UNDER THE DELTA AIR LINES, INC. 2007 PERFORMANCE COMPENSATION PLAN The Board of Directors recommends that stockholders re-approve the material terms of the existing performance goals adopted under the Delta Air Lines, Inc. 2007 Performance Compensation Plan (the “Delta 2007
Performance Compensation Plan” or “Plan”) to ensure that our federal tax deductions for performance-based awards under the Plan are not limited by Section 162(m) of the Internal Revenue Code (“Section 162(m)”).
Stockholders are not being asked to approve any additional shares for issuance under the Delta 2007 Performance Compensation Plan or to otherwise modify the terms of the Plan.
The Delta 2007 Performance Compensation Plan is a broad-based equity and cash compensation plan that was approved by Delta’s unsecured creditors committee and creditors as part of Delta’s Chapter 11 plan of reorganization, which was confirmed by the Bankruptcy Court and treated for purposes of Section 162(m) as shareholder approval. In connection with approving the merger between Delta and Northwest in 2008, stockholders approved an increase in the number of shares authorized under the Delta 2007 Performance Compensation Plan.
Section 162(m) places a limit of $1,000,000 on the amount Delta may deduct in any one year for compensation paid to our chief executive officer and each of our other three most highly-paid executive officers (other than our chief financial officer). Compensation that qualifies as “performance-based compensation” for purposes of Section 162(m) is not subject to this deductibility limit. In order to continue to qualify as performance-based compensation, stockholders must approve, every five years, the material terms of the performance goals of the Delta 2007 Performance Compensation Plan. These material terms include who is eligible to participate in the Delta 2007 Performance Compensation Plan, the business criteria on which the performance goals will be based and the maximum award payable to any participant under the Plan.
Because five years have passed since approval of the Delta 2007 Performance Compensation Plan pursuant to Delta’s plan of reorganization, the Board of Directors is submitting the material terms of the performance goals set forth in the Delta 2007 Performance Compensation Plan to our stockholders for re-approval. If the existing performance goals are not approved by stockholders, the Delta 2007 Performance Compensation Plan will continue in effect; however, in accordance with Section 162(m), Delta’s ability to deduct performance-based compensation under the Plan will be limited as described above.
The following is a summary of the material terms of the Delta 2007 Performance Compensation Plan, including the eligibility provisions and award limits and is qualified in its entirety by reference to the Plan. The Delta 2007 Performance Compensation Plan and the first amendment thereto are incorporated by reference from our Current Report on Form 8-K filed on March 22, 2007 and our Annual Report on Form 10-K for the year ended
December 31, 2008, respectively. None of the terms of the Plan, including the performance goals, will change as a result of this Proposal.
Performance Goals. Under the Delta 2007 Performance Compensation Plan, every award that is intended to constitute qualified performance-based compensation shall include a pre-established formula, such that exercise, payment, retention or vesting of the award is subject to the achievement during a performance period or
performance periods, as determined by the Personnel & Compensation Committee of the Board of Directors (the
“P&C Committee”), of a level or levels of, or improvements in, in each case as determined by the P&C
Committee, one or more performance measures with respect to Delta or its affiliates or any business unit thereof, based on the following:
(i) Any of the following financial measures:
• Revenue per available seat mile
• Cost per available seat mile
• Total shareowner return
• Return on equity, assets, capital or investment
• Operating, pre-tax or net income levels expressed in either absolute dollars, earnings per share, or changes of the same
• The market price of shares
• Economic or cash value added
• Capitalization
• Net or operating profit margin
• Revenues or revenue growth
• Expenses
• Cash flow
• Operating cash flow or liquidity
• Earnings before interest, taxes, depreciation, amortization and aircraft rent;
(ii) the results of employee satisfaction surveys;
(iii) the results of customer satisfaction surveys; and
(iv) other measures of operational performance (including, without limitation, U.S. Department of Transportation performance rankings in operational areas), quality, safety, productivity or process improvement.
