transferable only by will or by the laws of descent and distribution and is exercisable during the participant’s lifetime only by the participant.
Termination or Amendment. The Plan will continue until terminated by the Board or until all of the shares reserved for issuance under the Plan have been issued. The Board may amend, alter, or terminate the Plan at any time, except that Shareholder approval of any amendment is required if the amendment would (i) increase the aggregate number of shares of common stock that may be issued under the Plan (other than an increase merely reflecting a change in the number of outstanding shares, such as a stock dividend or stock split); or (ii) otherwise require approval by the rules of the NYSE, the Internal Revenue Code or Treasury regulations, or other laws.
Summary of U.S. Federal Income Tax Consequences
The following discussion is intended as a general summary of the U.S. federal income tax consequences arising from participation in the Plan. This summary does not purport to be complete and does not address any applicable state or local tax laws.
The Plan is intended to qualify as an “employee stock purchase plan” under section 423 of the Internal Revenue Code. Participants will not recognize income for federal income tax purposes either upon enrollment in the Plan or upon purchase of common stock under the Plan.
If common stock purchased under the Plan is held for more than two years after the date of purchase, gain realized on the sale is ordinary income, taxable as compensation, to the participant to the extent of the lesser of:
| • | ten percent of the fair market value of the common stock as of the purchase date; or |
| • | the actual gain (the amount by which the sale price exceeds the purchase price). |
All additional gain upon the sale of the common stock is treated as long-term capital gain.
If the common stock is sold within the two-year holding period described above, the sale will constitute a “disqualifying disposition.” In the event of a disqualifying disposition, the participant will recognize ordinary income, taxable as compensation, to the extent of the difference between the purchase price and the fair market value of the common stock at the date of purchase of the common stock. All additional gain upon the sale of the common stock is treated as capital gain.
The Company receives a deduction from its income for federal income tax purposes to the extent that the participant realizes ordinary income on a disqualifying disposition. The Company does not receive a deduction if a participant meets the two-year holding period requirement.
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Benefits Under the Plan
The following table sets forth the number of shares of common stock purchased under the Plan since its inception through March 7, 2022, by the individuals and groups listed.
| Name | Number of Shares | |||
| Gary C. Kelly |
— | |||
| Tammy Romo |
— | |||
| Michael G. Van de
Ven |
— | |||
| Robert E. Jordan |
920 | |||
| Andrew M.
Watterson |
— | |||
| Thomas M.
Nealon |
— | |||
| All Current Executive Officers as a Group |
920 | |||
| All Current Directors Who are Not Executive Officers as a Group |
— | |||
| Each Nominee for Election as a Director |
920 | |||
| Each Associate of the Above Directors, Executive Officers, or Nominees |
— | |||
| Each Other Person Who Has Received Five Percent or More of the Options, Warrants, or Rights Under the Plan |
— | |||
| All Employees, Including All Current Officers who are Not Executive Officers or Directors, as a Group |
24,210,598 | |||
*Mr. Kelly served as Chairman of the Board and Chief Executive Officer through January 31, 2022, and became Executive Chairman of the Board effective February 1, 2022.
**Mr. Van de Ven served as Chief Operating Officer throughout 2021, and also became President effective September 13, 2021.
***Mr. Jordan served as Executive Vice President Corporate Services until June 30, 2021, after which he served as Executive Vice President and Incoming Chief Executive Officer until February 1, 2022, when he became Chief Executive Officer.
****Mr. Nealon served as President until September 13, 2021, when he resigned and ceased to be an executive officer of the Company.
The benefits or amounts that will be received by or allocated to individuals in the future under the Plan are not determinable at this time.
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 this proposal. Proxies solicited by the Board of Directors will be so voted unless Shareholders specify a different choice.
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Equity Compensation Plan Information (1)
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights (a) |
Weighted- Average Exercise Price of Outstanding Options, Warrants, and Rights $(b) |
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) |
|||||||||
| Equity Compensation Plans Approved by Security Holders |
2,561,384(2) | —(3) | 22,036,227(4) | |||||||||
| Equity Compensation Plans not Approved by Security Holders |
— | — | — | |||||||||
| Total |
2,561,384 | —(3) | 22,036,227 | |||||||||
| (1) | As of December 31, 2021. |
| (2) | Restricted share units settleable in shares of the Company’s common stock. |
| (3) | Restricted share units discussed in footnote (2) above do not have a weighted average exercise price because the restricted share units do not have an exercise price upon vesting. |
| (4) | Of these shares, (i) 4,879,534 shares remained available for issuance under the Company’s tax-qualified employee stock purchase plan; and (ii) 17,156,693 shares remained available for issuance under the Company’s 2007 Equity Incentive Plan in connection with the exercise of stock options and stock appreciation rights, the settlement of awards of restricted stock, restricted stock units, and phantom shares, and the grant of unrestricted shares of common stock; however, no more than 1,071,969 shares remain available for grant in connection with awards of unrestricted shares of common stock, stock-settled phantom shares, and awards to non-Employee members of the Board. These shares are in addition to the shares reserved for issuance pursuant to outstanding awards included in column (a). |
Each of the above plans provides that the number of shares with respect to which options may be granted, the number of shares of common stock subject to an outstanding option, and the number of restricted share units granted shall be proportionately adjusted in the event of a subdivision or consolidation of shares or the payment of a stock dividend on common stock, and the purchase price per share of outstanding options shall be proportionately revised.
