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Tim Cook's latest promise to Apple's employees

In the recent event discussing Apple’s cash plans, Tim Cook stated that the primary objective of the stock repurchase program is to reduce dilution from the ongoing distribution of shares to Apple’s employees and executives as part of their future compensation.

The amount allocated to this is $10 billion over a three year period.

This sets up an interesting analysis. The company is saying that they will continue to pay employees with newly issued shares (in addition to wages) but that a portion of those shares will be purchased back from the market to reduce dilution.

To understand the impact, it would make sense to look back and observe how many shares were issued in this way historically and consider how much $10 billion buys.

The following chart shows the quarterly change in shares outstanding.

The absolute number of shares outstanding grew from 874.2 million in Q4 2005 to 941.6 million last quarter. That’s a net increase of 67 million shares over a six year period. The rate of growth has been accelerating. Over the last three years  40 million shares were issued.

These issuances have an effect for shareholders. They “dilute” the total shares outstanding and thus spread the earnings more thinly. You can get an instant feel for this as the EPS figure must be re-computed each quarter with a different denominator. This is a real cost.

Here is how to compute it. Last quarter there were two million shares issued at a “cost” of about $400/share. That means that shareholders lost the equivalent of $800 million (2 million x $400/share average price in Q4) of value.

Now what Apple has just promised is that they would buy back the equivalent of $833 million per quarter ($10 billion/(3 years x 4 quarters/yr)) for the next three years. Note how close this figure is to the one calculated above.

What we can also obtain is a ratio between stock-based compensation and wage-based compensation. Since we can estimate the total Apple employee wages at $3.2 billion per quarter (average R&D and SG&A over the last year), the stock compensation of $800 million amounts to a 25% bonus.

In other words, on average an employee is likely to get compensation of $X in wages and 0.25X in stock grants.

Therefore Apple’s $10 billion dollar pledge is not only a commitment to shareholders that the dilution will be eliminated. It’s also a signal to employees: for at least three years, Apple will continue to offer shares as compensation and will do so in a ratio of 1:4 of wages.

This seems like a good use of cash.

  • jcg3

    Average is relative… Tim Cook himself gets 1m RSUs. I think that is over 25% of his base salary (and totally deserved).

    • http://www.blenderking.com Dan Robbins

      Thought it was stated in the conference call that at his request, Cook’s unvested RSU’s won’t participate in the dividend… 

      • Mauto

        I took this to mean that Tim Cook’s 1M RSU grant would not participate in the program that allows unvested RSUs to accrue dividends for payment upon vesting.

        I would expect the 1M RSU grant becomes ordinary shares upon vesting, and then would be eligible to receive dividends as would any other share.

    • http://www.asymco.com Horace Dediu

      Right, my figures are for an “average employee”. Executive compensation ratio will skew the median lower.

      • Fake Tim Cook

        The average Apple employee makes $46,000.
        Apple’s standard employee stock purchase program allows employees to use up to 10% of their salary to purchase AAPL stock at a 15% discount.  Since employees are paying for 85% of the shares from their salary, the actual stock bonus equals about 2% of their salary.

        More realistically the average Apple employee will be compensated at 1:40
        Meanwhile the average Apple executive will be compensated at 40:1

        Also most Apple employees(retail, living paycheck to paycheck) can’t afford to invest 10% of their income.

  • Secular_Investor

    As a shareholder I’m in favour of rewarding Apple employees well with shares.

    As long as they are locked in for a period it gives them an incentive stake in the company.

    How long is average lock-in period?

    • http://www.asymco.com Horace Dediu

      I don’t know what it is for Apple, but four years seems to be a common vesting period.

      • perfy

        4 years, every 6 months.

    • Mauto

      From the Oct 2011 Annual report: “In general, RSUs granted under the 2003 Plan vest over two to four years, based on continued employment and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis.”

    • Secular Invyest

      Thanks everyone. 4 years lock-in is the consensus.

      $10 billion over 3 years to prevent dilution works out about $3.3 billion a year. That’s a really good deal for shareholders considering the growth the Apple staff are generating.

  • Mauto

    Another interesting element is that employees will also receive the dividend on unvested RSUs when they vest (assuming I correctly understood Peter yesterday). Thus, an employee who receives a 100 RSU grant will have 100 * $2.65 per quarter put aside until those RSUs vest at which time they receive the funds. Another incentive for employees to remain with the company. Tim Cook declined this for his 1M RSU grant.

    I am very interested in seeing the SEC filing describing this change.

  • http://twitter.com/qka qka

    How do they have negative shares issued for employee compensation?

    Are those shares issued to employees who leave the company before they are vested? Something else?

