CORRESP: A correspondence can be sent as a document with another submission type or can be sent as a separate submission.
Published on October 15, 2007
October
15, 2007
Via
EDGAR
Division
of Corporation Finance
U.S.
Securities and Exchange Commission
100
F
Street, NE
Washington,
D.C. 20549-3561
Attention: Daniel
Morris, Attorney Advisor
Re: Southwest
Airlines Co.
Schedule
14A
Filed
April 5, 2007
File
Number: 001-07259
Dear
Mr.
Morris:
On
behalf of Southwest Airlines Co.
(the “company”), set forth below are our responses to the comments of the staff
of the Securities and Exchange Commission in its letter dated August 21, 2007,
with respect to the company’s definitive proxy statement filed on April 5,
2007. For ease of reference, we have reproduced below the full text
of the staff’s comments, each of which is followed by the company’s
response.
Compensation
Committee, page 4
1. Please
expand your disclosure to discuss in greater detail the compensation committee
and board of directors’ responsibilities with respect to setting CEO and senior
executive compensation. Refer to Item 407(e)(3)(i) of Regulation
S-K.
Response:
In
the future, we will add disclosure
in the Compensation Discussion & Analysis about the role of the compensation
committee, as set forth in the compensation committee’s charter and described on
page 4 of the proxy statement. Please note that the company has an
extraordinarily simple compensation program.
2. We
note that the company retains compensation consultants to assist the
compensation committee. Please revise your discussion of the
functions performed by your compensation consultants to address the nature
and
scope of each consultant’s assignment, including its role in determining and
recommending compensation, and any other material elements of the consultant’s
functions. Refer to Item 407(e)(3)(iii) of Regulation
S-K.
Response:
The
company will attempt to more clearly convey the nature of its use of consultants
in future filings.
U.S.
Securities and Exchange Commission
October
15, 2007
Page
2 of
9
The company’s proxy statement disclosure reflects the fact that compensation
consultants have typically been used by the company and the compensation
committee more as a resource for market information than for the purpose of
making formal recommendations or determinations regarding executive
compensation. Because of the nature of the company’s use of
consultants, the related engagements are not necessarily as defined in nature
and scope as traditional executive consultant
arrangements. Rather, information is obtained from consultants
and then used
(i)
by the compensation committee
directly (for example, as noted on page 23, “[t]he Committee relied on
information supplied by an independent consultant in determining that Mr.
Kelly’s cash compensation for the three-year period covered by his employment
contract was significantly below the market midpoint for comparable positions
at
the time in question”); or
(ii)
by the company’s human resources
department, which may in turn provide its own analyses to the compensation
committee (for example, as noted on page 5, “[f]rom time to time, the Company,
through its human resources department, also retains other consultants in
connection with the design of compensation plans and programs that may impact
executive officer compensation”); or
(iii)
by management, on an ad
hoc or more general basis (for example, as noted on page 5, “[a]s part of
the review of the Company’s compensation practices discussed below under
‘Compensation Discussion and Analysis,’ the Company requested input from Mercer
Human Resource Consulting, ISS Corporate Services, Inc., and Georgeson
Inc.”).
Nominating
and Corporate Governance Committee, page 5
3. Please
explain the company’s policy with respect to the appropriate mix of cash and
equity in director compensation. The third-to-last sentence in this
section, which refers to the impact of the company’s “unique culture” on
equity-related compensation decisions, is unclear.
Response:
The
company will clarify this
disclosure in future filings. The company intends to include a
discussion of director compensation in the Compensation Discussion and Analysis
section in future filings. The company has historically
incorporated equity as a significant component of all of its Employees’
compensation, as well as the compensation of the Board of
Directors. This reflects a “pay-for-performance” philosophy and an
egalitarian culture. The company believes that its use of equity has
been somewhat unique. As noted elsewhere in the proxy statement, the company
has
been evaluating its overall compensation structure, in part due to the limited
number of shares that are available for future compensatory purposes, and in
part due to the Board’s and management’s consideration of the company’s highly
unionized work force.
Certain
Relationship and Related Transaction, and Director Independence, page
6
4. Please
expand the discussion of your related party transaction
policies. Your disclosure should address, among other things, the
types of transactions covered and the standards to be applied. Refer
to Item 404(b)(i) and (ii) of Regulation S-K.
U.S.
Securities and Exchange Commission
October
15, 2007
Page 3
of 9
Response:
The
company
will expand its future proxy statement discussions to clarify that the types
of
transactions covered and the standards to be applied are those specified by
Item
404(a) of Regulation S-K and SFAS 57, as amended, and related
guidance.