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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 Company’s independent auditors for the fiscal year ending December 31, 2022. Shareholder ratification of the selection of Ernst & Young LLP as the Company’s independent auditors is not required by the Company’s 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 registered public 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 Company’s independent auditors for the fiscal year ending December 31, 2022. 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 Company’s 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 or she 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 2021 and 2020:
| Year | Audit Fees(1) | Audit- Related Fees |
Tax Fees(2) | All Other Fees(3) |
Total Fees | |||||||||||||||||
| 2021 | $ | 2,204,200 | $ | — | $ | 158,198 | $ | 6,751 | $ | 2,369,149 | ||||||||||||
| 2020 | $ | 2,460,500 | $ | — | $ | 225,675 | $ | 7,713 | $ | 2,693,888 | ||||||||||||
| (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, and the attestation of management’s Report on Internal Controls. |
| (2) | Includes services for tax compliance, tax advice, and tax planning. Services included a review of the 2020 federal income tax return, CARES Act Employee Retention Credit study, assistance with the evaluation of re-domestication of the Company’s wholly-owned captive insurance company (the “Captive”), a feasibility study for an employee benefit cost containment program, and preparation of a tax opinion to document the federal tax qualification of the Captive. |
| (3) | Consists of fees for other permitted advisory services and products, including Ernst & Young subscriptions. |
A copy of the Audit Committee’s Audit and Non-Audit Services Preapproval Policy is attached to this Proxy Statement as Appendix B. All of the services rendered by the independent auditors during 2021 were pre-approved by the Audit Committee or by its Chairman pursuant to his delegated authority.
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SHAREHOLDER RIGHT TO REMOVE DIRECTORS WITHOUT CAUSE
PROPOSAL 5
The Company has been notified by Mr. John Chevedden that the following proposal is to be presented for consideration at the Annual Meeting. This proposal will be voted on if it is properly presented at the Annual Meeting. The Company will provide to any Shareholder, promptly upon receipt of the Shareholder’s written or oral request, the name and address of the proponent of this proposal and the number of shares of the Company’s common stock held by the proponent of this proposal.
|
The Board of Directors unanimously recommends a vote AGAINST the adoption of this Shareholder proposal. |
The Company is not responsible for the content of this Shareholder proposal, including the supporting statement and the checkmark graphic.
Proposal 5 – Shareholder Right to Remove Directors without Cause
Shareholders ask our Board of Directors to take the steps necessary to permit removal of directors by a majority vote of shareholders with or without cause.
This proposal topic won 48% support at the 2021 Southwest Airlines annual meeting in spite of formidable management resistance. Southwest management published a statement of resistance that had 6-times as many words as the 2021 proposal itself.
Plus there is no evidence that management subsequently talked to the large shareholders who voted in favor of the 2021 proposal to determine the action they expected Southwest Airlines management to take.
The 2021 management resistance to this proposal topic stuck up for a practice that could allow 350 days to elapse between the time a director was arrested to the date he was fired from the Board. If a pilot is arrested for flying DUI he is not allowed to fly for 350 days. Why should an airline director be better off?
Our present rule can give job security to directors if they are accused of domestic violence with overwhelming evidence.
It is not appropriate that, when airline employees do not necessarily have job security, that airline directors have job security regardless of their behavior.
Please vote yes:
Shareholder Right to Remove Directors without Cause - Proposal 5
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BOARD OF DIRECTORS STATEMENT IN OPPOSITION TO PROPOSAL 5
The Board of Directors unanimously recommends a vote AGAINST the adoption of this Shareholder proposal for the following reasons:
| • | The Board believes a Shareholder’s existing ability to remove Board members, with or without cause on an annual basis, affords Shareholders appropriate rights and mechanisms to hold Board members accountable. |
| • | The Board believes the stability and continuity enabled by a requirement that, between annual meetings, Board members may only be removed “for cause” is in the best interests of Shareholders. |
| • | The Board believes that adoption of this proposal could lead to distractions and disruptions associated with Board member removal campaigns that are not in the best interests of Shareholders. |
| • | The Board believes the Company’s existing governance practices provide appropriate means for Shareholders and independent directors to monitor and oversee the Board’s overall effectiveness, as well as the performance of individual Board members. |
The Board believes a Shareholder’s existing ability to remove Board members, with or without cause on an annual basis, affords Shareholders appropriate rights and mechanisms to hold Board members accountable.
Pursuant to both Texas law and the Company’s bylaws, at each Annual Meeting of Shareholders, each Shareholder has the opportunity to vote against the election of any Board member nominee, with or without cause. In addition, in accordance with applicable laws, in order to enable Shareholders to appropriately evaluate individual Board members, as well as the overall composition of the Board, the Company distributes information in the proxy statement for each Annual Meeting about the background, experience, independence, and other qualifications of each Board member nominee. The proxy statement also informs Shareholders of the role of the Board and its committees in overseeing the performance of the Company’s management. This information enables Shareholders to annually submit an educated vote on the merits of individual Board members. As discussed further below, Shareholders’ rights are further protected by way of their ability between annual meetings, to vote to remove any or all Board members “for cause.”
The Board believes the results of a similar proposal at the Company’s 2021 Annual Meeting of Shareholders, where the proponent’s removal without cause proposal failed to receive a majority vote in favor, further supports its views that Shareholders’ existing rights are appropriately protected.
