Apple's New Pay Plan: Good or Bad?

Tim Cook speaks at WWDC 2013 in San Francisco.
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Tim Cook speaks at WWDC 2013 in San Francisco.

Another shareholder-friendly move from Tim Cook and the board raises the question: Is this new tack better, or does it signal a company too concerned with appearances?

Apple's latest move involves executive pay. On Friday after the markets closed, the tech giant quietly filed documents that describe a notable shift in the way senior vice presidents, and Cook himself, will get stock awards.

They used to get a big bundle of stock just for sticking around. Now the award size will depend on how well shareholders have fared over a three-year period. If Apple's total shareholder return is in the top third of the S&P 500, they'll get more. If it's in the bottom third, they'll get less. (The exception is Tim Cook; he won't receive more stock if the shares do well, only less if they do poorly.)


How big a financial impact is this likely to have on the executives? Not enormous. The last two-year stock award Apple executives received was worth just over $66 million. The stock price has fallen since then. But look at it this way: Before, maybe Apple's top execs could expect to pull in about $50 million in stock every two years at today's prices. Now they'll probably get closer to $38 million worth if Apple's shares and dividend are doing poorly relative to the rest of the S&P 500, $66 million if they're doing well.

Those shares come on top of cash salary and bonus that can be as high as $2.4 million per year ($800,000 in salary, $1.6 million in bonus) if executives do a great job.

Undoubtedly, Apple's executive pay structure has changed over the past two years since Tim Cook took over and Steve Jobs passed away. Apparently Jobs wasn't a big fan of cash compensation. Senior executives had below-average cash salaries and bonuses for a company Apple's size, but sizeable stock awards. The stock awards were structured to keep management thinking about the long term; no annual grants, no stock options that were valuable only if the shares got a big pop from when they were granted.

(Read More: One Bad Apple: Tech Earnings to Shrink, and Apple's to Blame)

Does the new structure change that? Somewhat. Apple executives now get bigger cash salaries and bonuses. But the overwhelming majority of executive pay -- at today's stock price, more than 85 percent, by my count -- is still stock.

What about comparing Apple's shareholder return to other S&P 500 companies? Given the circumstances, it doesn't seem very likely to alter executive behavior much. Consider that Apple's stock isn't trading at a historically high multiple right now, and its dividend yield is healthy at just under 3 percent. It shouldn't take a lot of excitement for Apple to stay out of the bottom third of the S&P 500's total shareholder returns.

The one person whose compensation has shifted the most with these changes? Tim Cook's. Jobs clearly wanted Cook leading Apple for the long haul; under his guidance, the board awarded Cook 1 million shares, half of which would mature after five years, the other half after 10.

Given the dive Apple's stock has taken over the last 10 months, one can see why Cook might have pushed the board to change his arrangement. Shareholders are nervous about the performance of Apple's shares, and under the old structure the CEO probably seemed too distant from the impact. This way, more than $135 million worth of Cook's shares (using today's prices) are at risk.


Oh, and was Jobs himself known to change his mind when it came to compensation? Sure. Back in 2000, when he agreed to sign back on as permanent CEO, he let the board gift him with a Gulfstream V jet. Later, the news got out that during Jobs's tenure, he and other Apple executives received stock options that were backdated in a way that made them more valuable, but they weren't correctly accounted for.

Eventually Silicon Valley firms got in hot water over backdated options, and many (including Apple) abandoned stock options in favor of restricted stock units, or RSUs. Jobs stopped taking stock grants all together, and never got another big gift from the board.

Why? Maybe he felt he had enough money. But maybe -- just maybe -- he was also aware of appearances.


email: tech@cnbc.com

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