Performance criteria may be measured on an absolute (e.g., plan or budget) or relative basis. Relative
performance may be measured against a group of peer companies, a financial market index, or other acceptable objective and quantifiable indices.
In addition to any award limitations (as described below), the P&C Committee has the power to impose such other restrictions on performance-based awards as it may deem necessary or appropriate to ensure that such awards satisfy all requirements for qualified performance-based compensation. However, the P&C Committee is not authorized to increase the amount payable to a “covered employee” under any qualified performance-based award upon attainment of such pre-established formula. Further, any settlement which changes the form of payment from that originally specified for an award intended to qualify as a performance-based award does not, solely for that reason, fail to qualify as qualified performance-based compensation.
Purpose. The purpose of the Delta 2007 Performance Compensation Plan is to enhance the incentive of those employees, members of the Board of Directors and other individuals who are expected to contribute significantly to the success of Delta and its affiliates in achieving Delta’s short-term and long-term objectives and, in general, to further the best interest of Delta and its stockholders.
Administration. The P&C Committee administers the Delta 2007 Performance Compensation Plan and has authority to select individuals to whom awards are granted, determine the types of awards and number of shares covered, and determine the terms and conditions of awards, including the applicable vesting schedule, the effect of termination of service and whether the award will be settled in cash, shares or a combination of the two. In addition, the P&C Committee has authority to interpret and administer the Delta 2007 Performance
Compensation Plan and the related award agreements, and may make such determinations and take any actions deemed necessary or desirable for the administration of the Delta 2007 Performance Compensation Plan. The P&C Committee may delegate to one or more individuals or committees the authority to grant awards to participants who are not directors or executive officers.
Eligibility. Employees, consultants, advisors and service providers of Delta and its affiliates, as well as
members of the Board of Directors, are eligible to participate in the Delta 2007 Performance Compensation Plan.
This group currently includes approximately 80,000 individuals.
Shares and Award Limits. Subject to adjustment, the maximum number of shares of Delta common stock reserved for issuance under the Delta 2007 Performance Compensation Plan is 156,581,428, which includes shares available for issuance pursuant to awards currently outstanding and approximately 30,615,730 million shares that remain available for future awards. The majority of the shares awarded under the Delta 2007 Performance Compensation Plan were granted to non-management employees in connection with the Delta/Northwest Airlines merger in 2008.
No participant may receive in any calendar year stock options and stock appreciation rights that relate to more than 2 million shares of Delta common stock; restricted stock or restricted stock units that relate to more than 1 million shares; or performance awards and other stock-based awards that relate to more than 1.5 million shares.
In addition, the maximum amount that may be paid in cash to any participant in a calendar year for an annual cash incentive is $10 million and the maximum long-term cash incentive award is $10 million multiplied by the number of years included in any applicable performance period (and any fraction of a performance period of less than one year) relating to such award.
Shares of Delta common stock to be issued under the Delta 2007 Performance Compensation Plan may be made available from authorized but unissued Delta common stock or Delta common stock that Delta acquires. If any shares of Delta common stock are covered by an award (other than a substitute award as defined below) that expires, is cancelled, forfeited or otherwise terminates without the delivery of shares (including shares of Delta common stock surrendered or withheld in payment of any exercise or price of an award or taxes related to an award and shares subject to an award to the extent that award is settled without the issuance of shares), then such shares of Delta common stock will again be available for issuance under the Delta 2007 Performance
Compensation Plan (except that if a stock appreciation right is settled in shares of Delta common stock, the total number of shares of Delta common stock relating to the stock appreciation right, regardless of the actual number of share of Delta common stock used to settle the award, are counted against the maximum aggregate number of shares of Delta common stock that may be issued under the Delta 2007 Performance Compensation Plan). A substitute award is any award granted in assumption of, or in substitution for, an outstanding award previously granted by a company acquired by Delta or with which Delta combines. Shares of Delta common stock underlying substitute awards do not reduce the number of shares of Delta common stock available for delivery under the Delta 2007 Performance Compensation Plan.