The Board believes the stability and continuity enabled by a requirement that, between annual meetings, Board members may only be removed “for cause” is in the best interests of Shareholders.
Shareholder ability to remove members of the Board only “for cause” between annual meetings provides and promotes stability and continuity of the Board, which in turn allows the Company and its Shareholders to realize the benefits associated with a group of Board members whose collective experience with the Company and in-depth knowledge of the Company’s business and strategies contribute to the Board’s ability to effectively exercise its fiduciary duties. The Board believes experienced Board members are well positioned to focus on the long-term interests of the Company, particularly (as discussed further below) if their time and attention are not diverted by the threat of unfounded appeals for their removal. The proponent’s proposal implies Directors may only be removed between annual meetings for egregious behaviors such as would result in a felony conviction. In fact, the definition of “for cause” in the Company’s bylaws also includes behavior such as gross negligence in the performance of a Board member’s duties.
The Board believes that adoption of this proposal could lead to distractions and disruptions associated with Board member removal campaigns that are not in the best interests of Shareholders.
The Board believes Shareholders’ ability to remove any or all Board members without merit has the potential to create Board and management instability and uncertainty and distract the Company and its Board members from advancing the interests of the Company’s Shareholders. For example, adoption of this proposal could subject the Company and the Board to unfounded removal campaigns, attract activist investors who are not
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aligned with the interests of all Shareholders, or even facilitate a hostile takeover of the Company. Any of these events could unnecessarily divert the Board’s, as well as management’s, attention. The Board believes a requirement that removal between annual meetings only be for cause reduces the Company’s vulnerability to such events.
The Board believes the Company’s existing governance practices provide appropriate means for Shareholders and independent directors to monitor and oversee the Board’s overall effectiveness, as well as the performance of individual Board members.
The Board’s Nominating and Corporate Governance Committee, which consists solely of independent directors, is responsible for recommending a slate of nominees for election as directors at the annual meeting of Shareholders and identifying and recommending candidates to fill vacancies between annual meetings, in each case taking into account the qualifications required by the Company’s Corporate Governance Guidelines. The independent Nominating and Corporate Governance Committee also oversees evaluations of the Board as part of its ongoing assessment of the composition of the Board. Furthermore, to address feedback from Shareholders with respect to Board compensation and the frequency with which Shareholders have the ability to vote on the composition of the Board, (i) in 2005, the Board amended the Company’s bylaws to eliminate a classified Board structure; (ii) in 2009, the Board amended the Company’s bylaws to change the vote standard for the election of Directors in uncontested elections from a plurality of the votes cast to a majority of the votes cast; (iii) in 2016, the Board amended the Company’s bylaws to create a process by which Shareholders may submit Board nominees for inclusion in the Company’s proxy statement (commonly referred to as “proxy access”); and (iv) in 2019, the Board amended the Company’s Corporate Governance Guidelines to evidence authority of the independent Lead Director that had not previously been formally set forth in writing.
In the exercise of its fiduciary duties under Texas law, the Board will continue to evaluate governance standards and practices and will consider whether changes should be made to the Company’s current policies and practices. The Board believes, however, that implementation of this proposal would not be in the Company’s or its Shareholders’ best interests at this time.
Vote Required
Provided that 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. It should be noted, however, that approval of this proposal would not by itself amend the Company’s bylaws.
Recommendation of the Board of Directors
The Board of Directors unanimously recommends a vote AGAINST this Shareholder proposal. Proxies solicited by the Board of Directors will be so voted unless Shareholders specify a different choice.
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SHAREHOLDER RATIFICATION OF TERMINATION PAY
PROPOSAL 6
The Company has been notified by Mr. Kenneth Steiner that the following proposal is to be presented for consideration at the Annual Meeting. This proposal will be voted on if it is properly presented at the Annual Meeting. The Company will provide to any Shareholder, promptly upon receipt of the Shareholder’s written or oral request, the name and address of the proponent of this proposal and the number of shares of the Company’s common stock held by the proponent of this proposal.
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The Board of Directors unanimously recommends a vote AGAINST the adoption of this Shareholder proposal. |
The Company is not responsible for the content of this Shareholder proposal, including the supporting statement and the checkmark graphic.
Proposal 6 – Shareholder Ratification of Termination Pay
Shareholders request that the Board seek shareholder approval of any senior manager’s new or renewed pay package that provides for severance or termination payments with an estimated value exceeding 2.99 times the sum of the executive’s base salary plus target short-term bonus.
“Severance or termination payments” include cash, equity or other compensation that is paid out or vests due to a senior executive’s termination for any reason. Payments include those provided under employment agreements, severance plans, and change-in-control clauses in long-term equity plans, but not life insurance, pension benefits, or deferred compensation earned and vested prior to termination.
“Estimated total value” includes: lump-sum payments; payments offsetting tax liabilities; perquisites or benefits not vested under a plan generally available to management employees; post-employment consulting fees or office expense; and equity awards if vesting is accelerated, or a performance condition waived, due to termination.
The Board shall retain the option to seek shareholder approval after material terms are agreed upon.
Generous performance-based pay can be good but shareholder ratification of “golden parachute” severance packages with a total cost exceeding 2.99 times base salary plus target bonus better aligns management pay with shareholder interests.
For instance at one company if the CEO is terminated without cause, whether or not his termination follows a change in control, he will receive $39 million in termination payments, nearly 7-times his base salary plus short-term bonus.
