Back in the summer of 2013, facing a modest shareholder revolt, Apple CEO Tim Cook did one of the more remarkable things I’ve seen in years of writing about corporate compensation:
He volunteered to rewrite the rules for the restricted stocks units he had already been granted.
He was under no obligation to do so. But shareholders had seen the company’s stock cut almost in half over the past year and were getting nervous. There was lots of thumb-sucking over whether Apple could still innovate under the leadership of the man who had replaced Steve Jobs.
Cook, along with Apple’s board and executive team, wanted to make a defiant statement about their strong belief in the company’s future.
So the board decided to change the rules about vesting for restricted stock units by tying them even more closely to the company’s performance. While the rules were written for new RSUs, Cook asked to have them applied retroactively to the massive stock award he had received when he became CEO in August 2011.
Originally, Cook’s RSUs were scheduled to vest in two batches: one in 2016, and the other in 2021.
Under the new terms, Cook’s remaining RSUs were scheduled to vest in various amounts over the remaining eight years of his contract. For the full target amount to vest each year, Cook and Apple had to meet strict performance targets related to shareholder value.
To be clear, there was zero upside for Cook in this new arrangement. No matter how well Apple does, he can’t get more RSUs. But if the company stumbles, he loses stock. There is only downside for him.
Indeed, later that fiscal year (2013), Cook forfeited $4 million worth of stock because the company missed its targets. No need to weep for Cook, he’s loaded. But in the money-grubbing era of executive compensation, a CEO running the world’s most valuable (and massively profitable) company gives up compensation?
It’s almost unheard of.
The company’s latest proxy filing yesterday shows how that arrangement bites Cook in the other direction. It also reveals that Cook is facing enormous downside this year, for a couple of reasons.
To be sure, Cook will be fine no matter what. He made about $10 million in compensation last year between salary and executive bonuses. So no tears, please.
Still, to the first point: Apple blew the doors off, financially speaking, in fiscal year 2015. At the very highest end of its internal goals for executive bonuses, the board targeted a 15 percent increase in revenue to $210 billion for FY2015. Apple posted revenue of $233 billion.
Despite that bofo year, Apple’s stock was relatively flat.
Now, to the second point: The target performance for Cook’s RSU’s is tied to something called Total Shareholder Return (a factor of the stock performance relative to the S&P 500 plus things like dividends paid out). The TSR is measured over the previous two years.
As such, for the two years before August 2015, that TSR was good enough for Cook’s entire bucket of 280,000 RSUs to vest.
But for this coming August 2016, Cook has a larger-than-usual bucket scheduled to vest: 980,000 RSUs. To get that full amount, Apple has to be in the top one-third of S&P 500 companies this year in terms of the TSR (stock performance plus dividend payouts, etc.).
Now, the good news for Cook is that the TSR looks back over a two-year period. That means, what matters will be how Apple’s stock did from August 25, 2014 through August 24, 2016.
Still, the timing looks terrible.
There are growing predictions that Apple may have seen its first year-over-year decline in iPhone sales over the recent holiday quarter. That’s already been making investors nervous, whacking almost 10 percent off its stock since the start of the year.
For the moment, that leaves Apple’s stock up just 3.66 percent since Aug. 25, 2014.
We’ll learn more when Apple reports its Q1 2016 earnings. But should Apple be on a path to reporting dramatically slower growth or (unimaginably) a decline in revenue for the year, it’s safe to assume investors may freak.
It’s possible, of course, that Apple’s slate of new products from last year will catch fire. Or that the iPad will turn around.
But otherwise, there’s not a whole lot Cook and the board can do. About the only card they can play (which is not insignificant) is to dramatically increase the company’s stock buyback and dividend programs.
That bumps up the TSR, but it should also give shareholders a reason to get excited in a year when no major new products are expected. And now that 10 percent of Apple is owned by two large funds (Black Rock and Vanguard Group, as of Dec. 2014), such gestures can carry a lot of weight with fund managers.
Unfortunately for Cook, all of this is coming in a year when he has more at stake than usual, personally. He’s probably not losing any sleep over it or planning to radically change the direction of the company.
But it will be one of those times when his mantra about staying true to a long-term plan will be tested, and likely at some personal cost.
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