  • http://twitter.com/JimDis Jim D

    The press release states that the buybacks will compensate dilution from “future employee equity grants and employee stock purchase programs” which implies that employees need to pay Apple for some of the newly issued stock, which would mean that the cost is less than 10bn. Do we know that all the stocks that have been issued in previous years are simply given away to employees or do the employees actually need to purchase some of these stocks at a discount to market or through some sort of matching program (i.e buy one newly issued stock at market price and employer matches with one newly issued free stock)? 

  • LeCorsaire

    I like the idea of stock buyback, but I don’t like the new dividend, because a part of the instrinsic value was destroyed by tax in the process.   Horace could you do an analysis on how much value got “siphoned” out by the issue of the new dividend?  Thnx! 

    • Rhmznj

      Taxes!  The price of civilization is taxes. The public common must be maintained if we are to have a civilized society. For all those who object to taxes consider how it might be if there were no roads, bridges, airports or public parks. Or schools, firemen, police or libraries…. the list is almost endless and so is the carping of those who most benefit from the benefits taxes provide. I am sure that even our ancient forebears provided some resources for the common good of their clans. Let’s have a civilized discussion of how to fairly apply tax rates so that those who benefit the most individually from a civilized society will contribute the most individually.

      • neutrino23

        Amen. Some people complain that the San Francisco Bay Area is not business friendly because taxes are too high. But they don’t mention the multiple international airports, world class universities, world class hospitals, museums, libraries, highways, clean water, clean air (such as it is), police forces, fire departments, court system, and on and on supported wholey or in part by taxes.

      • equanimous

        Agreed. One cannot argue that dividends are not a curious case of double taxation, however. 

      • http://twitter.com/ChristianPeel Christian Peel

        The double taxation works to discourage returning dividends, and works to encourage investing that money in growth.   I guess the govt is perfectly aware of what it’s doing here.

      • equanimous

        Just because the Govt. is ‘aware’ doesn’t mean it is right. Assuming your logic of ‘money needs to be invested’ the implicit assumption is that the company knows better than the shareholders where the capital should be invested. I’m not arguing one way or another on that point. My only point is, let the shareholders and the company executives decide that. Taxing dividends is asinine.

      • http://twitter.com/ChristianPeel Christian Peel

        Here’s Horace’s take on the subject:

        http://5by5.tv/criticalpath/3

      • Jon

        The items you mention are paid primarily by state and local taxes, some federal (primarily via federal use taxes like gas taxes, airport ticket fees, etc.). The biggest problem is not the fact of paying taxes, but, how much is enough, and should they be paid to the federal government, or to state and local governments?  Having the federal government collect taxes via taxes on income (wages and dividends) and capital gains, etc., to then re-distribute back to the states and localities in the form of grants, etc., is simply inefficient, and prone to political cronyism and influence.  Big urban areas benefit, smaller cities somewhat less, suburban and rural areas the least so.  

        San Franciscans should pay for the lifestyle they desire, and not require contributions from folks from Wyoming, Illinois, Connecticut, or Lousiana.  People seem to put too little stock or understanding in the concept of federalism and the division of responsibilities between the federal government, state government, and local governments.  Our current federal government does not really understand or buy into that concept, either.  The USA is a large, highly heterogenous society with many points of view.  Concepts like federalism are what have historically allowed us to fashion together a society that works that doesn’t constantly devolve into war. 

      • poisonkitchen

        This is terribly off-topic but you’ve got it backwards, urban regions (particularly on the coasts) are net contributors to the tax-base, rural regions are net beneficiaries of government programs.

    • http://www.asymco.com Horace Dediu

      It varies depending on what each shareholder’s tax rate is.

  • http://twitter.com/wakemp Bill Kempthorne

    I’d take a bit of exception to the “In other words, on average an employee is likely to get compensation of $X in wages and 0.25X in stock grants” … Apple’s Employee Stock Purchase plan is based on employees directing a portion of their salary to purchase units based on a quarterly stock price rather than outright grant. I expect that would change the calculation a bit. 

    • Z Kariv

      Do you mean change in distribution Vs. change in calculation?

    • equanimous

      I don’t think ESPP is what is being referred to here

    • http://www.asymco.com Horace Dediu

      Stock purchase plans are different from stock grants or option plans. SPP does not dilute existing shareholders.

  • berult

    Obviously a good use of cash for ‘post-China syndrome’ and ‘investor expectation’ management, …but certainly not optimal by any legacy stretch of imagination.

    It boils down to a ‘feel-good-about-oneself’, guilt-ridden couch operation. I would’ve expected from Tim Cook a shrink-free, imagination-driven, cash-on-hand take on up-and-coming ‘smarter’ generations.