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It is in the best interest of Southwest Airlines shareholders to be protected from such lavish management termination packages for one person.
It is important to have this policy in place so that Southwest management stays focused on improving company performance as opposed to seeking a merger mostly to trigger a management golden parachute windfall.
This proposal topic won 58% support at the 2021 FedEx annual meeting. A proposal similar to this proposal won 41% support at the 2013 Alaska Air annual meeting in spite of a special management effort against it.
A 2015 General Electric shareholder proposal similar to the FedEx proposal won 40% GE shareholder support with 2.2 billion votes in favor. This may have represented 51% support from the GE shares that had access to independent proxy voting advice and are not forced to rely on the biased recommendations of management especially on issues of management pay.
Please vote yes:
Shareholder Ratification of Termination Pay – Proposal 6
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BOARD OF DIRECTORS STATEMENT IN OPPOSITION TO PROPOSAL 6
The Board of Directors unanimously recommends a vote AGAINST the adoption of this Shareholder proposal for the following reasons:
| • | The Board believes the proposal is unnecessary and unwarranted given the Company’s past compensation practices and Shareholder support of those practices. |
| • | The Board believes the Company’s compensation practices include reasonable limits on post-termination compensation and that the proposal seeks to address a practice that does not currently exist. |
| • | The Board believes any potential payment in the event of termination due to death or disability is both just and consistent with market practice. |
| • | The Board believes implementation of the proposal could impair the Compensation Committee’s and the Board’s flexibility and judgment in evolving compensation practices and determining appropriate post-termination compensation. |
The Board believes the proposal is unnecessary and unwarranted given the Company’s past compensation practices and Shareholder support of those practices.
The Board believes the Company has a long track record of responsible compensation practices, which include limited termination-related pay. The Board believes this view is supported by the Company’s Shareholders, whose votes in favor of approving the Company’s say-on-pay proposals have always constituted at least 93 percent of the shares voted either for or against these proposals. In addition, Shareholder votes in favor of approving the Company’s 2007 Equity Plan (pursuant to which all equity compensation awards are granted) constituted approximately 95% of the votes cast either for or against the proposal at the Company’s 2015 Annual Meeting of the Shareholders.
The Board believes the Company’s compensation practices include reasonable limits on post-termination compensation and that the proposal seeks to address a practice that does not currently exist.
Potential payments for which the Company’s named executive officers are eligible are disclosed above under “Potential Payments Upon Termination or Change-in-Control.” As shown in the table included in that section, the most significant potential payment upon termination would only be triggered in the event of a named executive officer’s death or disability, in which case the officer’s time-vesting (but not performance-based) restricted stock units (“RSUs) would accelerate.
The Board purposely limited the circumstances under which RSUs may accelerate based on Shareholder input with respect to the terms of the 2007 Equity Plan. Taking into account the Shareholder input, the 2007 Equity Plan specifically provides that “(i) in no event shall any Restricted Stock Award that has a vesting schedule based on the passing of time have (or be accelerated such that it has) a vesting schedule of less than three years from the date of grant, and not more than 33-1/3 percent of any such Award shall vest (or be accelerated such that it vests) on each anniversary of the date of grant; and (ii) in no event shall any Restricted Stock Award that is a Performance Award vest (or be accelerated such that it vests) in under one year from the date of grant.” As discussed above under “Compensation Discussion and Analysis,” the Company has also granted cash-based awards that mirror the terms of the Company’s stock awards and are therefore subject to the same restrictions on acceleration of vesting. Therefore, the Company does not have agreements with any of its employees (including its officers) that provide for acceleration of vesting of outstanding stock or cash incentive awards.
Although the Company has change-in-control agreements, including the Company’s Executive Service Recognition Plan Executive Employment Agreements with its officers, unlike many other large companies, in the event of a change-in-control, the Company does not provide for excessive payouts or acceleration of vesting of equity. As discussed above under “Potential Payments Upon Termination or Change-in-Control,” payments
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under the Company’s Executive Service Recognition Plan Executive Employment Agreements are limited (approximately equal to one year of salary and two years of bonus) and are subject to “double-trigger” provisions, meaning they do not provide for any incremental compensation to be paid to the named executive officers unless, subsequent to a change-in-control, an executive’s employment is terminated other than for cause or disability, or the executive resigns for good reason.
The proponent’s proposal expresses concern about lavish management termination packages, but considering the limited and narrow severance benefits described above, the Board and its Compensation Committee believe the proposal seeks to address a practice that does not currently exist.
The Board believes any potential payment in the event of termination due to death or disability is both just and consistent with market practice.
As discussed above, a named executive officer may be eligible for payments in the event of the individual’s death or disability. The Board believes providing certain benefits in the case of death or disability is fair, consistent with standard practice among public companies, and appropriate from a moral perspective. The proponent’s proposal is focused on “golden parachute” severance packages, but if adopted and implemented, could require the Company to spend time and resources securing Shareholder approval for payments to an individual who is deceased or is no longer an employee due to a disability. The Board does not believe this result would serve any purpose in maximizing Shareholder value or protecting Shareholders’ interests.
The Board believes implementation of the proposal could impair the Compensation Committee’s and the Board’s flexibility and judgment in evolving compensation and determining appropriate post-termination compensation.