The P&C Committee will equitably adjust any or all of the number and type of shares of Delta common stock issued under the Delta 2007 Performance Compensation Plan or subject to any award thereunder and/or the grant, purchase, or exercise price with respect to any award in the event that any recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or any other similar corporate transaction or event affects the shares of Delta common stock such that an adjustment is appropriate to prevent the dilution or enlargement of benefits or potential benefits intended to be made available under the Delta 2007 Performance Compensation Plan.
Awards. The Delta 2007 Performance Compensation Plan provides for grants of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, including cash incentive awards, and other stock-based awards.
• Stock Options. The exercise price of an option (other than a substitute award) may not be less than the fair market value of a share of Delta common stock on the date of grant and each option has a term to be determined by the P&C Committee (not to exceed ten years). Options may be granted as incentive stock options, which are intended to qualify for favorable treatment to the recipient under federal tax law, or as non-qualified stock options, which do not qualify for this favorable tax treatment. Stock options are exercisable at such time or times as determined by the P&C Committee.
• Stock Appreciation Rights. A stock appreciation right, which we refer to as a SAR, may be granted as a free-standing right or in tandem with a stock option. Upon exercise of a SAR, the holder of that SAR is entitled to receive the excess of the fair market value of the shares for which the right is exercised over the exercise price of the SAR. The exercise price of a SAR (other than a substitute award) may not be less than the fair market value of a share of Delta common stock on the date of grant. A tandem SAR may be granted on the grant date of the related option. A tandem SAR will be exercisable only at such time or times and to the extent that the related option is exercisable. A tandem SAR will terminate or be forfeited upon the exercise of the related option, and the related option will terminate or be forfeited upon the exercise or forfeiture of the tandem SAR.
• Restricted Stock/Restricted Stock Units. Shares of restricted stock are shares of Delta common stock subject to restrictions on transfer and a substantial risk of forfeiture. A restricted stock unit consists of a contractual right denominated in shares of Delta common stock which represents the right to receive a share or the value of a share of Delta common stock at a future date, subject to certain vesting and other restrictions and such other terms and conditions as the P&C Committee may determine, which
restrictions and such other terms and conditions may lapse separately or in combination at such time or times, in such installments or otherwise, as the P&C Committee may deem appropriate.
• Performance Awards. The Delta 2007 Performance Compensation Plan provides that grants of performance awards, including cash-denominated awards, and (when determined by the P&C Committee) options, restricted stock or other stock-based awards, may be based upon, and subject to achieving performance goals. The performance goals with respect to those awards that are intended to quality as “performance-based compensation” for purposes of Section 162(m) are set forth above.
Except with respect to awards that are qualified performance-based compensation under Section 162(m), if the P&C Committee determines that a change in Delta’s business, operations, corporate structure or capital structure, or the manner in which Delta conducts its business, or other events or circumstances render the performance goals unsuitable, the P&C Committee may modify the performance goals or the related minimum acceptable level of achievement, in whole or in part, as the P&C Committee deems appropriate and equitable.
• Other Awards. The P&C Committee is authorized to grant other stock-based awards, either alone or in addition to other awards granted under the Delta 2007 Performance Compensation Plan. Other awards may be settled in shares, cash, awards granted under the Plan or any other form of property as the P&C Committee determines.
Effect of Termination of Employment or Change in Control. The P&C Committee has authority to determine the treatment of awards in connection with termination of a participant’s employment and any transaction or transactions resulting in a change in control by rule or regulation or in any award agreement or at any time in any individual case. The Plan’s standard award agreements provide that upon a change in control, awards will vest only if a participant’s employment is terminated by Delta without cause or by the participant for good reason (a
“double trigger”) within two years of the change in control.