Outstanding
Equity Awards at Fiscal Year-End, page 13
5. The
final paragraph on page 15 states that the company “typically” makes option
grants to its officers upon appointment and in the form of annual merit
grants. These granting practices are not discussed in the
Compensation Discussion and Analysis. Please revise the Compensation
Discussion and Analysis to discuss these, and any other, granting
practices.
Response:
The
Company will revise Compensation
and Analysis disclosures in future filings to make its granting policies more
clear. The disclosure on page 15 was intended as an explanatory
narrative to the Outstanding Equity Awards at Fiscal Year-end Table, which
table
evidences the company’s historical focus on equity compensation (as
stated in the referenced paragraph, “[i]n an effort to bridge the perceived gap
between the lower level of cash compensation for Company officers as compared
to
their peers and to provide a longterm incentive…the Company has historically
relied on stock options”). The company acknowledges that the word
“receive” in the referenced sentence should have been “received,” which would be
in conformity with the past tense context of the rest of the
paragraph.
The
Compensation Discussion and
Analysis discusses the changes in the company’s option granting
practices. As noted on page 23, the company’s equity compensation
practices necessarily required some changes during 2006, as the company’s
management stock option plans expired. Therefore, the company
undertook (and continues to undertake) a review of its compensation practices
for management in light of the unavailability (at the time of the proxy
statement) of shares for future option grants to management, as well as the
change in accounting for equity grants. The company’s practices with
respect to merit grants were intended to be covered by the following disclosure:
“…grants have been based on levels of individual performance. With
respect to all options granted, the precise number of shares was determined
on a
subjective basis.”
Nonqualified
Deferred Compensation in Last Fiscal Year, page 16
6. Please
include, pursuant to the Instruction to paragraph (i)(2) of Item 402 of
Regulation S-K, a footnote quantifying the extent to which amounts reported
in
“Aggregate Balance at December 31, 2006” previously were reported as
compensation to the named executive officer in the registrant’s Summary
Compensation Table for prior years.
U.S.
Securities and Exchange Commission
October
15, 2007
Page 4
of 9
Response:
The
company will provide this footnote
in future filings.
Employment
and Other Contracts; Potential Payments Upon Termination or Change-in-Control,
page 17
7. Please
consider providing a table to show amounts payable upon termination or change
of
control.
Response:
The
company will provide a table in
future filings.
8. In
your Compensation Discussion and Analysis, please discuss the basis for
structuring the change of control triggers differently under the employment
contracts with Mr. Kelleher, Mr. Kelly and Ms. Barrett than under the Executive
Service Recognition Plan and the Change of Control Severance
Plan. Specifically, we note that if Mr. Kelleher, Mr. Kelly or Ms.
Barrett elects, in his or her discretion, to terminate employment within 60
days
following a change of control, such executive will be entitled to a lump sum
severance payment. Conversely, under the Executive Service
Recognition Plan and Change of Control Severance Plan, the company must
terminate the employee (or the employee must resign for good reason) in order
for lump sum payments to become payable. Please discuss the rationale
for this divergent treatment. Refer to Item 402(b)(2)(xi) and (j)(3)
of Regulation S-K.
Response:
In
the future, the company will explain
that the employment contract provisions follow contractual provisions which
have
been in place for the CEO for many years, and while they are different than
the
Executive Service Recognition Plan and Change of Control Severance Plan, they
reflect the committee’s consideration that the differences are consistent with
market conditions and the company’s overall compensation
philosophy.
9. In
addition, please explain why the contracts were structured to provide that
each
executive receives an identical lump sum of $750,000 (in addition to unpaid
base
salary for the remaining term of the employment contract) despite earning
different salaries.
Response:
The
base salaries for each executive
are not, in actuality, materially different (Kelleher - $450,000; Barrett -
$362,487; and Kelly - $416,860 for 1006); and the sum in question reflects
the
company’s egalitarian approach to compensation and a practice that has been in
place for over 20 years. We will make this point in future
filings.
Change
of Control Severance Pay Plan, page 19
10. Please
consider revising your disclosure to clarify, if true, that Mr. Kelleher, Mr.
Kelly and Ms. Barrett are not participants in the Severance Pay Plan because
their respective employment agreements contain separate severance
provisions.
Response:
The
company will revise this disclosure
in its future filings. The Change of Control Severance Pay Plan does
not apply to any of the named executive officers, as such officers are covered
either by an employment agreement or by the Executive Service Recognition
Plan. The company voluntarily included disclosure regarding the
Change of Control Severance Pay Plan to provide a more complete picture of
its
change in control arrangements, in particular the fact that they are offered
to
non-officer Employees as well as officers (consistent with the company’s overall
compensation philosophies).
U.S.
Securities and Exchange Commission
October
15, 2007
Page 5
of 9
11. Please
consider disclosing in tabular format the amounts payable to each named
executive officer upon the occurrence of each triggering
event.