The Compensation Committee assists the Board with its oversight of compensation of the Company’s executives and other employees. The Compensation Committee is comprised solely of independent, non-employee directors. In addition, each member of the Compensation Committee is elected to the full Board annually by the Company’s Shareholders and is responsible for taking Shareholder interests into account when developing compensation programs. The proposed requirement that the Company secure Shareholder approval of certain severance arrangements would be time consuming and expensive, and in the view of the Board, could constrain the Compensation Committee’s judgment in structuring further compensation arrangements. The Board believes the Compensation Committee should retain the responsibility and flexibility to tailor, assess, and approve compensation structures based on its unique access to market information and the advice of its independent compensation consultant. The Company competes for executive talent with other large companies, and the Board believes the ability of the Compensation Committee to exercise discretion in designing compensation arrangements is necessary to remain competitive in attracting and retaining highly qualified executive talent.
In the exercise of its fiduciary duties under Texas law, the Board will continue to evaluate governance standards and practices and will consider whether changes should be made to the Company’s current policies and practices. The Board believes, however, that implementation of this proposal would not be in the Company’s or its Shareholders’ best interests at this time.
Vote Required
Provided that 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 AGAINST this Shareholder proposal. Proxies solicited by the Board of Directors will be so voted unless Shareholders specify a different choice.
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Submission of Shareholder Proposals
To permit the Company and its Shareholders to deal with Shareholder proposals in an informed and orderly manner, the Company’s 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 2023 Proxy Statement. Any Shareholder who wishes to submit a proposal for inclusion in the Company’s Proxy Statement and Proxy relating to the 2023 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 9, 2022.
Shareholder Director Nominations for Inclusion in 2023 Proxy Statement. Under the Company’s 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 Company’s 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 year’s 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 year’s 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 2023 Annual Meeting date no more than 30 days before or more than 60 days after the first anniversary date of this year’s annual meeting date, any eligible Shareholder who wishes to have a nomination considered at the 2023 Annual Meeting and included in the Company’s Proxy Statement must deliver a written notice (containing the information specified in the Company’s bylaws regarding the Shareholder and the proposed nominee) to the Corporate Secretary of the Company between November 9, 2022 and December 9, 2022.
Shareholder Director Nominations and Other Shareholder Proposals for Presentation at the 2023 Annual Meeting Not Included in 2023 Proxy Statement. The Company’s bylaws provide that, in order for a proposal that is not intended to be included in the Company’s Proxy Statement to be properly and timely submitted as business to come before the Company’s 2023 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 60th day and no earlier than the close of business on the 90th day prior to the first anniversary of the prior year’s 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 90th 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 120th day prior to such annual meeting. Any Shareholder proposal or nomination must contain the information specified in the Company’s 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 2023 Annual Meeting date no more than 30 days before or more than 60 days after the first anniversary date of this year’s annual meeting date, if the Company does not receive notice of a proposal between February 17, 2023 and March 19, 2023, 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.
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 the meeting. These rules will be available at
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www.virtualshareholdermeeting.com/LUV2022 on the day of the meeting. The Chairman may exercise broad discretion in determining the extent of discussion on each item of business. 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 online 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.
In some cases, only one copy of the Company’s 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.
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 Company’s 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. The Company’s regular Employees will not be additionally compensated.
A copy of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, 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.
| By Order of the Board of Directors, |
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| Gary C. Kelly Chairman of the Board |
April 8, 2022
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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 16, 2022.
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Amended and Restated
1991 Employee Stock Purchase Plan
| 1. | Purpose. |
The Southwest Airlines Co. Amended and Restated 1991 Employee Stock Purchase Plan (the “Plan”) is intended to provide an incentive for Employees of Southwest Airlines Co. (the “Company”), and any Designated Subsidiary, to acquire a proprietary interest (or increase an existing proprietary interest) in the Company through the purchase of shares of the Company’s Common Stock. It is the intention of the Company that the Plan qualify as an “employee stock purchase plan” under Code section 423. Accordingly, the provisions of the Plan shall be construed in a manner consistent with the requirements of Code section 423.
| 2. | Definitions. |
(a) “Administrator” means the Board or any committee duly appointed by the Board to administer the Plan.
(b) “Board” means the Board of Directors of the Company.
(c) “Code” means the Internal Revenue Code of 1986, as amended. References in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section.
(d) “Common Stock” means the Company’s common stock, par value $1.00 per share.
(e) “Company” has the meaning set forth in Section 1.
(f) “Designated Subsidiary” means a “subsidiary corporation,” as defined in Code section 424(f), of the Company that has been designated by the Administrator as an entity to which this Plan applies.
(g) “Employee” means any person that is providing services to the Company or any Designated Subsidiary as a common law employee.
(h) “Fair Market Value” means the mean between the highest and lowest quoted selling prices on the New York Stock Exchange on the applicable valuation date.
(i) “Month End Date” has the meaning set forth in Section 3.
(j) “New York Stock Exchange” means the New York Stock Exchange, or any other stock exchange on which the Company’s Common Stock is traded at the applicable determination date.
(k) “Offering Period” has the meaning set forth in Section 3.
(l) “Option” has the meaning set forth in Section 3.
(m) “Option Price” means, with respect to the grant of a particular Option, 90% of the Fair Market Value of the Common Stock on the Month End Date.
(n) “Participant” means an Employee eligible to participate in the Plan pursuant to Section 6 who elects to participate in the Plan pursuant to Section 7.
