According to a filing Apple made with the SEC on Friday, Apple's Board of Directors decided to adjust Tim Cook's compensation package as it pertains to his stock options.
When Cook became the CEO of Apple in August 2011, he was awarded 1 million restricted stock units, half of which are scheduled to vest on August 24, 2016, with the other half slated to vest on August 24, 2021. Of course, in order to claim said shares, Cook must remain employed by Apple throughout each vesting date.
With the updated SEC filing, Cook's stock compensation will now be based, in part, on the company's performance.
Apple's SEC filing reads in part:
In outreach discussions this year with many of our largest shareholders, we heard that they believe it is appropriate to attach performance criteria to a portion of our future executive stock awards that have been entirely time-based (i.e., vesting for continued service) in the past. We agree and, beginning today, the Company will include a performance element in new stock awards to our executive officers.
CEO Leadership by Example
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. After careful deliberation, the Committee has approved a modification to Mr. Cook's 2011 award.
Under the adopted modification, Mr. Cook will forfeit a portion of the 2011 CEO equity award, which was previously entirely time-based, if the Company does not achieve certain performance criteria. While the Committee generally believes that a performance-based award should have both a downside and an upside component, at Mr. Cook's request, the modification does not contain an upside opportunity for overachievement of these criteria. As a result of implementing a modification with only downside risk, the Committee has determined that a portion of the original grant should vest earlier than originally scheduled.
So just how will the Board of Directors measure Apple's performance under the helm of Cook? Well, the SEC filing notes that the Board consulted with shareholders and compensation experts and ultimately concluded that they'd measure Cook's performance as CEO by measuring the company's "total shareholder return" (TSR) as compared to other companies.
With the modified plan in place, Cook will now receive 100,000 shares in 2016 and an additional 100,000 shares in 2021. The remaining 800,000 shares will then be divided up into 10 installments of 80,000 that will vest each year since the award was initially granted in 2011, assuming of course that Apple's annual performance is up to snuff with the TSR of the S&P 500.
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%.