Response:
As
noted in response to comment number
10, this plan does not include any named executive officers and appropriate
clarifying disclosures will be made in future filings.
12. Where
appropriate, please describe and explain how the appropriate payment and benefit
levels are determined for purposes of termination and severance
packages. See paragraphs (b)(1)(v) and (j)(3) of Item 402 of
Regulation S-K. Also please discuss in the compensation discussion
and analysis how these arrangements fit into your overall compensation
objectives and affect the decisions you made regarding other compensation
elements and the rationale for decisions made in connection with these
arrangements.
Response:
With
respect to the determination of
appropriate payment and benefit levels, please see our response to comment
number 8. The company will request that the compensation committee
provide further detail for the Compensation Discussion and Analysis with respect
to how termination and severance packages fit within the committee’s overall
compensation objectives and affect the committee’s decisions regarding other
compensation elements and related rationales.
Directors’
Compensation, page 20
13. We
note the disclosure in the final sentence on page 21. Please consider
providing similar disclosure in footnote (3) to clarify, if true, that Mr.
King
and Ms. Morris, as directors who had each served 10 years, each received $75,000
upon retirement.
Response:
The
$75,000 paid to Mr. King and Ms.
Morris is reflected in the “All Other Compensation” column of the Directors’
Compensation Table. To the extent the company has similar disclosures
in future proxy statements, the company will more clearly identify in the
related footnote that such payments have been made in connection with the
retirement arrangement discussed in the narrative disclosure.
14. Please
disclose all assumptions made in the valuation of awards in the option awards
column of the table by reference to a discussion of those assumptions in your
financial statements, footnotes to the financial statements, or discussion
in
management’s discussion and analysis. See Instruction to Regulation
S-K Item 402(k), which refers to Instruction 1 to Item 402(c)(2)(v) and
(vi).
Response:
The
company will include such
disclosure in future filings.
U.S.
Securities and Exchange Commission
October
15, 2007
Page 6
of 9
15.
For each director, please disclose by footnote to the stock and option awards
columns of the director compensation table the grant date fair value of each
equity award computed in accordance with FAS 123R. See Instruction to
Regulation S-K Item 401(k)(2)(iii) and (iv).
Response:
The
company will include such
disclosure in future filings.
Compensation
Discussion and Analysis, page 22
16. Please
restructure the proxy statement so that this section precedes the Summary
Compensation Table.
Response:
The
company will restructure its
disclosures in future proxy statements so that the Compensation Discussion
and
Analysis precedes the Summary Compensation Table.
17. We
note that the introductory paragraph to this section contains a general
discussion of the objectives of the company’s compensation
programs. Please revise this paragraph to provide specific disclosure
that will be more helpful to investors. The revised disclosure should
provide a more detailed summary of the objectives of your executive compensation
program and what it seeks to reward. Refer to Item 402(b)(1)(i) and
(ii) of Regulation S-K.
Response:
We
will make revisions to the disclosure in the future to make the introductory
paragraph more clear and provide a more detailed summary of the objectives
of
the
compensation
program and what it seeks to reward. The introductory paragraph,
which is a quote from the company’s Salary Administration Manual, applicable to
all non-contract Employees, was intended to provide the context for the
Company’s compensation philosophies for executives. The company considers that
all of its public documentation includes its Employees as part of its target
audience. Employee Shareholders hold over 10% of the company’s common
stock through their ProfitSharing Plan. The introductory
statement was included for the purpose of disclosing a general mission statement
of the company, rather than as a response to a technical regulatory
requirement. Again, we will make revisions in the future to make this
more clear.
18. We
note that your base salary, bonus compensation and total compensation are
determined with reference to “comparably sized companies and other
airlines.” Please identify the benchmark companies and explain why
they were selected. Refer to Item 402(b)(2)(xiv) of Regulation
S-K. If you have benchmarked different elements of your compensation
against different benchmarking groups, please specify the companies that
comprise each group. Refer to Item 402(b)(2)(xiv) of Regulation
S-K. This disclosure should include a discussion of where you target
each element of compensation against the peer companies and where actual
payments fall within targeted parameters. To the extent actual
compensation was outside a targeted percentile range, please explain
why.
U.S.
Securities and Exchange Commission
October
15, 2007
Page 7
of 9
Response:
The
company will include the requested disclosure of benchmark companies in future
filings, and the company will take the staff’s comments into consideration for
future disclosure should the compensation committee decide to more specifically
target elements of executive compensation against peer companies in the
future.
The
company does not target any
specific element of compensation against peer companies. We will make
this more clear in future filings.