    • http://twitter.com/handleym99 Maynard Handley

      So what do you recommend?
      I think it’s useful, in this situation, to think back over the history of Apple. Remember the 1990s? Remember Taligent? PowerTalk? OpenDoc? Quickdraw GX? Pippin? As Jobs said, focus means saying no.It would be very easy for Apple to follow the path of so many other tech companies (including late 1980s Apple) — dramatically ramp up hiring, then find something for all those employees to do. But we have experience now, from enough companies (including eg MS in its glory days, or Google, in its glory days) to see the problems with this — mass hiring followed by mass new projects mostly gives us Orkut and Google Buzz, or thirteen different MS APIs for talking to databases. Apple is doing something very different, but it has to be admitted that so far it is working. They’re willing to accept some slowness in how fast they roll out new features (new Mac file system, a new language — Apple’s answer to C# — to replace Objective C, etc) in return for not making mistakes. I’m guessing what they have is some sort of system whereby upper management (perhaps even Tim Cook) has to sign off on all large new features, rather than allowing empire building. So what we get is one big idea at a time (iPhone, iPad, Apple TV, or in SW a suite of features for the next OS) all of which get the full company behind them. Compare with what happens in so many other companies where you get something like Kin gets a huge amount of money poured into it, then at the last minute the CEO seems to decide it no longer matches strategy. Apple’s success in HW in this way is most obvious — the only “failures” one can point to in the recent past are the Apple Bluetooth headset (which I imagine was a failure given that it was cancelled) and the iPod nano lanyard headset, which I thought was a fantastic idea but which was likewise cancelled. But in software the same seems true — it’s hard to think of a recent Apple software initiative that was given a lot of developer evangelism but went nowhere. Maybe iAd — but I think right from the start that was a gamble that Apple knew was a gamble — let’s try it and see if it works? To me the stark difference between the 1990s software discard stack and today’s nonexistent software discard stack says all one needs to know about how new Apple operates. And let’s not forget that there is a larger dynamic here. If Apple is no longer throwing out random APIs it will likely abandon in two years, you as a developer can have some confidence in spending time to fully support a new API. Not only will Apple not abandon it — at least not immediately, not until, in ten years they have a much better idea of how to do things — they will also (unlike MS or Google) work really hard to ensure that the new API appears as soon as possible across the vast bulk of the iOS or Mac HW.

      • berult

        Eloquent. I concur on the whole with the rationale.

        I recommend a cash-on-hand statement of faith, a bold one, a Jobsian one, a seamingly borderline irrational …fully imaginative wager on future generations.

      • berult

        …seemingly…

      • berult

        …seemingly…

  • gbonzo

    Are you gonna bless us with your fiscal Q2 estimates anytime soon, Horace?

  • http://wmilliken.livejournal.com/ Walter Milliken

    I think the most interesting thing about the announcement is that the stock buyback is specifically described as an anti-dilution measure, rather than as a means of maintaining/boosting stock price, which seems to be what a lot of the analysts and institutional holders were agitating for, and seems to be a common theme in a lot of corporate stock buybacks. It doesn’t seem like Tim Cook is catering to Wall Street here, just because they’re a squeaky wheel. And the anti-dilution buybacks don’t seem to be the usual attempt to time the company’s own stock price, since it sounds like they’re going to be driven by the issuance of incentive stock, not by when the management thinks the stock is cheap. Simple, easy to understand, and not speculating on their own stock — sounds good to me.

    I would paraphrase my overall take-away from the announcement as “We have too much cash and cash flow, and we can’t make better use of all of it ourselves because we’ve already been expanding as fast as we know how, and we see it as less wasteful to return it to the shareholders than simply hold onto it.”

    This seems to be in stark contrast to many tech companies that have burned cash in R&D adventures that have ultimately returned nothing, or overpriced acquisitions that attempt to buy into new markets but often fail to integrate well. Apple seems to be staying with their rather narrow R&D focus and slow, deliberate expansion into new markets, rather than trying to do “throw at the wall” research and wholesale acquisition just because they have a lot of cash.

    I’ve seen some commentary bemoaning this announcement as Apple going the way of ordinary companies, and losing the “Way of Jobs”. I can’t see this — most large-company CEOs sitting on this much cash seem to see it as a mandate to go on an empire-building buying spree. Tim Cook is doing no such thing here. And just because a lot of mundane companies pay dividends, doesn’t mean this isn’t a good idea. I don’t think Apple management needs to do everything differently than everyone else — just do things sensibly. Which seems to be the case here. (Okay, for big corporate management, sensible *is* different, I suppose.)

    • Studentrights

      What’s more interesting is that despite the dividend and stock buyback, Apple cash holding will continue to increase, not decrease. Clear Apple has another objective for their cash as they continue to grow their warchest.

      Has Horace projects $145 billion by Q4 2012.

