Apple Board Changes Tim Cook’s 2011 Stock Award to Performance-Based

Back in August of 2011 Apple CEO Tim Cook was awarded 1 million shares of stock, with fifty percent of these shares to vest by August 2016 and the other half by August 2021.

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However, a Form 8-K filing made yesterday by Apple has indicated Tim Cook asked the board to modify his his 2011 stock award (and future bonuses) to be performance-based, which some shareholders have asked for. Thus, Cook will be leading by example as stated and future stock award bonuses for executive officers will be based on merit.

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. This modification will not change the award’s original value for accounting expense purposes.

As for Cook’s 2011 restricted stock units 100,000 will remains scheduled to vest in August 2016, plus another 100,000 in August 2021. As for the remaining 800,000, they will be divided into equal parts of 80,000 units set to vest over the ten year life of the reward.

The “total shareholder return” (TSR) will be used to determine Cook’s payout on each anniversary of the vested units. The TSR of Apple will be compared to the TSR of other companies in the S&P 500. Here’s how the performance-based bonus scheme will work:

  • If Apple performs in the top third of the S&P 500, Cook will be able to redeem his stock units in full for that year.
  • If Apple performs in the middle group, Cook’s restricted stock units will be reduced by 25%.
  • If Apple performs in the middle group, Cook’s restricted stock units will be reduced by 50%.

That’s essentially the cliff notes of how this performance-based system will work. So for Cook to earn his stock bonuses in full, he’ll have to continue to work hard and ensure Apple’s shareholder return is in the top third of the S&P 500.