Southwest Airlines 2009 Annual Report Download - page 88

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
depending on market conditions. The Company had repurchased 4.4 million shares for a total of $54 million as
part of this program through February 15, 2008; however, the Company has not repurchased any additional
shares from that date through the date of this filing. The Company does not believe it is prudent to repurchase
shares at the current time considering today’s unstable financial markets and volatile fuel prices.
14. STOCK PLANS
Share-based Compensation
The Company has previously awarded share-based compensation pursuant to plans covering the majority of its
Employee groups, including plans adopted via collective bargaining, a plan covering the Company’s Board of
Directors, and plans related to employment contracts with the Chairman Emeritus of the Company. The Company
accounts for share-based compensation utilizing the fair value recognition provisions of “Share-Based Payment.”
The Consolidated Statement of Income for the years ended December 31, 2009, 2008, and 2007 reflects
share-based compensation cost of $13 million, $18 million, and $37 million, respectively. The total tax benefit
recognized in earnings from share-based compensation arrangements for the years ended December 31, 2009,
2008, and 2007, was $1 million, $4 million, and $11 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 one plan covering non-management, non-contract
Employees, which had options outstanding to purchase 4.5 million shares of the Company’s common stock as of
December 31, 2009. The Company also has a shareholder-approved plan related to a past employment agreement
with its Chairman Emeritus in which 501,000 stock options were outstanding as of December 31, 2009, 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
80