Apple's board of directors on Friday tied a massive stock grant given to CEO Tim Cook in 2011 to the company's performance, a move that could cost the executive $135 million over the next nine years at the current share price.
The new plan could have a more immediate impact: Come August, it's likely Cook will forfeit stock worth about $2.9 million at Friday's price.
Apple detailed the changes in a filing with the U.S. Securities & Exchange Commission (SEC) that alters an earlier deal under which Cook was to receive 500,000 "restricted stock units" (RSUs) in August 2016, and another 500,000 RSUs in August 2021. Cook only needed to be employed by Apple on those dates to receive the awards.
Restricted share units are not awarded at the time of the grant -- in Cook's case, in August 2011 when he was promoted to CEO position just weeks before the death of co-founder Steve Jobs -- but instead are given when they vest. The shares will be worth their then-current price.
At Cook's request, the RSUs will instead vest in allotments each August through 2021, with 80% of them, or 800,000 RSUs, placed under the new performance criteria.
The criteria Apple will use is called "total shareholder return" (TSR), a combination of share price appreciation and dividends. If Apple is within the top third of the S&P 500 in TSR, Cook will receive all the RSUs scheduled to vest that year. However, if Apple's TSR is in the middle or bottom third, he will receive only three-fourths or one-half, respectively, of the at-risk RSUs.
Worst case, if Apple appears in the bottom third in each of the years through 2021, Cook would forfeit 327,123 shares, which at Friday's close price were valued at $135.3 million.
Although less than 10% of the 80,000 shares slated to vest this August will be at risk under the new plan, it seems likely that Cook will take a hit: As of Friday, Apple's total return was -37% for the period that started Aug. 25, 2012. If that is unchanged by Aug. 24, 2013, and Apple's total return is in the bottom third of the S&P 500 -- very probable, as the S&P 500's average total return from Aug. 25, 2012 to last Friday was +15% -- Cook will forfeit 7,123 shares.
As of Friday, that represented a little over $2.9 million.
But the change also had an immediate upside for Cook: The board vested 80,000 of his RSUs last week, making him $33 million richer.
In the filing, Apple's board said Cook was "leading by example" in the new push to link performance with stock awards given to the company's top executives. "[Cook] asked the Committee to apply a performance metric to his outstanding 2011 CEO equity award as well as any potential future awards," the Form 8-K stated.
But the board also acknowledged that pressure had come from outside the company. "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 in the past," the filing read.
When Cook's huge stock grant was announced two years ago it was worth $383 million at the then-current share price. At Friday's close price, the 1 million shares would have been valued at $413.5 million.
Apple has made other changes recently related to its retention practice of issuing large numbers of shares to executives. In January, the firm implemented stock ownership guidelines for Cook and other top-tier executives, requiring them for the first time to hold stock equal to multiples of their base salaries. In Cook's case, he must retain shares equal in value to 10 times his salary, which for 2012 was $1.4 billion.
Other Apple executives will be impacted by a new emphasis on performance, too, although the company did not spell out those details. Last year, four of Cook's subordinates -- then-CFO Peter Oppenheimer, lead counsel Bruce Sewell, head of operations Jeffrey Williams, and Bob Mansfield, who returned from retirement to run the new Technologies division -- received RSU awards worth between $66.2 million and $83.1 million that they can collect if they remain with the company through March 2016.
Oppenheimer left Apple earlier this year.
The Cupertino, Calif. company's stock has been hit hard, falling 41% from a peak of $702 per share last September. In February, a third of Apple's shareholders declined to back the company's pay scheme, an increase of dissatisfaction from 2012, when just 17% did not support that year's executive pay.
During an April earnings call with Wall Street, Cook sympathized with investors angry at the plunging price. "The decline in Apple's stock price over the last couple of quarters has been very frustrating to all of us," Cook said then.
Under the new vesting plan, that frustration could get very personal.
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is [email protected].