Tim Cook's new compensation plan bets long on AAPL

Tim Cook's new compensation plan bets long on AAPL

Over the last week Apple announced changes to CEO Tim Cook’s compensation. The changes are quite non-standard and there has been much discussion on the topic. Here’s the situation: Cook was granted one million restricted stock units after taking the CEO job. Some people incorrectly call these stock options. They aren’t the same thing but it doesn’t matter for this discussion. So, what's changed and what does it all mean for Apple investors?

Originally, Cook was to get half a million shares in August 2016 and another half a million shares in August 2021. The value of the stock would only depend upon the stock price, but either way he’d get all one million shares so long as he stayed in the CEO position. Makes sense right? Long term compensation has always been popular for executives.

Well, as the story goes, Cook wanted to tie his compensation more directly to the stock’s actual performance. But he didn’t want to do this in a way that gave him more potential upside. That would seem greedy. So he proposed that the board of directors measure Apple’s stock performance against the S&P 500 and grant him the full one million shares only if Apple performs in the top third of all companies that make up this index.

Interesting.

Some have said Steve Jobs would never do this. That may be true. Maybe it isn’t. Who cares.

Cook’s potentially taking a significant hit to his total compensation between now and 2021. He’s also tying his compensation to votes cast by Wall Street. I say this because the stock trades based on actual buying and selling of shares, which I think of as voting with your wallet. Some have said Steve Jobs would never do this. That may be true. Maybe it isn’t. Who cares. Steve was a brilliant man, and perhaps the best tech CEO that ever lived. We all wish he was still here. Regardless, Cook makes his own decisions and we should simply ask ourselves if this decision makes sense.

Apple says it is leadership by example. I agree. I don’t think Cook is tying himself to the short term whims of Wall Street. In fact it’s quite the opposite. He’s tying himself to the long term performance of Apple stock. Notice they phrase “long term”.

Cook’s stock grants will be measured against a 3-year average of Apple versus the S&P 500. Each year he’ll get a grant of stock dependent upon that rolling 3 year performance. In the end, after the vesting period is complete, Tim Cook’s stock compensation will have been significantly tied to the performance of the stock over about an 8-year period.

I don’t think Cook is tying himself to the short term whims of Wall Street. In fact it’s quite the opposite. He’s tying himself to the long term performance of Apple stock.

That’s light years on Wall Street. Most money managers can’t fathom the idea of thinking beyond the next couple of quarters. To tie your stock compensation to an 8-year period of time is not saying “I’m going to make decisions that please Wall Street”. Not even close.

Cook is wealthy. He doesn’t need the money. But still, people tend to be greedy and I applaud him for doing what he’s done. It makes sense. It probably doesn’t change much but it’s a great signal to the market that he’s committed to long term stock performance.

The only way I can see this logically being spun in an negative way is if Cook’s real plan is to leave prior to August 2016. If that happens he’d get a good chunk of stock vesting before the original planned vesting date. But I don’t believe he’s going anywhere, and I think making that argument would be a huge stretch.

Well done, Mr. Cook. This is a non-standard way to behave, and it’s a very shareholder friendly move.

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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Tim Cook's new compensation plan bets long on AAPL

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Thanks Chris for great article and the concise explanation.
I think Tim Cook will be at Apple for the long haul. From his actions over many years at Apple, he seems more a passionate man than a greedy one; the Wall Street crowd will have difficulty understanding his motives and no doubt twist them to suit their own.

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