Again, I'm no financial guru. Much of what I will post will come directly from other sources but I will try to give a pilot version of what SWAPA negotiated with SWA in terms of stock options.
Stock options issued by SWA are issued under the contract the pilots signed in 1994 & the extension in 2002. Many other employee groups at SWA now have options. What is an option? It is the company granting the employee the "option" to purchase SWA stock at a predetermined price at the choosing of the employee for the purpose of turning around & selling it for a profit (hopefully but not the case for me, read on) immediately. There is a specified time period (no more than 10 years for the "1994 grants, 8 yrs for the 2002) & restrictions (continued employment, etc) on options. This predetermined price will never vary FOR THE SPECIFIC EMPLOYEE FOR THE SPECIFIC SET OF OPTIONS.
Currently SWA has 3 different groups of stock options that are being distributed to the pilots at SWA. For simplicity sake we will call these "1994 grants" (this was when the last section 6 contract was signed in 1994), "2002 grants" (when the last extension was signed) and the "ORG grants" (option repair grants) which were issued at the same time as the "2002 grants" which means they have the same strike price. However, the "option price" for each of these can & is different.
"Vesting" occurs when the employee meets all the requirements for taking ownership of the stock. In other words, I am to receive 3,083 shares for SWA stock priced at $18.78. That was the price of the stock on my stock vesting date, 1 Sept 2001. I will receive 1,013 shares each year until I have received all 3083 shares (last distribution is 2003). Complicating the issue further, if the stock splits (which it has many times & is why the more senior folks have shares of their stock at $3.95 range..yea for them!) then the price of my options will decrease with the result being=more money for me. All groups, FOs & Capts wish for this.
Here is the rub for some folks. Someone being hired in Aug 15, 1999 versus 2 Sept 1999 will receive a total of 5063 versus 3058 shares with a share price of $15. 51 versus $18.78. As you can see that while one maybe within just a few days of being hired together there can be a tremendous difference in overall "potential wealth"---there is no wealth with options until they are exercised!!!
Lets use the following scenario to illustrate why some folks don't like options to be considered part of the "pay compensation equation".
I choose to "exerice my options" & purchase from the company the shares that have been negotiated in the contract at the predetermined price based upon when I got hired. I will then turn right around & sale them for the current price. Here are the results:
Exercise Proceeds:
2,026 Shares @ $17.24 (recent high price of SWA) = $32,416.00
(I'm only vested in 2026 shares & don't become vested in the last 1053 shares until 1 Sept 2003)
Cost @ $18.78 (my option price) = $38,048.28
Gross Proceeds (before tax)
$0.00
There are other fees associated with "exercising options" so the difference is even greater, I just didn't put them on here. As you can see the cost of my options to buy is $38,048.28. Proceeds from the sale is $32,416.00.
Not to beat this dead horse, my current 1994 options are worthless as you can see from this simple exercise. When do my 1994 options have value one asks? Whenever the price of LUV stock goes above 18.78.
Does the individual who was hired in mid-Aug 1999 have more "wealth" than me? Yes because his stock option price was $15.51. Even without the additional shares they received, his underlying stock price is much better than mine.
Having someone senior (even if it is only by a few days) with more wealth is explainable to most pilots. However, could someone junior to me have more "option wealth" than me? In the case of SWA, they do. Here is why. Folks hired 1 year after me, Oct 2000, will receive a total of 1560 shares split over two years (2002 & 2003). Their shares are priced at $15.05. Already their shares are worth more than mine based upon different "option prices" or "strike price".
This is why many folks will say there aren't 12 pay scales for FO's & Capts but A-Z scales by taking into consideration the option issue.
