Southwest Airlines 2008 Annual Report Download - page 86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
share-based compensation arrangements for the years
ended December 31, 2008, 2007, and 2006, was $4
million, $11 million, and $27 million, respectively.
Stock Plans
The Company has previously awarded stock
options under plans covering Employees subject to
collective bargaining agreements (collective
bargaining plans) and plans covering Employees not
subject to collective bargaining agreements (other
Employee plans). None of the collective bargaining
plans were required to be approved by shareholders.
Options granted to Employees under collective
bargaining plans are non-qualified, granted at or
above the fair market value of the Company’s
common stock on the date of grant, and generally
have terms ranging from six to twelve years. Neither
Executive Officers nor members of the Company’s
Board of Directors are eligible to participate in any of
these collective bargaining plans. Options granted to
Employees through other Employee plans are both
qualified as incentive stock options under the Internal
Revenue Code of 1986 and non-qualified stock
options, granted at no less than the fair market value
of the Company’s common stock on the date of grant,
and have ten-year terms. All of the options included
under the heading of “Other Employee Plans” have
been approved by shareholders, except the plan
covering non-management, non-contract Employees,
which had options outstanding to purchase
4.8 million shares of the Company’s common stock
as of December 31, 2008. The Company also has a
plan related to a past employment agreement with its
Chairman Emeritus in which 556,000 stock options
were outstanding as of December 31, 2008, all of
which were fully vested. Although the Company does
not have a formal policy, upon option exercise, the
Company will typically issue treasury stock, to the
extent such shares are available.
Vesting terms for the collective bargaining plans
differ based on the grant made, and have ranged in
length from immediate vesting to vesting periods in
accordance with the period covered by the respective
collective bargaining agreement. For “Other
Employee Plans,” options vest and generally become
fully exercisable over three, five, or ten years of
continued employment, depending upon the grant
type. For grants in any of the Company’s plans that
are subject to graded vesting over a service period,
the Company recognizes expense on a straight-line
basis over the requisite service period for the entire
award. None of the Company’s grants include
performance-based or market-based vesting
conditions, as defined.
The Black-Scholes option valuation model was
developed for use in estimating the fair value of
short-term traded options that have no vesting
restrictions and are fully transferable. In addition,
option valuation models require the input of
somewhat subjective assumptions including expected
stock price volatility. The Company estimates
expected stock price volatility via observations of
both historical volatility trends as well as implied
future volatility observations as determined by
independent third parties. For 2008, 2007, and 2006
stock option grants, the Company has consistently
estimated expected volatility utilizing two-thirds of
implied future volatility and one-third historical
volatility as of the grant date. In determining the
expected life of the option grants, the Company has
observed the actual terms of prior grants with similar
characteristics, the actual vesting schedule of the
grant, and assessed the expected risk tolerance of
different optionee groups. The risk-free interest rates
used were actual U.S. Treasury zero-coupon rates for
bonds matching the expected term of the option as of
the option grant date.
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