      Apple’s dividend and share re-purchase plan: the impact on cash growth
      http://www.asymco.com/2012/03/19/apples-dividend-and-share-re-purchase-plan-the-impact-on-cash-growth/

      • http://wmilliken.livejournal.com/ Walter Milliken

        I think this isn’t quite the intent, rather, if the dividend were much larger, they’d have to use non-US cash flow to fund it, which has an immediate negative return around 30 percent due to US tax law. With the dividend in place, I believe the vast majority of their cash growth will be in their non-US accounts.while the US stash will grow very slowly now.

  • Collins Rudzuna

    Is it safe to assume that because Apple has a huge cash pile and has decided that a cash buy back is the best use for some of it they have run out of ideas on how to translate it into new products? I would have assumed that a lot of their money would go into R&D and expansion etc. Is this a signal that they will now fly an ordinary pitch from now on?

    • Collins

       correction: SHARE buy back

    • http://wmilliken.livejournal.com/ Walter Milliken

      This concerns my point below about R&D adventures. The short answer is no, they don’t see a way to usefully employ this money for R&D, and they haven’t for years now — this isn’t new.They actually spend a lot of money on R&D (and retail expansion), but spending more won’t necessarily let them grow any faster. They just happen to generate money from their existing R&D so efficiently that they generate this huge cash flow.

      I was in R&D for 30+ years, and I can assure you that only a small fraction of R&D spending is actually productive — but it’s hard to tell what falls into that category up front. More R&D spending doesn’t automatically mean more growth. Apple is remarkable in that they seem to manage to spend R&D money on things that mostly have a good return. My guess is that Apple is growing about as fast as they know how to do so productively, trying to grow faster would be counterproductive. Realizing this is one of the things that makes Apple unusual in the corporate world.

    • aardman

      Like anything else there is diminishing returns in R&D spending.  Apple literally has billions more money than they know how to use wisely.  They have a hundred billion dollars, that’s 11 of the US Navy’s most modern aircraft carrier.  Apple, literally can write a check to replace the US Navy’s entire compliment (11) of aircraft carriers!  No company can come with ways to spend 100 Bil and not waste it in the process.

      Apple’s dilemma is not that they’ve run out of ideas, it’s that they’re making an unbelievable amount of money and piling up an embarrassing mountain of cash.

  • Cash-Hoarder

    Presumably they are prepared to by the “anti-dilution” amount of stock at any price to “comp employees”?  Even at an overvalued price if happens so in the next 3 years?  They didn’t say. How smart is that?

    P.s. if they were smart (or not your typical self-serving bunch), they would have retired gobs of stock on behalf of shareholders at an advantageous price, which simple math indicates would be beneficial even after paying the repatriation prices.

    Barbarians at the gate anyone?

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  • demodave

    “Therefore Apple’s $10 billion dollar pledge is not only a commitment to shareholders that the dilution will be eliminated. It’s also a signal to employees: for at least three years, Apple will continue to offer shares as compensation and will do so in a ratio of 1:4 of wages.

    This seems like a good use of cash.”

    It also seems like a tremendously strong commitment to employees, which I think (beyond the financials, which are of course important) I think is your main point. Not only does Apple plan to do well for its investors (dividend, and to a lesser degree the buy-back), but it also plans to do well by its employees (a strong stock bonus structure, which furthe invents its employees to do well by the company whose shares they now own).

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  • Travis

    I don;t know about buybacks, seems like it rewards people who get out the investment. I really want to research this more. Thanks for the column :)
    BTW- here’s another column evaluating the bull bear case for Apple.http://www.richmakesyourich.com/2012/03/why-doug-kass-is-wrong-about-apple.htmlhope it helps!

  • MikeGraf

    Sounds like a boondoggle to me. Why not just give everyone a 25% raise, tell them they can buy their own shares if they like and then cut out the expense of running a share buy back and an employee stock program?

    EDIT: Another commenter said why: The employees have about a 4 year lock in where they cannot sell the stock and have some incentive to grow the company for the next 4 years.. This is very different than giving a raise and telling them to buy stock on their own…

  • http://www.bscdesigner.com/ Aleksey Savkin

    I did some research about reward and compensation KPIs. According to this research four levels of reward practices can be defined.

    On the 1st level a reward is linked to a performance KPI of an individual.

    On the 2nd level a reward is linked to important business outcomes (not just to an individual’s performance). This is logically supposed to work better, but in practice it is not a long term solution to a motivational problem.

    Most companies are on the 3rd level where a reward is paid in a form of stocks and investments in a retention plan. For example, Apple today is definitely at that level.

    There is a 4th level, where a company doesn’t pay a reward at all. That’s what Henry Mintzberg was writing about in the Wall Street Journal back in 2009.

    The conclusion of my research is that:

    – A company should choose a reward scheme (be on one of the four levels) according to its current business objectives;

    – It is important to understand to change the reward type when the business objectives change

    Read more: http://www.bscdesigner.com/reward-kpi-best-practices.htm