Let me say this also. In 1993 & 1994 when this was being discussed, the implications of this disparity was not known or realized by the vast majority of the negotiators (in my opinion, others will argue the fact...pls don't here, I don't have the energy) so in the opinion of many of the pilots who voted for it, they thought newer pilots would have the same low "strike price" they had. This wasn't to be the case. For historical perspective, the options were given to the pilots because no pay increases occurred for the first 5 years of the contract, only distribution of options. In hindsight it was an extraordinary lucrative deal for the pilots on property & I have no heartburn with their decision. Again, I have no objection, hard feelings or resentment toward those who voted for or against the contract...whew, gotta get that out of the way!
2002 timeframe
"2002 options"
When the 2002 contract extension was signed many folks didn't want options again. Others did. A new round of option distributions occurred. Each pilot on the property was to receive 7,163 shares with a strike price of $12.83. We begin receiving these shares to divest (if desired) beginning 2004 & are fully vested by 2006. Pilot coming after this date will receive a proportional share & their "strike price" will be determined based upon their hire date. Again we will have different "strike prices" for each different new hire group with a diminishing share of options distributed until the new contract is negotiated & signed (hopefully) in late 2006.
"ORG options"
As the name implies, "option REPAIR grants", were designed to repair SOME of the inequities in the orginal distribution plan from 1994 (my apologies to the contract/negotiating committee if I'm misrepresenting their thoughts). Depending on one's month/year date of hiring, various numbers of options are distributed & are available nearly immediately after being hired. The price for new hires is set based upon the price of LUV on that date. For folks on the property when the contract was signed, the price is $12.83. There is a schedule that shows by month/yr how many shares are distributed.
Finally a caveat.
I'm not a contract adminstrator, negotiator or financial guru so any misintrepreations are mine & not SWAPA or anyone elses. I'll take the heat.
Sorry for the length but I don't know of an easy way to explain this portion of "compensation". The variations of how much "wealth" one year/month group has over another is too difficult in this limited space to evaluate. You need to be the judge whether this type of compensation is something you wish to live with. Will there be options in future contracts? I wouldn't hazard a guess. For some it has been lucrative, others not so but as with any compensation tied to a stock, there are inherit risks & rewards, you'll have to be the judge if you wish to play.
Part III will be 401K matching, much simplier!!! It won't occur for several weeks though, off to Montana for some cooler weather!
Stock options issued by SWA are issued under the contract the pilots signed in 1994 & the extension in 2002. Many other employee groups at SWA now have options. What is an option? It is the company granting the employee the "option" to purchase SWA stock at a predetermined price at the choosing of the employee for the purpose of turning around & selling it for a profit (hopefully but not the case for me, read on) immediately. There is a specified time period (no more than 10 years for the "1994 grants, 8 yrs for the 2002) & restrictions (continued employment, etc) on options. This predetermined price will never vary FOR THE SPECIFIC EMPLOYEE FOR THE SPECIFIC SET OF OPTIONS.
Currently SWA has 3 different groups of stock options that are being distributed to the pilots at SWA. For simplicity sake we will call these "1994 grants" (this was when the last section 6 contract was signed in 1994), "2002 grants" (when the last extension was signed) and the "ORG grants" (option repair grants) which were issued at the same time as the "2002 grants" which means they have the same strike price. However, the "option price" for each of these can & is different.
"Vesting" occurs when the employee meets all the requirements for taking ownership of the stock. In other words, I am to receive 3,083 shares for SWA stock priced at $18.78. That was the price of the stock on my stock vesting date, 1 Sept 2001. I will receive 1,013 shares each year until I have received all 3083 shares (last distribution is 2003). Complicating the issue further, if the stock splits (which it has many times & is why the more senior folks have shares of their stock at $3.95 range..yea for them!) then the price of my options will decrease with the result being=more money for me. All groups, FOs & Capts wish for this.
Here is the rub for some folks. Someone being hired in Aug 15, 1999 versus 2 Sept 1999 will receive a total of 5063 versus 3058 shares with a share price of $15. 51 versus $18.78. As you can see that while one maybe within just a few days of being hired together there can be a tremendous difference in overall "potential wealth"---there is no wealth with options until they are exercised!!!
Lets use the following scenario to illustrate why some folks don't like options to be considered part of the "pay compensation equation".
