Monday, June 4, 2012

Restricted Stock and Dividend Equivalents

Yeah, about that 'Think Different' post I wrote on Tim Cook. Some other things to note, because its not as simple as it looks.

Basically, the story goes that Apple's CEO gave up $75 million in dividend income, over a period of 10 years. Now I was happy amazed to see someone voluntarily give up that much amount of money. After a while, I was also puzzled. How could he get dividends on stocks that he doesn't even own right now? 

So I went to the SEC filing. Turns out I got confused between Stock Options and Restricted Stocks (which is what Tim Cook owns). Stock Options give an employee the right to purchase stock in the future, while restricted stock already belong to the employee, but he just isn't allowed to vest it or sell it. That's my (rather) crude interpretation of the situation. 

Still, dividend equivalents are something new. From the filing below, I'm able to make out that restricted stock do not participate in the normal dividend payout, which is why they had to pass a resolution to basically say that all restricted stocks will also get a cash amount (not a dividend) equal to the dividend amount. 

Of course, some companies pay out the dividend equivalent as part of an executive's yearly pay (which is a highly dubious move, IMHO) . Apple seems to be doing the right thing in vesting the dividend equivalent along with the stock itself.

Again, Bravo TC! 



Item 5.02.    Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers (e) Compensatory Arrangements with Certain Officers.On May 24, 2012, the Compensation Committee (the "Committee") of the Board of Directors of Apple Inc. (the "Company") approved amendments to each outstanding and unvested restricted stock unit award granted by the Company to its employees (other than Timothy D. Cook, the Company's Chief Executive Officer). The amendments provide that if the Company pays an ordinary cash dividend on its common stock, each award will be credited with an amount equal to the per-share cash dividend paid by the Company, multiplied by the total number of restricted stock units subject to the award that are outstanding immediately prior to the record date for such dividend. The amounts that are credited to each award are referred to as "dividend equivalents." Any dividend equivalents credited to an award will be subject to the same vesting, payment and other terms and conditions as the unvested restricted stock units to which the dividend equivalents relate. Depending on the domicile of the employee, accumulated dividend equivalents will either be paid in cash or used to offset employee taxes due upon vesting of the restricted stock units.
The Committee determined these amendments were appropriate in light of the Company's announcement on March 19, 2012 that it intends to commence paying ordinary cash dividends of $2.65 per share to its shareholders on a quarterly basis sometime during the fourth quarter of its 2012 fiscal year. As restricted stock units are not outstanding shares of common stock and thus would not otherwise be entitled to participate in such dividends, the crediting of dividend equivalents is intended to preserve the equity-based incentives intended by the Company when the awards were granted and to treat the award holders consistently with shareholders.
At Mr. Cook's request, none of his restricted stock units will participate in dividend equivalents. Assuming a quarterly dividend of $2.65 per share over the vesting periods of his 1.125 million outstanding restricted stock units, Mr. Cook will forego approximately $75 million in dividend equivalent value.