may be one of the hippest companies around, but its management apparently hasn't realized that stock options are out of fashion.
In a proxy filing on Tuesday, the company asked shareholders to approve a tripling of the number of shares it has available as awards to executives and employees in its stock options plan. If approved by shareholders, the move would push the company's options-related dilution above 15%, a critical threshold for many institutional investors.
In laying out its case for the increase in the filing, the company touted its recent success with its popular iPod music players, which has helped boost its financial revenue and its stock price.
"The board believes the company's recent success is due to its highly talented employee base and that future success depends on the ability to attract and retain high caliber employees," the company said in its proxy statement. "The ability to grant equity awards is a necessary and powerful recruiting and retention tool for the company to obtain the quality employees it needs to move its business forward."
Despite the company's performance of late, Apple may have a hard time getting the proposal past shareholders. The company already showed two years ago that it was out of step with shareholders on the issue. Although a majority of investors then passed a proposal that urged the company to expense options, it ignored their request.
Just how much options are costing shareholders has become an urgent and timely issue. Accounting regulators have
mandated that public companies begin showing the costs of their options plans in their income statements beginning later this year. For Apple and other heavy users of options, the rule will mean a sizable hit to reported earnings, a development that will inflate its price-to-earnings ratios and could encourage shareholders to sell off shares.
Options have drawn increasing skepticism from investors since the corporate scandals that occurred earlier in the decade. Corporate critics attributed many of those fiascoes to the use of options and charged that options were simply a way of deceiving investors about the amounts companies were spending on payroll and executive compensation.
In response, hundreds of companies have moved to expense options, use other forms of stock-based compensation or eliminate their options programs entirely. Silicon Valley companies such as Apple, however, have fought bitterly to retain their options programs.
Under its proposal, Apple is asking shareholders to increase the number of shares it can grant to employees under its current plan by 49 million shares. Of the 98 million shares allowed under that plan, Apple has about 21.6 million shares left.
The shares that would be added to Apple's stock pool under the proposal are equivalent to about 6% of the company's outstanding stock. Under the company's current stock plans, it has already awarded about 92.3 million shares that haven't yet been exercised. All told -- including the proposed shares, the shares already available and the unexercised shares -- the company's total options dilution comes to about 163 million shares, or about 20% of its outstanding share count.
In contrast, many investors vote against option plan increases if the dilution caused by them exceeds 15% or even 10% of outstanding shares.
To be sure, in its filing, Apple did acknowledge shareholder concerns, particularly about dilution. The company promised to slash the amount of options it awards each year, for instance, and to limit them to "essential" employees.
On average, each year over the last three years, Apple has awarded options equivalent to about 4.8% of outstanding shares, the company said. It vowed to cut that dilution to about 2.5% per year and said that the increase in shares should last it until the end of 2007.
"The Compensation Committee ... recognizes its responsibility to strike a balance between shareholder concerns regarding the potential dilutive effect of equity awards and the ability to attract, retain and reward employees whose contributions are critical to the long-term success of the company," the company said in its proxy statement.
Shareholders will get a chance to weigh in on the proposal at the company's annual meeting on April 21 at Apple's headquarters in Cupertino, Calif.
They will also get a chance to vote on a related proposal submitted by the Sheet Metal Workers' National Pension Fund, which owns some 12,050 shares of Apple stock. The Sheet Metal Workers' proposal requests that Apple adopt a share program for senior executives that places restrictions on how and when they could exercise the shares.
Under the proposal, those restricted shares wouldn't vest until after at least three years and unless the company met certain specified operating targets.
"We believe that performance and time-vesting restricted shares should be an important component of such a program. In our opinion, performance and time-based restricted shares provide an effective means to tie equity compensation to meaningful operational performance beyond stock price performance," the organization said in support of the proposal.
In recent years, other companies such as
have begun offering new types of stock awards that vest only under certain conditions or are priced above the stock's market price.
Apple's management, however, opposes the change, pointing to another proposal on the ballot in which the company is asking shareholders to approve a cash bonus program for executives.
"The board believes that the compensation program, including changes planned for 2005, is consistent with the underlying objectives of the shareholder proposal, but that the specifics of the
shareholder proposal are not in the best interests of shareholders and recommends a vote "AGAINST" this proposal," the company said in its proxy.