SkyWest Airlines 2013 Annual Report Download - page 143

schedule, generally one grant per year made at the first Compensation Committee meeting of each
year.
The purpose of stock options is to tie a significant percentage of the award’s ultimate value to
increases in the market price of the Common Stock, thereby rewarding increased value to the
shareholders. A stock option only has a value to the extent the value of the underlying shares on the
exercise date exceeds the exercise price. Accordingly, stock options provide compensation only if the
underlying share price increases over the option term and the Executive’s employment continues
through the vesting date.
The size of the grant for each Executive is calculated by determining the number of shares with a
theoretical future value equal to the targeted compensation for stock options, assuming each option will
have a value equal to 33% of its exercise price. This value generally correlates to the ASC Topic 718
value of the awards. The targeted stock option allocation of each Executive’s aggregate, targeted level
of long-term incentive compensation for 2013 was 15%.
Restricted Stock Units—The Company also granted restricted stock units to the Executives in 2013
under the 2010 Plan. The restricted stock units awarded to an Executive entitle the Executive to receive
a designated number of shares of Common Stock upon completion of a three-year vesting period,
measured from the date of grant. Until the vesting date the shares underlying restricted stock units are
not considered issued and outstanding. Accordingly, the Executive is not entitled to vote or receive
dividends on the shares underlying his restricted stock units unless and until those restricted stock units
vest. The purpose of the restricted stock unit component is to support continued employment through
volatile economic and stock market conditions, to manage dilution overhang, and to align officers’
interests with maintaining shareholder value already created. The Compensation Committee believes
this approach mitigates the incentive for Executives to take unnecessary risks and helps retain the
Executives’ expertise through continued employment. Recipients of restricted stock units do not pay for
the underlying shares once the awards vest; however they must remain employed by the Company for
three years to receive the underlying shares. Restricted stock unit awards provide the Executives with
an indirect ownership stake in the Company and encourage the Executive to continue employment in
order to receive the underlying shares. The compensation value of a restricted stock unit award does
not depend solely on future stock price increases; at grant, its value is equal to the market price of the
Common Stock. Although its value may increase or decrease with changes in the stock price during the
period before vesting, a restricted stock unit award will likely have value even without future stock
price appreciation. Accordingly, restricted stock unit awards deliver significantly greater share-for-share
compensation value at grant than do stock options, and the Company can offer what it anticipates will
be comparable grant date compensation value with 65% fewer shares than if the grant were made
solely with stock options.
The annual award of restricted stock units to each Executive for 2013 consisted of the right to
receive upon future vesting a number of shares of Common Stock. The targeted restricted stock unit
allocation of each Executive’s aggregate, targeted level of long-term incentive compensation for 2013
was 35%.
Performance Units—The remaining component of each Executive’s 2013 annual long-term incentive
award was a performance unit award payable in cash under the 2010 Plan. The targeted cash allocation
of each Executive’s aggregate, targeted level of long-term incentive compensation for 2013 was 50%.
The purpose of the performance unit awards is to reward achievement of a financial efficiency goal
that supports shareholder value and reflects real performance without regard to stock market volatility.
Under each Executive’s performance unit award, a cash bonus is payable three years from the date of
grant, based on the level of pretax earnings actually attained for the year of grant, and subject to the
Executive’s continued employment through the date of payment. The 2013 committee-designated
targeted pretax earnings was set as $165 million, with the actual amount of cash bonus payable to each
29