SkyWest Airlines 2015 Annual Report Download - page 132

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Stock Options—Options are granted with an exercise price equal to the closing price per share on the date of
grant and vest one third at each annual anniversary of the date of grant over a three year period. Grants are made on a
systematic 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 2015 was 20%.
Restricted Stock Units—The Company also granted restricted stock units to the Executives in 2015 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 the restricted stock units are not 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 Executives 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 approximately 65% fewer shares
than if the grant were made solely with stock options.
The annual award of restricted stock units to each Executive for 2015 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 2015 was 40%.
Performance Shares—The remaining component of each Executive’s 2015 annual long-term incentive award
was performance shares payable in Common Stock under the 2010 Plan. The performance shares allocation of each
Executive’s aggregate, targeted level of long-term incentive compensation for 2015 was 40%. The purpose of the
performance share awards is to reward achievement of a financial efficiency objective that supports shareholder value
and reflects real performance. The objectives upon which performance share awards are based are established annually
by the Compensation Committee. It is the view of the Compensation Committee that those objectives should be set at
levels which are high enough to motivate the Executives to achieve exceptional Company performance. Under each
Executive’s performance shares award, a grant of Common Stock is made upon completion of a three-year vesting
period from the date of the grant (subject to the Executive’s continued employment through the vesting date), based on
the level of pre-tax earnings, cash flow from operations and increase in pre-tax return on equity actually attained over the
2015 to 2017 calendar years. Until the vesting date, the shares underlying the performance shares are not issued and