This is the final in a series of five articles, covering the highest paid CEOs in the U.S. Number five on the list is, strictly speaking, Oracle's Larry Ellison, who made $153 million in fiscal 2012, the latest year for which figures are available. But I've already written in detail about Ellison's pay and shareholders' solid dislike of it here and here. So let's move on to the CEO who is actually #6 on the list – Tim Cook, CEO of Apple (NASDAQ:AAPL), who earned $144 million.
Tim Cook initially worked at IBM, moving to Intelligent Electronics in 1994 and then to Compaq three years later, before being recruited to Apple in 1998. Cook was promoted to COO in 2005 and succeeded Steve Jobs as CEO in August 2011.
On the day that he formally replaced Jobs, Cook received a mega-grant of one million restricted stock units (RSUs) with an initial estimated value of more than $376 million. Half of this award is due to vest in 2016 and the other half in 2021. While the lengthy vesting is a positive element, the award came under a significant amount of criticism because of the lack of any performance requirements for vesting.
However, the expectation is that this is a one-time event. Indeed, it is not expected that Cook will receive any more equity at all until after 2021, especially since the grant is now worth $527 million.
The origin of the millions
Since this huge grant has not vested, the millions of dollars Cook earned in 2012 came from the vesting of grants of RSUs from 2008 and 2010, while Cook was still COO. Some 237,500 RSUs vested during the year with a value of around $140 million. Another 125,000 RSUs from the 2010 grant are due to vest in 2014. These are currently worth $66 million, so it is safe to say that there are a few big paydays to come at Apple.
In addition to the RSUs, Cook earned a base salary of $1,357,718 and a maximum bonus of $2.8 million because the company exceeded net sales and operating income targets in 2012. Perks are non-existent and benefits were negligible.
Other executives also benefited from maximum cash bonuses, and, like Cook when he was COO, receive RSU grants every other year. 2012 was one of those years and grant values ranged from $66 million to $83 million, making executives at Apple more highly paid than 90% of CEOs.
What about the board
In contrast to the disaster boards at the other four highest paid CEOs' companies – conflicted, non-independent directors unable and unwilling to stand up to over-dominant CEOs – Apple's board is a star-studded, independent affair.
Unlike any of the other boards, there is an independent, non-executive chairman, Arthur Levinson, former CEO of Genentech. Then there is former Vice President Al Gore, former CEO of Avon Andrea Jung, former CEO of Northrop Grumman Ronald Sugar, former CEO of Gap and current CEO of J. Crew Millard Drexler, CEO of Disney Bob Iger, and former CEO and current chairman of Intuit William Campbell. That's a lot of former and current CEOs, and might make you think that it is one of the reasons executives are so well paid at Apple. In fact, a report I co-authored has unfortunately proved that this particular urban myth is not true.
Apple's pay/performance link
While there is much to admire in executive pay policy at Apple – modest base salaries, few perks and benefits, modest cash bonuses – the lack of any additional performance requirement (beyond that of stock price) for long-term stock awards is a serious problem that needs to be addressed.
To determine whether stock price alone is enough of a performance measure for these RSUs, let's look at Apple's stock price performance over Cook's tenure. In what seemed like a seamless transition between Jobs and Cook, stock price continued to increase inexorably from around $376 until the beginning of April 2012 when it dropped suddenly from $633 to $530. It then rose again over the following months to hit an all-time high of more than $700 per share. It then dropped to around $390 on two occasions during 2013 before climbing back up to its current $526.
How much of this was due to Cook's leadership, or Apple strategy in general? Some certainly, but not all, of the volatility can be attributed to good news and bad news, successful product launches and disappointing product launches.
But the most worrying issue is that even if Apple's stock price falls to $200, that RSU grant will still be worth $200 million. In this instance, will stockholders think that Cook was value for money? It is very doubtful. It is also very doubtful that they will think he is value for money if the grant is worth the same when it vests as it was when it was granted, meaning the stock price has been essentially flat over 10 years.
So, some form of additional performance measure should be retrospectively applied to this grant and grants to other executives. What should it be? Not my job; that's what the compensation committee is for – Drexler, Jung and Gore. Figure out what you want these executives to do for the shareholders you are representing and make the RSUs dependent on achieving it.