According to the recent drop in stock price and slowed growth, Apple stakeholders looked to improve pay-for-performance alignment by establishing stock ownership guidelines for the CEO and non-employee directors. Tim Cook, the CEO of Apple, will be required to own 10X his base salary in Apple stock over a 5-year period, and the directors will be required to own shares equal to 5X the value of their retainer (which range from $50K to $250K). Shares must be owned directly and acquired through open market purchases or upon the vesting of stock awards. (Note: Stock owned by immediate family members is also considered.)
Tim Cook’s base salary is currently set to $1.4M, so the ownership guideline would essentially be $14M worth of Apple stock. Reviewing the compensation tables disclosed in Proxies, Compensation Discussion and Analysis (CD&A), and Form 4s, let’s evaluate this guideline further.
- Per the CD&A, Apple does not offer Option Awards, only Stock Awards which are delivered via Restricted Stock Units (RSUs). Tim Cook did not receive any RSUs in 2012.
- In the Option Exercises and Stock Vested – 2012 Table, Tim Cook had 237,500 shares vest as part of RSUs stock awards. Disclosed was the estimated realized value of $139,653,875 for this, reflecting vesting of a 2008 award where 100% of 200,000 RSUs vested and a 2010 award where 50% of 75,000 RSUs (e.g. 37,500) vested. Subsequent to this vest, he filed two Form 4s on March 12 and March 27, 2012, where all 237,500 shares were sold at stock prices ranging from $545 to $606.
- From the Outstanding Equity Awards section in the 2012 Year-End Table, it is disclosed that Tim Cook has 125,000 RSUs that cliff vest 100% on September 21, 2014; he was also awarded 1,000,000 RSUs when he was promoted to CEO, and this award has a 10-year graded vesting schedule (50% on August 24, 2016, and 50% on August 24, 2021).
- From the Security Ownership of Certain Beneficial Owners and Management Disclosure, Tim Cook owns 13,817 shares of common stock as of the fiscal year end September 29, 2012. Subsequently, on February 4, 2013, he also filed a Form 4 acquiring 41 shares at $387.16, bringing his total stock ownership to 13,858.
Given the timeline of events, it appears the shareholders required a response to reassure them of Tim Cook and the non-employee directors’ commitment to the long-term growth of the company. Based on this review, Tim Cook has achieved about 42.5% (e.g. $4.9M) of the ownership guideline, taking the 13,858 shares he directly owns and valuing them at the latest stock price of $430. In 18 months, when the 125,000 RSUs vest and modeling a worst case scenario with $215 stock price, he will have achieved over 200% of the stock ownership guideline in less than 3 years.
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