SOUTHWEST AIRLINES COLUV
SOUTHWEST AIRLINES CO Stock Compensation Disclosure
STOCK PLANS
Share-based Compensation
The Company accounts for share-based compensation utilizing fair value, which is determined on the date of grant for all instruments. The Consolidated Statement of Income for the years ended December 31, 2025, 2024, and 2023, reflects share-based compensation expense of $99 million, $45 million, and $86 million, respectively. The total tax impact recognized in earnings from share-based compensation arrangements for the years ended December 31, 2025, 2024, and 2023, was not material. As of December 31, 2025, there was $100 million of total unrecognized compensation cost related to share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.9 years. The Company expects substantially all unvested shares associated with time-based restricted stock unit awards to vest.
Restricted Stock Units and Stock Grants
Under the Company’s Amended and Restated 2007 Equity Incentive Plan ("2007 Equity Plan"), which was approved by Shareholders, the Company granted restricted stock units ("RSUs") and performance-based restricted stock units ("PBRSUs") to certain Employees during 2025, 2024, and 2023.
The RSUs are scheduled to vest with respect to one-third of the shares covered thereby annually. Other than in connection with death or disability, vesting is subject to the individual’s continued service as an Employee, Board member, or advisor through the vesting date. However, with respect to the RSUs granted in 2023, 2024, and 2025, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” any outstanding unvested RSUs will remain outstanding as if the individual’s service has not terminated and will continue to vest in accordance with the schedule set forth in the notice of the grant. An individual's termination of service will be considered a "qualified retirement" if (a) the individual has completed at least 10 years of continuous service; (b) the individual’s age plus completed years of continuous service equal at least 65 at the time of the individual’s termination of service; and (c) the individual has not been terminated for cause.
Under the 2023 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Adjusted ROIC performance, as defined, and ranges from zero to 200 percent of granted PBRSUs, only after a minimum performance level has been achieved. Adjusted ROIC for the Performance Period is the average of the ROIC, using an assumed federal tax rate of 24 percent, over the full fiscal years within the Performance Period (2023, 2024, and 2025), and vesting is also subject generally to the individual’s continued employment or service. However, in the event the Company's average Adjusted ROIC is greater than zero and exceeds the median (i.e., 50th percentile) return on invested capital of certain of the Company's Peer Group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent. If the Company's relative Adjusted ROIC ranks highest compared to the Company's Peer Group, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 100 percent.
Under the 2024 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Adjusted ROIC performance, as defined, and ranges from zero to 200 percent of granted PBRSUs, only after a minimum performance level has been achieved. Adjusted ROIC for the Performance Period is the average of the ROIC, using an assumed federal tax rate of 24 percent, over the full fiscal years within the Performance Period (2024, 2025, and 2026), and vesting is also subject generally to the individual’s continued employment or service. However, in the event the Company's average Adjusted ROIC is greater than zero and exceeds the median (i.e., 50th percentile) return on invested capital of certain of the Company's Peer Group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements, the minimum number of
PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent. If the Company's relative Adjusted ROIC ranks highest compared to the Company's Peer Group, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 100 percent.
Under the 2025 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Adjusted ROIC performance, as defined, and ranges from zero to 200 percent of granted PBRSUs, only after a minimum performance level has been achieved. Adjusted ROIC for the Performance Period is the average of the ROIC, using an assumed federal tax rate of 23.5 percent, over the full fiscal years within the Performance Period (2025, 2026, and 2027), and vesting is also subject generally to the individual’s continued employment or service. However, in the event the Company's average Adjusted ROIC is greater than zero and exceeds the median (i.e., 50th percentile) return on invested capital of certain of the Company's Peer Group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent. If the Company's relative Adjusted ROIC ranks highest compared to the Company's Peer Group, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 100 percent.
Under the 2025 Southwest Even Better ("SEB") grants, the number of PBRSUs vesting on the vesting date will be based on the Company's Adjusted EBIT (as defined) for the years 2026 and 2027 and ranges from zero percent of granted PBRSUs to 200 percent of granted PBRSUs, only after a minimum performance level has been achieved. Vesting is also subject generally to the individual's continued employment.
