Apple Steve Cook Highest Executive in 2011?

Apparently, Tim Cook could be the highest paid person in 2011. The Associated Press is reporting that Tim Cook could stand to receive $378 million in compensation. It should be pointed out that $376 million of this is in the form of restricted stock. Companies give employees restricted stock in order to reward long term productivity from employees. The shares usually can’t be sold for a number of years. The earliest Mr. Cook can sell these shares is August 2016. Not only does he have to wait five years to sell these shares but he can only sell half of the shares receives at that time. He will be able to sell the other half in August 2021. In essence, the idea of restricted stock is to incentivize employees (usually executives) into creating shareholder wealth. If employees are highly productive and make decisions that create wealth for the company it will usually be reflected in the share price. I say usually only because in the short term the market can gyrate for various reasons but the long run is a good measure of a company’s true value. Profits are created by fixing problems.

People complained that executives were getting paid too much of a salary so then corporations began giving executives (and regular employees) options. Even to this day people complain when executives receive large amounts of compensation because of stock options. If you look at Tim Cook 99.4% of his compensation will be based on how well Apple stock does. True his options today are worth $376 million however if Apple takes an iTumble in the market Cook could stand to lose lots of money depending on the stock price in 2016. In 2016, when Cook has the right to buy the stock he will pay ordinary income of that money. Assuming he is in the highest tax bracket, tax laws don’t change, and Apple stock is around $500 per share cook would pay around $78 million in taxes when he has the right to exercise (buy the stock). Not only will Cook pay ordinary income but also pays capital gains when he ultimately sells the stock.

Executive compensation is a hot topic. Often people who have never paid or been a CEO seem to know how much a CEO is worth. What people seem to fail to realize is how much of net worth any executive has tied up in stock options. True the executives get a salary but often used to pay their taxes from exercising options. If anything these executives have much more to lose than the average employee so much of their net worth relies upon how well the company does.

Hopefully, Tim Cook will lead Apple to create insanely great products that satisfy millions of people. With Steve Jobs now gone we can now test to see how “innovative” Jobs really was. If Cook is successful the value of his stock options will rise. Of course he won’t be able to cash out his stock options until 2016.