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Apple ties CEO's stock rewards to Wall Street

Tim Cook could forfeit $2.9M in shares this year, $135M over the next nine if Apple's stock performance slumps

June 24, 2013 06:06 AM ET

Computerworld - 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.

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