(o) “Payroll Deduction” means a withholding of amounts by the Company or a Designated Subsidiary from a Participant’s salary or wages to be used to purchase Common Stock pursuant to the Plan.
(p) “Payroll Period” means, with respect to a particular Participant, the recurring period during which such Participant regularly receives payment of salary or wages.
(q) “Plan” has the meaning set forth in Section 1.
(r) “Purchase Date” has the meaning set forth in Section 3.
(s) “Trading Day” means a day on which trading in Common Stock takes place on the New York Stock Exchange.
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| 3. | Grant of an Option. |
For purposes of Code section 423, the Company shall be deemed to have granted a Participant an option to purchase shares of Common Stock (an “Option”) on the last Trading Day of each month in which such Participant has made a Payroll Deduction (the “Month End Date”). Each Option shall entitle the Participant to acquire a set number of shares of Common Stock, including fractional amounts, determined by dividing the total Payroll Deductions for such month (the “Offering Period”) by the Option Price, and shall be exercisable at such Option Price for each share. Each Option granted shall be exercised on the Month End Date (the “Purchase Date”), in accordance with, and subject to the limitations of, Section 7.
| 4. | Administration. |
The Plan shall be administered by the Administrator. Subject to the express provisions of the Plan, to the overall supervision of the Board, and to the limitations of Code section 423, the Administrator may administer and interpret the Plan in any manner it believes to be desirable, in its sole and absolute discretion, and any such interpretation shall be conclusive and binding on the Company and all persons.
| 5. | Number of Shares of Common Stock. |
(a) The maximum aggregate number of shares of Common Stock that may be issued under the Plan is 43,750,000 (which includes the 18,750,000 and 10,000,000 shares previously approved by the Company’s shareholders for issuance pursuant to the Plan). Common Stock acquired pursuant to the Plan may be either newly issued shares, treasury shares, or open market purchases, but, regardless of source, all such shares shall be counted against the maximum amount of shares that may be issued under the Plan.
(b) In the event of any reorganization, recapitalization, stock split, reverse stock split, stock dividend, combination of shares, merger, consolidation, offering of rights or other similar change in the capital structure of the Company, the Administrator shall make such adjustment as it deems appropriate in the number of shares of Common Stock available for purchase under the Plan.
| 6. | Eligibility Requirements. |
(a) Any Employee who has completed six (6) months of continuous service with the Company or a Designated Subsidiary may participate in the Plan; provided, however, that the following Employees are ineligible to participate in the Plan:
(1) Employees who would, immediately upon the receipt of the right to purchase any Common Stock under the Plan, own, directly or indirectly, or hold options or rights to acquire, an aggregate of 5% or more of the total combined voting power or value of all outstanding shares of all classes of stock of either the Company or any corporation related to the Company;
(2) Employees whose customary employment is for not more than five months in any calendar year; and
(3) Employees who are citizens or residents of a foreign jurisdiction (without regard to whether they are also citizens of the United States or resident aliens (within the meaning of Code section 7701(b)(1)(A)) if:
(i) the grant of an option under the Plan to a citizen or resident of the foreign jurisdiction is prohibited under the laws of such jurisdiction; or
(ii) compliance with the laws of the foreign jurisdiction would cause the Plan to fail to meet the requirements of Code section 423.
(b) No option shall be granted pursuant to the Plan to any person who is not an Employee. Specifically, options may not be granted to consultants and other non-Employees.
(c) In order to facilitate participation in the Plan, the Administrator may provide for such special terms applicable to Participants who are citizens or residents of a foreign jurisdiction, or who are employed by the Company or a Designated Subsidiary outside of the United States, as the Administrator may consider necessary
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or appropriate to accommodate differences in local law, tax policy or custom. Such special terms may not be more favorable than the terms of Options granted under the Plan to Employees who are residents in the United States. Moreover, the Administrator may approve such supplements to, or amendments, restatements or alternative versions of, this Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of this Plan as in effect for any other purpose. No such special terms, supplements, amendments or restatements shall include any provisions that are inconsistent with the terms of this Plan as then in effect unless this Plan could have been amended to eliminate such inconsistency without further approval by the shareholders of the Company.
| 7. | Enrollment and Payroll Deductions. |
(a) Any Employee who is eligible under Section 6 may enroll as a Participant in the Plan by completing and submitting an election, in writing or electronically, in the manner specified by the Administrator. Participation in the Plan is entirely voluntary by Employees.
(b) Contributions to the Plan by Participants shall be made only through Payroll Deductions. A Participant’s election shall specify the Participant’s Payroll Deduction for each Payroll Period and shall authorize the Company to withhold such Payroll Deduction from the Participant’s salary or wages with respect to each Payroll Period thereafter until such Participant’s participation in the Plan is terminated or until the amount of the Participant’s Payroll Deduction is changed or suspended as hereafter provided. The following shall apply with respect to any Participant who authorizes Payroll Deductions pursuant to the Plan:
(1) The Administrator may adopt rules and procedures for the implementation and administration of Payroll Deduction elections, including the following:
(i) the definition of “salary or wages” to which a Participant’s Payroll Deduction election applies; provided that, in the absence of any determination by the Administrator, “salary or wages” shall refer to the Participant’s basic or regular rate of compensation for such period (exclusive of commissions, bonuses, overtime pay, shift differential, long-term disability or workers compensation payments and similar amounts);
(ii) whether a Participant’s Payroll Deduction election may be stated in terms of a dollar amount per payroll period, a percentage of salary or wages within a payroll period or in any other manner;
(iii) any methods or assumptions used by the Administrator in the calculation of the Participant’s Payroll Deduction election; and
(iv) any minimum or maximum dollar or percentage limitations that apply to a Participant’s Payroll Deduction election; provided that, in the absence of any determination by the Administrator, the minimum to be made by a Participant is $5.00 (if a specific amount is selected) or 1% (if a specific percentage is selected).
