Apple (NASDAQ:AAPL) stockholders, rejoice!
On Friday, Apple's board of directors amended CEO Tim Cook's equity bonus compensation package to now be dependent on the company's stock performance. Before the revision, Tim Cook received restricted stock units after a specified period of time, regardless of how the Apple's stock performed relative to its S&P 500's constituents.
The takeaway here is that Apple investors should consider this to be the dawn of a new era for how it compensates executives. Additionally, it's officially in Cook's best interest for Apple's stock to outperform.
The rule of thirds
Cook's original 1 million restricted stock units will still vest over a 10-year period, but now 800,000 units will be directly tied to Apple's stock performance. Of those 800,000 units, a maximum of 80,000 units can be awarded to Cook each year. For Cook to earn the entire 80,000 units allotted yearly, Apple's stock performance must rank in the in the top third of all S&P 500 companies. Ultimately, Apple's stock performance will be measured on a three-year rolling time horizon based on previous vesting dates, but in the beginning, performance will be measured on either one- or two-year time horizons until August 2016.
If Apple's stock performance ranks in the middle-third compared to its S&P 500 constituents during a specified period, Cook loses 25% of his yearly award. For Cook to lose 50% of his award, Apple's stock performance must rank in the lower-third compared to its peers.
Not only did Tim Cook request this change in compensation, he refused to take an upside performance multiplier, which Apple's board of directors believes should be part of a performance-based compensation package. With this move, Cook has better aligned his own interests with that of individual shareholders, which do not have the opportunity to be gifted additional shares if Apple's stock outperforms. It's becoming increasingly clear that Apple is transforming itself into a more shareholder-centric company.
Fool contributor Steve Heller owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.