Effective Date; Amendment to the Delta 2007 Performance Compensation Plan. The Delta 2007
Performance Compensation Plan became effective on April 30, 2007, and no award may be granted under the Plan on or after the tenth anniversary of that date. However, unless otherwise expressly provided in the Delta 2007 Performance Compensation Plan or in an applicable award agreement, any award granted prior to such tenth anniversary may extend beyond such date, and the authority of the P&C Committee to administer the Delta 2007 Performance Compensation Plan and to amend, suspend or terminate any such award, or to waive any conditions or rights under any such award, and the authority of the Board of Directors to amend the Delta 2007 Performance Compensation Plan, will extend beyond such date.
Except as otherwise provided in an award agreement, the Board of Directors or the P&C Committee may from time to time suspend, discontinue, revise or amend the Delta 2007 Performance Compensation Plan and the P&C Committee may amend the terms of any award in any respect; provided that no such action will adversely impair or affect the rights of a holder of an outstanding award under the Delta 2007 Performance Compensation Plan without the holder’s consent, and no such action will be taken without stockholder approval, if required by the rules of the stock exchange on which shares of Delta common stock are traded. Further, the Delta 2007 Performance Compensation Plan prohibits the direct or indirect repricing of any award under the Plan.
Certain Federal Income Tax Consequences. The following is a summary of certain U.S. federal income tax consequences of awards made under the Delta 2007 Performance Compensation Plan, based upon the laws currently in effect. The discussion is general in nature and does not take into account a number of considerations which may apply in light of the individual circumstances of a participant under the Delta 2007 Performance Compensation Plan. The income tax consequences under applicable state and local tax laws may not be the same as under U.S. federal income tax laws.
• Non-Qualified Stock Options. A participant will not recognize taxable income upon the grant of a non-qualified stock option and Delta will not be entitled to a tax deduction at such time. A participant will recognize compensation taxable as ordinary income (and be subject to income tax and employment tax withholding) upon exercise of a non-qualified stock option equal to the excess of the fair market value of the shares purchase pursuant to such option over their exercise price, and Delta generally will be entitled to a corresponding deduction.
• Incentive Stock Options. A participant will not recognize taxable income upon the grant of an incentive stock option. A participant will not recognize taxable income (except for purposes of the alternative minimum tax) upon exercise of an incentive stock option. If the shares acquired by exercise of an incentive stock option are held for the longer of two years from the date the option was granted and one year from the date the shares were transferred to the participant, any gain or loss arising from a subsequent disposition or such shares will be taxed as a long-term capital gain or loss, and Delta will not be entitled to any deduction. If, however, such shares are disposed of within such two or one year periods, then in the year of such disposition the participant will recognize compensation taxable as ordinary income equal to the excess of the lesser of the amount realized upon such disposition and the fair market value of such shares on the date of exercise over the exercise price, and Delta generally will be entitled to a corresponding deduction. The excess of the amount realized on a subsequent sale or exchange over the fair market value of the stock on the exercise date generally will be treated as a capital gain.
• Stock Appreciation Rights. A participant will not recognize taxable income upon the grant of a SAR, and Delta will not be entitled to a tax deduction at such time. Upon exercise, a participant will recognize compensation taxable as ordinary income (and be subject to income and employment tax withholding) equal to the fair market value of any shares delivered and the amount of cash paid by Delta, and Delta generally will be entitled to a corresponding deduction.
• Restricted Stock. A participant who receives an award of restricted stock does not generally recognize taxable income upon the grant of the award. Instead, the participant recognizes ordinary income in the first taxable year in which the participant’s interest in the shares becomes either (i) freely transferable
• Restricted Stock. A participant who receives an award of restricted stock does not generally recognize taxable income upon the grant of the award. Instead, the participant recognizes ordinary income in the first taxable year in which the participant’s interest in the shares becomes either (i) freely transferable