(2) No Employee may be permitted to purchase stock under all employee stock purchase plans (within the meaning of Code section 423) of the Company and its related corporations at a rate that exceeds $25,000 in fair market value of the stock (determined at the time the option is granted) for each calendar year in which any Option granted to the Employee is outstanding at any time. Payroll Deduction amounts in excess of the foregoing limit will be returned to the Participant as soon as administratively feasible.
(3) A Participant may elect to change the Participant’s Payroll Deduction election by completing and submitting a new Payroll Deduction election, in writing or electronically, in the manner specified by the Administrator. Any new election made by a Participant shall be effective as soon as is administratively practicable after the election is received by the Administrator but shall in no event be effective before the next subsequent Offering Period after the election is received by the Administrator.
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(4) The Company shall maintain records of a Participant’s Payroll Deduction amounts for each Offering Period. The Company will not pay interest on Payroll Deduction amounts, and will not hold such amounts in trust or in any segregated account.
(c) All amounts available with respect to Payroll Deductions on the Purchase Date will be used by the Administrator for the purchase of Common Stock as set forth in Section 8.
| 8. | Purchase of Common Stock. |
(a) On the Purchase Date, the Company shall apply the Participant’s Payroll Deduction amounts to the purchase of shares, including fractional shares, of Common Stock at the applicable Option Price. Participants shall be treated as the record owners of their Common Stock effective as of the Purchase Date. Any cash remaining following a purchase of shares on behalf of a Participant shall, subject to the limitations of Section 7(b)(2) or any other limit established by the Administrator, be carried forward for purchase on behalf of such Participant on the next Purchase Date at the applicable Option Price. In no event shall a purchase of Common Stock take place with respect to an Option granted more than five years prior to the Purchase Date.
(b) If purchases of Common Stock for a Participant are restricted by the limit in Section 7(b)(2), the Participant’s Payroll Deduction election shall be suspended for the remainder of the calendar year. A Participant’s Payroll Deduction election and purchases of Common Stock for such Participant shall automatically resume for the Offering Period that begins as of January 1 of the following calendar year.
| 9. | Termination of Employment. |
(a) Participation in the Plan will terminate immediately when a Participant dies or ceases to be employed by the Company or any of its Designated Subsidiaries.
(b) A termination of employment shall not include any period in which the Participant is on sick leave, military leave or a leave of absence in accordance with Company policies.
(c) Any of a Participant’s Payroll Deduction amount that remains upon the termination of the Participant’s participation in the Plan and that has not been used to purchase Common Stock under this Plan shall be returned to the Participant as soon as administratively feasible after termination of employment.
| 10. | Assignment. |
The Options granted under the Plan are not transferable by the Participant other than by will or the laws of descent and distribution, and must be exercisable, during the Participant’s lifetime, only by the Participant. No Participant may create a lien on any funds, securities, rights or other property held by the Company on behalf of the Participant under the Plan.
| 11. | Administrative Assistance. |
If the Administrator in its discretion so elects, it may retain a brokerage firm, bank or other financial institution to assist in the purchase or recordkeeping of Common Stock, delivery of reports or other administrative aspects of the Plan.
| 12. | Costs. |
All costs and expenses incurred in administering the Plan shall be paid by the Company. Any brokerage fees for the purchase of Common Stock by a Participant shall be paid by the Company, but any brokerage fees for the sale of Common Stock by a Participant shall be borne by the Participant.
| 13. | Equal Rights and Privileges. |
Notwithstanding any provision of the Plan to the contrary and to ensure compliance with the requirements of Code section 423, all Employees who are granted Options pursuant to the Plan shall have the same rights and privileges. Any provision of the Plan that is inconsistent with Code section 423 shall, without further act or amendment by the Company or the Board, be reformed to comply with the requirements of Code section 423. This Section 13 shall take precedence over all other provisions of the Plan.
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| 14. | Applicable Law. |
The Plan shall be governed by the laws of the State of Texas.
| 15. | Modification and Termination. |
(a) The Board may amend, alter or terminate the Plan at any time. No amendment shall be effective unless within twelve months either before or after it is adopted by the Board it is approved by the shareholders of the Company, if such amendment would:
(1) increase the aggregate number of shares of Common Stock that may be issued under the Plan (other than an increase merely reflecting a change in the number of outstanding shares, such as a stock dividend or stock split); or
(2) otherwise require approval of the Company’s shareholders by the rules of the New York Stock Exchange, the Code or regulations of the Department of the Treasury, or other laws.
(b) In the event the Plan is terminated, the Board may elect to terminate all participation either immediately or upon completion of the purchase of Common Stock on the next Purchase Date. All Payroll Deduction amounts that have not been used to purchase Common Stock pursuant to the Plan shall be returned to the Participants as soon as administratively feasible.
