As many have noted
As background Tim Cook gets the usual sort of things the CEO of a large company will get: a decent salary, no doubt some good perks and so on. But the major part of his compensation is in restricted stock units (RSUs). These have rather taken over from stock options as the compensation of choice as they're much less subject to the vagaries of the stock market. An option could be worth a fortune because the stock market in general has gone up, worth nothing at all because the market as a whole has gone down. An RSU, assuming that the company is still in business, will always have a value but there is no gearing on its rise in value. Whether it's the perfect form of senior management compensation is another matter, but it's most certainly the current fashion.
Cook's compensation from Apple is in the form of 1 million such RSUs. Around $450 million's worth at current stock prices: but he has to stay the entire decade to get it all. Or did until the change that's just been filed. There's two major changes made:
As a result of the adoption of a performance component and regular performance measurements, and the absence of a performance multiplier, the Committee has modified Mr. Cook’s 2011 award of one million RSUs to vest as follows: 100,000 RSUs remain scheduled to vest on August 24, 2016; 100,000 RSUs remain scheduled to vest on August 24, 2021; the balance of 800,000 RSUs is separated into ten equal tranches of 80,000 RSUs each that vest over the ten-year life of the award. Details are explained below and illustrated in Table 1.
Instead of two humongous chunks the vesting will be a drip feed ("vesting" means that the stock units go from being potentially payable to Cook to being his own property). And there doesn't seem to be anything wrong with that. The second change is more interesting:
Mr. Cook is leading this initiative by example and has the full support of the Board of Directors. He asked the Committee to apply a performance metric to his outstanding 2011 CEO equity award as well as any potential future awards......(...)....The Committee considered what percentage of Mr. Cook’s unvested one-year RSU tranches to place at risk under the new performance criteria. Because Mr. Cook faces only downside risk from the modification, the Committee believed that less than 50% should be placed at risk. Mr. Cook, however, expressed a strong desire to set a leadership example in the area of CEO compensation and governance and requested a larger at-risk percentage. Accordingly, the Committee is placing 50% of the RSUs at risk in each future annual performance-based tranche.
The performance metric is surprisingly strong as well:
The relative TSR criteria will be applied to each 80,000 RSU tranche scheduled to vest on each anniversary of the original August 24, 2011 grant date, and will compare Apple’s TSR to the TSR of the companies in the S&P 500 using public data derived from Standard and Poor’s. If Apple’s performance is within the top third of that group, the RSUs in the tranche for that year will vest in full. If its performance is in the middle third, the RSUs in the tranche for that year will be reduced by 25%, and if its performance is in the bottom third, the RSUs in that tranche will be reduced by 50%.
TSR is
I can imagine any number of other CEOs spitting with rage at this. For Cook has voluntarily come forward and demanded (hmm, asked? insisted?) that he should be held to a performance target and that also it should be a stringent one. And finally, that he can only lose money for failing it, not gain any more for beating it. And I'd expect some of those CEOs to be spitting with rage because this might wake up some of the more supine boards out there and become a template for stock awards that are rather more stringent than those usual at present.
I would have to say that it's full marks to Mr. Cook on this.
The little detail that I found fascinating (please see the above about accounting geeks) is that this rather changes something that Cook did just over a year ago.
These RSUs do exist, even if they don't belong to the awardee until they vest. If they exist then they garner dividends just like any other common stock. Apple has a program whereby those waiting for the stock to vest can still have access to the dividends before they vest. But Cook said that on his 1 million units he didn't want to take the dividends:
Apple Inc Chief Executive Tim Cook will not be earning dividend income on the more than 1 million shares to which he is entitled, which will cost him about $75 million.
Apple said in a filing with the U.S. Securities and Exchange Commission on Thursday that Cook had asked to be excluded from a recently instituted company program through which employees can accumulate dividends on their restricted stock units that are still vesting.
The changes just announced won't make Cook any more money (quite the opposite if he doesn't hit his targets). But it will reduce the cost to him of what he's given up in those dividends. For the $75 million number is based upon the idea that half of the RSUs vest after 5 years, half after 10. So, on average, he was giving up 7.5 years' dividends on the whole 1 million amount. Now his (maximum) vesting is 80,000 shares a year plus 100,000 in year 5 and 100,000 in year 10. Which means that he's giving up those dividends on 200,000 shares for 7.5 years (on average) and 800,000 for 5 years (again, on average). I'll leave it as an exercise for the reader to work out quite how much less he's giving up. It's not a huge amount (not in comparison to his total pay that is: to us mere mortals working for a salary it's more than a lifetime's earnings). And I don't particularly think that, in context, it's a material amount either. I just thought it interesting to note that this will be the effect of annual vesting rather than bi-decadal.
