Not long after the death of Steve Jobs had faded from the headlines, stock grants to senior executives at Apple generated coverage in many news reports (see, for example, Apple Awards Senior Execs $60 Million Each, Computerworld, Nov. 7). Related commentary and opinion about the Apple grants cropped up in blogs (e.g. Apple's Stock Awards: Well, At Least They're Not Backdating Options Again by Tim Worstall, Forbes, Nov. 8). To sum up the awards: six senior Apple executives each received a grant of 150,000 restricted stock units, half of which vest in June 2013 and half in March 2016; the company made a separate grant of 100,000 RSUs to another VP, apparently as a retention method.
Indeed, executive retention seems to be the recurring theme here. Looking at the executives' related Form 4 filings (required within two days of grant under Section 16 rules), we see that the grants do not have any performance-vesting features. In fact, the vesting of these RSUs seems to be based entirely on continued work at the company and not on any type of performance goal, such as total shareholder return, revenue, or earnings per share. Nowadays, under scrutiny from shareholders and the media, many companies would not dream of making big equity awards without performance-vesting features for at least part of each grant. But Apple seems to have other priorities now. As noted in the Forbes blog, "the death of Steve Jobs has clearly meant that securing and solidifying the management team is a good idea. They're locked in for years in order to actually get their hands on these shares, to be able to sell them."
By contrast, performance-vesting features do factor heavily in the stock option award Hewlett-Packard made to its new CEO Meg Whitman. Options with performance features are not that common, though they have occurred upon the hiring of other new CEOs in recent years. Ms. Whitman's grant received extensive media coverage (e.g. HP CEO Meg Whitman's Salary: $1, CNN Money, Sept. 30). This is understandable, given HP's recent history of controversy involving CEOs and Ms. Whitman's own recent history at eBay.
At HP, Ms. Whitman received a grant of nonqualified stock options for 1.9 million shares. According to the Form 8-K announcing the arrangements for both the former and the new CEO, the options have an eight-year term, and almost all will vest only if the company's stock price enjoys a 40% increase during her time of employment:
- 100,000 shares vest annually over three years
- 800,000 options vest after one year if the stock price exceeds by 120% the exercise price of the options for at least 20 consecutive trading days
- 800,000 options vest after two years if the stock price exceeds by 140% the exercise price of the option for at least 20 consecutive trading days
For more about performance share grants, including survey data about company practices, see the section Restricted Stock: Performance Shares at myStockOptions.com.
Bruce,
Excellent juxtaposition of two different strategies for equity compensation. I personally would have liked to have seen both companies use a more balanced approach of using multiple instruments, but can understand their motivation for the plans designed.
The truly long-term nature of the Apple awards is unique. I believe it can be justified given their current position. Sometimes retention of people who have been proven to be great is more important than finding a way to motivate the motivated.
I would caution companies when they wish to use stock price as a sole performance goal. With markets being historically volatile over the past decade, stock prices often move faster than expected with less link to individual company performance than can be justified. Strong upward movement in the market that us caused by other factors may result in HP stock options vesting far sooner than planned or is prudent. This has happened to other companies multiple times in the past.
While these types of awards look great when initially rolled out, they can be attacked when they do, or do not, vest in the future. It would have been nice to have seen a goals that included metrics based on explicit corporate performance combined Relative Total Shareholder Return and/or Stock Price. That being said performance-based options are a fairly unique solution that many companies avoid due to their nature to never fall into the money.
I am very glad to see companies moving away from the follow-the-leader approach that plagued equity compensation for so long. Perhaps Say on Pay is having more impact that some thought it would.
Dan Walter
President and CEO
Performensation
415-625-3406
dwalter@performensation.com
Posted by: Dan Walter | 02 December 2011 at 11:21 AM