Southwest Airlines 2014 Annual Report Download - page 119
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Stock options
The Company has previously awarded stock options under plans covering Employees subject
to collective bargaining agreements (collective bargaining plans) and plans covering other Employees
and members of the Board of Directors (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 value of the Company’s common stock
on the date of grant, and generally have terms ranging from six to twelve years. There were no material
grants of stock options to Employees covered by collective bargaining plans during 2012, 2013, or
2014, and no future option grants from these plans are possible. Neither Executive Officers nor
members of the Company’s Board of Directors are eligible to participate in any of the collective
bargaining plans. Options granted to Employees and members of the Board of Directors 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 value of the Company’s common stock
on the date of grant, and have 10-year terms. All of the options included in other Employee plans have
been approved by Shareholders, except one plan covering non-management, non-contract Employees,
which did not require Shareholder approval and had an insignificant number of options outstanding as
of December 31, 2014. 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.
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 stock option 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 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. Stock options issued by the Company during 2014, 2013, and 2012 were immaterial.
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