Earlier this summer, Apple announced that CEO Tim Cook’s previously granted RSU for 1 million shares will be modified to vest contingent on relative TSR–per his own request.  In today’s blog entry, I take a look at this development. 

The Modification

Cook’s award was granted in 2011 and originally vested as to 500,000 shares in August 2016 and another 500,000 shares in August 2021. I’m sure you can guess what I thought of the original award, based on my prior entries covering Apple and mega grants (“Steve Jobs’ Affinity for Mega Grants,” April 28, 2009, and “And Another Thing,” May 5, 2009).

As modified, 100,000 shares still vest in August 2016 and 2021, regardless of performance. The remaining shares vests in increments of 80,000 per year, from 2012 to 2021, with the vesting in years 2014 to 2021 subject to a relative TSR goal (a small portion of the shares vesting in 2013 is also subject to a relative TSR goal).  The TSR goal is applicable to 50% of each 80,000-share vesting tranche–so 40,000 shares vest every year regardless of Apple’s TSR and another 40,000 shares vest if specified TSR thresholds are achieved.

Why Do This?

What’s most interesting about this story is that the award was modified at the request of Cook.  Past examples of companies modifying awards to vest contingent on performance conditions have been executed under threat of a failed Say-on-Pay or stock plan proposal or in response to a failed Say-on-Pay vote (“Eleven and Counting,” May 3, 2011).  So why would Cook voluntary ask for his award to be modified?  The stated reason (Apples’ Form 8-K, June 21, 2013) is that Apple is going to be granting performance awards to executives in the future and Cook wants to lead by example.  Which could be true, but I’m a skeptic, especially when it comes to grants of stock currently worth close to $500 million. So I wondered, was the real reason:

• To demonstrate confidence in Apple’s products and performance
• To make other CEOs look bad
• Because Cook is worried he won’t perform well if not properly motivated
• Because Cook really wants his personal wealth to be better aligned with Apple’s shareholders’ wealth

After gestating on this question for a while, my suspicion is that it was a preemptive strike.  In the 8-K announcing the change, Apple says:

“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.”

I think that Cook saw awards held by other CEO’s modified in response to shareholder pressure and thought it might be smart to get out ahead of any demands for the same thing from Apple’s shareholders.  This way, he has more control over the modifications and was able to ensure that over 50% of the award still vests based solely on the passage of time.

More on Say-on-Pay and Performance Awards

Tune in tomorrow for the NASPP’s webcast “Performance Equity Design in Light of Say-on-Pay,” which will take a look at the pressure to grant performance awards that has resulted from Say-on-Pay votes and how this is changing long-term incentive programs.

– Barbara