Subpar Stock Performance Nets Apple's Tim Cook With $4M Stock Loss
December 30, 2013

Subpar Stock Performance Nets Apple’s Tim Cook With $4M Stock Loss

Bryan P. Carpender for - Your Universe Online

There’s an old saying that goes something like this: “careful what you wish for, ‘cause you might just get it.”

Apple CEO Tim Cook wanted to lead by example by tying executives’ annual stock awards to Apple’s own stock performance. Well, Cook made his wishes known and now he’s getting exactly what he wished for – and it’s costing him $4 million in lost stock options.

Although his overall compensation package for the 2013 fiscal year included a 2 percent increase, Apple’s Board of Directors (of which he is a member) significantly reduced the number of stock shares that were to have vested this year. In Cook’s case, this ding to his performance-based stock award amounts to $4 million dollars. Ouch. But then again, he asked for it – literally.

In June of this year, Cook championed the adoption of a new vesting schedule, which would tie executive stock options to the company’s stock performance. This is the first example of the new vesting policy in action; none of Apple’s top execs were granted stock awards for 2013.

But don’t start taking up collections for Cook’s care package just yet. In 2011, Cook received a gigantic award of 1 million shares of Apple stock as part of the deal locking him in as CEO through mid-2021.

These shares, or “restricted stock units” (RSUs), would have vested in equal parts, with half vesting in August 2016 and the remaining in August 2021, with the only condition being Cook’s continued employment by Apple on the vesting dates.

The newly modified CEO stock award specifies 100,000 RSUs scheduled to vest in August 2016, with another 100,000 shares scheduled to vest in August 2021. The remaining 800,000 RSUs will be separated into equal annual awards for the ten years of the award’s lifespan.

Under the new vesting policy, half of each year’s vesting pool can be eliminated or reduced if Apple isn’t in the top third of the S&P 500, as measured by the “total shareholder return” (TSR) metric, a combination of share price appreciation and dividends paid to shareholders.

Since Apple’s TSR was in the bottom third, Cook forfeited 7,123 shares thanks to the company’s subpar stock performance. Using Friday’s closing price, the shares Cook was stripped of could have been worth almost $4 million.

Again, don’t shed a bitter tear for Cook just yet; the 72,877 shares that did vest in August could have been valued at $40.8 million at Friday’s closing.

80 percent of Cook’s original 1 million shares are covered under the new pay for performance plan.

Although Apple’s TSR has been keeping pace with the S&P 500’s since August 25, 2013, Cook’s stock grant for the 2014 fiscal year is far from bulletproof. If Apple lands in the middle third of the S&P 500, Cook could lose 20,000 shares slated to vest in August 2014. Even worse, if Apple lands in the bottom third of the S&P 500, he stands to lose 40,000 shares.

However, Cook received a base salary of $1.4 million – far from paltry. Plus, for the 2013 fiscal year, Cook – along with other top Apple executives – received the maximum bonus, which is equivalent to two times each man’s annual salary.

In Cook’s case, that means a bonus of $2.8 million.

Those maximum bonuses are thanks to Apple’s net sales and operating income both exceeding targets previously set by the board.

Add to the total compensation package, Apple’s contributions to his 401(k) plan, company-paid life insurance and $35,000 for vacation time converted to cash and Cook is still sitting pretty.

In sharp contrast to the compensation philosophies at many other companies, Apple champions internal pay equity for the four executives just below Cook, as seen on the following chart.

“Because the Company's executive officers operate as a team, the Compensation Committee considers internal pay equity to be an important factor in the Compensation Committee's decisions," according to a preliminary proxy statement filed on Friday with the US Securities and Exchange Commission.

Though Apple has seen both a decline in its stock price, as well as its market share, thanks to increased competition in the smartphone and tablet markets, it still remains the world’s most valued company as measured by market capitalization.

Apple continues to invest in its long-term success with numerous tech company acquisitions.

And as we reported earlier, Tim Cook has high hopes for 2014, having recently teased what’s to come in a memo to all Apple employees. “We have a lot to look forward to in 2014, including some big plans that we think customers are going to love.”

Let’s see if what Apple has up its sleeve will be enough to have a positive impact on its stock performance and, in turn, the top executives’ stock awards. Hopefully, Cook and company will have a few wins in coming months. After all, that’s why they make the big bucks.