updated 06:45 pm EST, Thu February 28, 2013
Change may have come from persuasion by Calpers
[Updated with details, stock grants for BoD] Despite recommending (and obtaining) a "no" vote on a similar measure, Apple has updated its bylaws and now requires executive officers to hold at least three times their annual salary in AAPL stock, reports the Wall Street Journal. The rule adopted by Apple has significant differences from the proposal put forth at Apple's annual shareholder meeting, but embraces the same principle -- that executives (and in this case non-executive directors as well) need to be personally invested in the companies they manage.
The change in governance is likely to have come about through persuasion by institutional investors, specifically the California Public Employees Retirement System (known as Calpers) -- the largest institutional investor in the country. Calpers met with Apple officials in advance of the annual shareholder meeting, presumably to lobby for some variation on the concept of mandating executives to hold stock -- a policy the institution views as "a standard good practice" and "part of our conversation with all companies we engage," said Calpers spokesperson Anne Simpson.
The proposal voted down at the meeting was more draconian, requiring executives to hold a third of their entire equity pay (not just salary) in stock until their retirement, a requirement Apple felt was "onerous" and recommended voting against at the meeting. The proposal was defeated, though board-governance advocates are likely to be satisfied with Apple's change in policy. The Calpers spokesperson hinted that more changes would be coming to Apple in terms of executive pay.
The iPhone maker has traditionally paid very low annual salaries compared to other corporations, and instead periodically awards stock or stock options (the option to buy stock at reduced rates) to executives -- leading to inaccurate stories of Apple leaders making many millions of dollars, often without clarifying that stock bonuses are only theoretical amounts based on the current stock price, and are often not eligible for redemption until a number of years down the road and beset with other conditions. For example, many media outlets claimed that CEO Tim Cook "made" $378 million in 2011, his first full year as CEO. In fact, nothing of the kind happened.
Cook was given a total of a million restricted stock units (RSUs) that vest on his fifth and tenth anniversaries as CEO of the company -- meaning the first half wouldn't be eligible for redemption until 2015, and would be subject to whatever the price of the stock is at the time. The $378 million figure was based on what Cook would have grossed if he could have cashed in all his future stock awards on the day he got them. Due to stock market fluctuations, those RSUs are currently worth less now than they were when they were awarded -- Cook's current and future holdings have lost some $300 million in value from AAPL's high of $705 per share.
To be sure, the stock will result in Cook ultimately receiving millions of dollars in 2015 and again in 2020 -- presuming he is still CEO then, as the options are tied to his continued employment -- but provide long-term incentive to keep the company healthy and prosperous, and are not (as media outlets would have it) a huge annual giveaway of cash. In fact, Cook's annual salary is set at $1.4 million, up from the $900,000 he earned in 2010. Cook, like other executives, also receives some bonuses and other incentives -- making his true annual compensation package around $4 million per year. Even adding in another $10 million in amortized stock compensation, Cook only managed to rank 107th on Forbes' list of top CEO pay for 2012.
The new requirement that executives hold three times their base salary in stock went into effect on February 6, ahead of the annual meeting. The new rules also require non-employee directors of the company to hold five times their $50,000 annual retainer in AAPL, and require Cook himself to hold 10 times his base salary in Apple stock. At the end of 2012, Cook's AAPL holdings were estimated at being worth $8.3 million.
[U] Apple has filed documents with the Securities and Exchange Commission noting that all directors on Apple's board, with the exception of CEO Tim Cook, have received 562 Restricted Stock Units (RSUs), worth approximately $232,000 as part of an automatic grant program to keep them in compliance with the corporate charter. The shares will vest on February 1, 2014. The new RSU, given to all the non-employee directors, keeps them in compliance with the new requirement of holding five times their retainer salary irrespective of any AAPL stock they might already hold.