19. Please
expand your analysis of the elements and levels of compensation paid to the
named executive officers. Throughout your Compensation Discussion and
Analysis, and as to each compensation element, you should provide an analysis
of
how you arrived at and why you paid each particular level and form of
compensation for 2006. For example, please disclose how your specific
annual and long-term awards were determined. In this regard, although
your disclosure provides some general information relating to this form of
compensation, please provide detailed analysis and insight into how the
committee makes actual payout determinations. Refer to paragraphs
(b)(1)(iii) and (v) of Item 402 of Regulation S-K. Please revise your
Compensation Discussion and Analysis such that investors are provided with
an
understanding of the specific factors considered by the committee in ultimately
approving particular pieces of each named executive offer’s compensation package
and describe the reasons why the committee believes that the amounts paid
to
each named executive officer are appropriate in light of the various items
it
considered in making specific compensation decisions. Refer to Item
402(b)(2)(v) of Regulation S-K.
Response:
The
company will be more detailed in
future filings, with respect to detail which is available. Salaries
(i) fall below salaries for comparable positions, (ii) are impacted by pay
rates
for contract employees, and (iii) increase on a percentage basis consistent
with
non-executive employees, as described in the proxy statement. In
addition, as stated in the Compensation Discussion and Analysis,
ultimate decisions with respect to bonuses and equity are
subjective.
20. Your
disclosure suggests that different elements of compensation (such as base
salary
and incentive compensation) are significantly impacted by individual
performance. You should provide additional detail and an analysis of
how individual performance contributed to actual 2006 compensation for the
named
executive officers, including specific contributions the compensation committee
considered in its evaluation, and if applicable, how they were weighted and
factored into specific compensation decisions. See Item
402(b)(2)(vii) of Regulation S-K.
U.S.
Securities and Exchange Commission
October
15, 2007
Page 8
of 9
Response:
The
company will take the staff’s
interpretation of the disclosure into account when preparing future disclosures,
and will provide additional disclosure to the extent the committee makes
any
such considerations. Individual performance was included as one of
many factors considered by the compensation committee. As noted in
the discussion of annual incentive bonus, “[n]o mathematical formulae were
applied with respect to any factors” and no defined performance targets
were used. These disclosures were included in an attempt to
specifically address the SEC’s disclosure requirements and to put into context
how individual performance factors into the committee’s decisions.
Base
Salary, page 22
21. We
note the first sentence of this section. Please explain if, and
why, the company might make exceptions to its general rule of paying its
executives base salaries that are below market.
Response:
We
will change the language in the
future to address this concern. For your information, the Committee
has not considered any such exceptions, nor adopted any policy with respect
thereto.
Annual
Incentive Bonus, page 22
22. According
to your disclosure, the annual incentive bonus is largely contingent upon
the
Company’s annual profitability. Please explain how profitability is
measured for the purposes of annual incentive bonus eligibility. For
instance, please discuss whether you measure earnings with reference to EBITDA
or some other adjusted earning criteria.
Response:
We
will clarify this in future
filings. For your information, profitability was based on GAAP net
income, excluding the impact of certain unrealized items that were recorded
as a
result of SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities," as amended. The unrealized items consisted of gains or
losses for derivative instruments that would settle in future accounting
periods
or gains or losses that had been recognized in prior period results, but
which
settled during 2006. The company believes in certain cases, the
company's GAAP results are not indicative of the company's operating performance
for the applicable period, nor should they be considered in developing trend
analysis for future periods, and accordingly the “economic” number described
above is used for purposes of determining annual incentive bonus
eligibility. The company has consistently used this “economic” number
for communicating results to Employees and the investment community, consistent
with the requirements of Regulation G.
Longterm
Incentives, page 23
23. Although
the company’s current stock option plans appear to have expired, if an equity
plan is expected to be in place at the time of next year’s annual meeting,
please disclose in next year’s proxy statement the company’s policy with respect
to the selection of grant date and the granting of equity when the board
or
committee is in possession of material non-public information. Refer
to Section II.A of Commission Release 33-8732A.
U.S.
Securities and Exchange Commission
October
15, 2007
Page 9
of 9
Response:
The
company will include such
disclosure in future filings.
****
In
connection with our above responses
to the staff’s comments, the company acknowledges that:
|
·
|
the
company is responsible for the adequacy and accuracy of the disclosure
in
the filing;
|
|
·
|
staff
comments or changes to disclosure in response to comments do not
foreclose
the commission from taking any action with respect to the filing;
and
|
|
·
|
the
company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
|
Thank you for your assistance. If you have any questions, please do
not hesitate to contact me at (214) 792-4665.
|
Sincerely,
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Deborah Ackerman
|
|
|
|
Deborah
Ackerman
|
|
|
|
Vice
President – General Counsel
|
Copy
to:
David W. Biegler (Chair of the Compensation Committee)
Gary
C. Kelly
Laura
Wright
Tammy
Romo