Southwest Airlines Co. more than doubled its CEO's compensation for last year, to nearly $3.4 million, thanks mainly to a stock award worth $1.8 million.
Gary C. Kelly was rewarded for a big jump in Southwest's income as passenger traffic rose sharply in a bounce-back year for the airline industry.
Southwest earnings surged to $459 million last year from $99 million in 2009, although its stock price did not appreciate as quickly _ rising 14 percent in 2010. Kelly also engineered Southwest's biggest acquisition ever, the $1.4 billion purchase of AirTran Airways that will increase Southwest's size by 25 percent. The deal is expected to close in the next few weeks.
Dallas-based Southwest has been gaining passengers more quickly than other airlines, which Kelly attributes partly to Southwest's policy of letting passengers check two bags for free. It carries more U.S. passengers than anyone.
But Southwest faces many challenges, topped by rising fuel prices. Southwest's on-time performance has suffered as Kelly has pushed into busy hub airports that the airline once shunned, two of its older planes have sprung holes in the roof and others were found to have cracks in the fuselage. Also, many longtime customers are angry over recent changes in the airline's frequent-flier program.
In a Friday filing with the Securities and Exchange Commission, Southwest said a consultant hired in 2009 advised the board that executive pay was too low, making it harder to attract and retain top people. For 2010, the company boosted bonuses and stock awards but held salaries flat in order to tie executives' rewards to Southwest's performance.
In Kelly's case, the committee said the CEO was rewarded for squeezing out unprofitable routes, buying AirTran, launching Southwest's "Bags Fly Free" advertising campaign and other achievements.
Kelly's 2010 salary rose only 5 percent but he got a bigger bonus of $930,000, up from $590,000 in 2009. The major difference in his compensation, however, was a stock award valued at $1.84 million when issued on May 19.
Unlike 2009, Kelly received no stock options in 2010. He got $112,668 in other compensation, including $49,433 in deferred income that the company said was earned for 2010 but paid this year. He also received above-market earnings on deferred compensation of $7,902 in 2010.
The Associated Press formula calculates an executive's total compensation during the last fiscal year by adding salary, bonuses, perks, above-market interest the company pays on deferred compensation and the estimated value of stock and stock options awarded during the year. The AP formula does not count changes in the present value of pension benefits. That makes the AP total slightly different in most cases from the total reported by companies to the SEC.
The value that a company assigned to an executive's stock and option awards for 2010 was the present value of what the company expected the awards to be worth to the executive over time. Companies use one of several formulas to calculate that value. However, the number is just an estimate, and what an executive ultimately receives will depend on the performance of the company's stock in the years after the awards are granted. Most stock compensation programs require an executive to wait a specified amount of time to receive shares or exercise options.