With respect to PBRSUs granted in 2023, 2024, and 2025, not including the SEB grants, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” such individual’s PBRSUs will remain outstanding as if the individual’s service has not terminated and will otherwise be settleable in accordance with the notice of grant and applicable terms and conditions; however, the number of shares received upon settlement will be prorated based on the individual’s number of days of service between the date of grant and the end of the performance period.
For all RSU and PBRSU grants, forfeiture rates are estimated at the time of grant based on historical actuals for similar grants, and are trued-up to actuals over the vesting period. For all RSU and PBRSU grants, the Company recognizes all expense on a straight-line basis over the vesting period, as adjusted for qualified retirement provisions, with any changes in expense due to the number of RSUs and PBRSUs expected to vest being modified on a prospective basis.
Aggregated information regarding the Company’s RSUs and PBRSUs is summarized below:
| All Restricted Stock Units | ||||||||||||||
| Units (000) | Wtd. Average Fair Value (per share) | |||||||||||||
| Outstanding December 31, 2022 | 2,943 | $ | 47.97 | |||||||||||
| Granted | 1,750 | (a) | 35.37 | |||||||||||
| Vested | (650) | 48.45 | ||||||||||||
| Surrendered | (80) | 39.69 | ||||||||||||
| Outstanding December 31, 2023 | 3,963 | 39.97 | ||||||||||||
| Granted | 4,069 | (b) | 29.85 | |||||||||||
| Vested | (2,012) | 44.38 | ||||||||||||
| Surrendered | (133) | 32.64 | ||||||||||||
| Outstanding December 31, 2024 | 5,887 | 33.73 | ||||||||||||
| Granted | 4,842 | (c) | 31.38 | |||||||||||
| Vested | (1,437) | 36.93 | ||||||||||||
| Surrendered | (502) | 31.05 | ||||||||||||
| Outstanding December 31, 2025 | 8,790 | 31.56 | ||||||||||||
(a) Includes 1.1 million PBRSUs
(b) Includes 1.7 million PBRSUs
(c) Includes 2.4 million PBRSUs
In addition, the Company granted approximately 65 thousand shares of unrestricted stock at a weighted average grant price of $31.38 in 2025, approximately 108 thousand shares at a weighted average grant price of $28.77 in 2024, and approximately 73 thousand shares at a weighted average grant price of $30.12 in 2023, to members of its Board of Directors.
A remaining balance of up to 9 million shares of the Company’s common stock may be issued pursuant to grants under the 2007 Equity Plan.
Employee Stock Purchase Plan
Under the Amended and Restated 1991 Employee Stock Purchase Plan ("ESPP"), which has been approved by Shareholders, the Company is authorized to issue up to a remaining balance of 12 million shares of the Company’s common stock to Employees of the Company. These shares may be issued at a price equal to 90 percent of the market value at the end of each monthly purchase period. Common stock purchases are paid for through periodic payroll deductions.
The following table provides information about the Company’s ESPP activity during 2025, 2024, and 2023:
| Employee Stock Purchase Plan | ||||||||||||||||||||
| (a) | ||||||||||||||||||||
| Total number | Weighted-average | |||||||||||||||||||
| of shares | Average | fair value of each | ||||||||||||||||||
| purchased | price paid | purchase right | ||||||||||||||||||
| Year ended | (in thousands) | per share | under the ESPP | |||||||||||||||||
| December 31, 2023 | 1,972 | $ | 27.46 | $ | 3.05 | |||||||||||||||
| December 31, 2024 | 2,227 | $ | 26.38 | $ | 2.93 | |||||||||||||||
| December 31, 2025 | 2,101 | $ | 28.54 | $ | 3.17 | |||||||||||||||
(a) The weighted-average fair value of each purchase right under the ESPP granted is equal to a ten percent discount from the market value of the Common Stock at the end of each monthly purchase period.
Taxes
Grants of RSUs result in the creation of a deferred tax asset, which is a temporary difference, until the time the RSU vests. All excess tax benefits and tax deficiencies are recorded through the Consolidated Statement of Income. Due to the treatment of RSUs for tax purposes, the Company’s effective tax rate from year to year is subject to variability.
About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.