(c) If at any time the shares of Common Stock available under the Plan are overenrolled, enrollments shall be reduced as determined by the Administrator to eliminate the overenrollment. Any of a Participant’s Payroll Deduction amounts that cannot be applied to the purchase of shares of Common Stock due to overenrollment shall be paid to the Participant as soon as administratively feasible.
| 16. | Securities Laws. |
The Company shall not be obligated to issue any Common Stock pursuant to the Plan at any time when the requirements of any securities exchange upon which the Company’s securities shall then be listed have not been met or when the shares of Common Stock have not been registered under the Securities Act of 1933, as amended, or such other state, federal, or other laws, rules, and regulations as the Company or the Administrator deem applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules, and regulations available for the issuance and sale of such shares.
| 17. | Notices. |
Except as otherwise provided by the Administrator, all notices that may be or are required to be given by Participants or Employees of the Company to the Company or the Administrator under the terms of this Plan shall be effective when received in writing addressed to Administrator, Southwest Airlines Co. Amended and Restated 1991 Employee Stock Purchase Plan, at the Company’s principal place of business.
| 18. | Effective Date. |
The Plan, as amended to increase the maximum aggregate number of shares of Common Stock that may be issued under the Plan to 43,750,000, was amended by the Board on February 2, 2022, to be effective subject to, and as of the date of, shareholder approval.
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Audit and Non-Audit Services Preapproval Policy
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 auditor’s 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 SEC’s 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 SEC’s 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 Company’s business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance the Company’s 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 auditor’s independence.
II. Delegation
The Act and the SEC’s 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 Company’s 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 SEC’s rules on auditor independence, the Audit
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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 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 auditor’s 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 SEC’s 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 SEC’s 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 SEC’s rules on auditor independence.
A list of the SEC’s prohibited non-audit services is attached in this policy as Exhibit 1. The SEC’s 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 SEC’s rules on auditor independence.
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Exhibit 1
Prohibited Non-Audit Services
| • | Bookkeeping or other services related to the accounting records or financial statements of the audit client |
| • | Financial information systems design and implementation |
| • | Appraisal or valuation services, fairness opinions or contribution-in-kind reports |
| • | Actuarial services |
| • | Internal audit outsourcing services |
| • | Management functions |
| • | Human resources |
| • | Broker-dealer, investment adviser or investment banking services |
| • | Legal services |
| • | Expert services unrelated to the audit |
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VOTE BY INTERNET Before The Meeting - Go to www.proxyvote.com or scan the QR Barcode above
Use the Internet to transmit your voting instructions until 11:59 P.M. Eastern Daylight Time on May 17, 2022 (May 16, 2022 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.
During The Meeting - Go to www.virtualshareholdermeeting.com/LUV2022
You may attend the meeting via the Internet and vote during the meeting. Have the information that is printed in the box marked by the arrow available and follow the instructions.
VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Daylight Time on May 17, 2022 (May 16, 2022 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. |
| TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: | ||||
| D72128-P69560 | 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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| A. Company Proposals | ||||||||||||||||||||||||||||||||||
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The Board of Directors recommends a vote “FOR” all of |
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Election of Directors |
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David W. Biegler |
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1b. |
J. Veronica Biggins |
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The Board of Directors recommends a vote “FOR” proposals 2, 3, and 4:
2. Advisory vote to approve the compensation of the Company’s named executive officers.
3. Approval of the Southwest Airlines Co. Amended and Restated 1991 Employee Stock Purchase Plan.
4. Ratification of the selection of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending December 31, 2022.
B. Shareholder Proposals
The Board of Directors recommends a vote “AGAINST” proposals 5 and 6:
5. Advisory vote on shareholder proposal to permit shareholder removal of directors without cause.
6. Advisory vote on shareholder proposal to require shareholder ratification of termination pay. |
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1c. |
Douglas H. Brooks |
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1d. |
William H. Cunningham |
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1e. |
John G. Denison |
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1f. |
Thomas W. Gilligan |
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1g. |
David P. Hess |
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1h. |
Robert E. Jordan |
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1i. |
Gary C. Kelly |
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1j. |
Nancy B. Loeffler |
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1k. |
John T. Montford |
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1l. |
Christopher P. Reynolds |
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For address changes and/or comments, please check this box and write them on the back where indicated. |
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1m. |
Ron Ricks |
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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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Signature (Joint Owners)
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SOUTHWEST AIRLINES CO.
ANNUAL MEETING OF SHAREHOLDERS
Wednesday, May 18, 2022
10:00 a.m. Central Daylight Time
Our Annual Meeting will be broadcast live on the Internet. To listen to the broadcast, log on to
www.virtualshareholdermeeting.com/LUV2022.
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D72129-P69560
| SOUTHWEST AIRLINES CO. | ||||
| 2702 LOVE FIELD DRIVE | ||||
| DALLAS, TEXAS 75235 | ||||
This proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoints Robert E. Jordan, 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 virtually at www.virtualshareholdermeeting.com/LUV2022 on May 18, 2022, at 10:00 a.m., Central Daylight 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, 3, AND 4; “AGAINST” PROPOSALS 5 AND 6; 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 ENSURE THAT THE SHARES ARE REPRESENTED AT THE MEETING.
YOU MAY ALSO VOTE VIA THE TELEPHONE OR THE INTERNET.
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(If you noted any Address Changes/Comments above, please mark the corresponding box on the reverse side.)
Continued and to be signed on reverse side