I choose to "exerice my options" & purchase from the company the shares that have been negotiated in the contract at the predetermined price based upon when I got hired. I will then turn right around & sale them for the current price. Here are the results:
Exercise Proceeds:
2,026 Shares @ $17.24 (recent high price of SWA) = $32,416.00
(I'm only vested in 2026 shares & don't become vested in the last 1053 shares until 1 Sept 2003)
Cost @ $18.78 (my option price) = $38,048.28
Gross Proceeds (before tax)
$0.00
There are other fees associated with "exercising options" so the difference is even greater, I just didn't put them on here. As you can see the cost of my options to buy is $38,048.28. Proceeds from the sale is $32,416.00.
Not to beat this dead horse, my current 1994 options are worthless as you can see from this simple exercise. When do my 1994 options have value one asks? Whenever the price of LUV stock goes above 18.78.
Does the individual who was hired in mid-Aug 1999 have more "wealth" than me? Yes because his stock option price was $15.51. Even without the additional shares they received, his underlying stock price is much better than mine.
Having someone senior (even if it is only by a few days) with more wealth is explainable to most pilots. However, could someone junior to me have more "option wealth" than me? In the case of SWA, they do. Here is why. Folks hired 1 year after me, Oct 2000, will receive a total of 1560 shares split over two years (2002 & 2003). Their shares are priced at $15.05. Already their shares are worth more than mine based upon different "option prices" or "strike price".
This is why many folks will say there aren't 12 pay scales for FO's & Capts but A-Z scales by taking into consideration the option issue.
Let me say this also. In 1993 & 1994 when this was being discussed, the implications of this disparity was not known or realized by the vast majority of the negotiators (in my opinion, others will argue the fact...pls don't here, I don't have the energy) so in the opinion of many of the pilots who voted for it, they thought newer pilots would have the same low "strike price" they had. This wasn't to be the case. For historical perspective, the options were given to the pilots because no pay increases occurred for the first 5 years of the contract, only distribution of options. In hindsight it was an extraordinary lucrative deal for the pilots on property & I have no heartburn with their decision. Again, I have no objection, hard feelings or resentment toward those who voted for or against the contract...whew, gotta get that out of the way!
2002 timeframe
"2002 options"
When the 2002 contract extension was signed many folks didn't want options again. Others did. A new round of option distributions occurred. Each pilot on the property was to receive 7,163 shares with a strike price of $12.83. We begin receiving these shares to divest (if desired) beginning 2004 & are fully vested by 2006. Pilot coming after this date will receive a proportional share & their "strike price" will be determined based upon their hire date. Again we will have different "strike prices" for each different new hire group with a diminishing share of options distributed until the new contract is negotiated & signed (hopefully) in late 2006.
"ORG options"
As the name implies, "option REPAIR grants", were designed to repair SOME of the inequities in the orginal distribution plan from 1994 (my apologies to the contract/negotiating committee if I'm misrepresenting their thoughts). Depending on one's month/year date of hiring, various numbers of options are distributed & are available nearly immediately after being hired. The price for new hires is set based upon the price of LUV on that date. For folks on the property when the contract was signed, the price is $12.83. There is a schedule that shows by month/yr how many shares are distributed.
Finally a caveat.
I'm not a contract adminstrator, negotiator or financial guru so any misintrepreations are mine & not SWAPA or anyone elses. I'll take the heat.
Sorry for the length but I don't know of an easy way to explain this portion of "compensation". The variations of how much "wealth" one year/month group has over another is too difficult in this limited space to evaluate. You need to be the judge whether this type of compensation is something you wish to live with. Will there be options in future contracts? I wouldn't hazard a guess. For some it has been lucrative, others not so but as with any compensation tied to a stock, there are inherit risks & rewards, you'll have to be the judge if you wish to play.
Part III will be 401K matching, much simplier!!! It won't occur for several weeks though, off to Montana for some cooler weather!
