The GMI Blog

Stock and Option Awards are Valueless for Executives at AMR, but what about the Pensions?

By Greg Ruel- Research Associate

AMR will not be filing a proxy or holding an annual meeting in 2012. Therefore, the company disclosed compensation policy and figures in its 2012 annual report, filed yesterday, laying out the compensation for CEO and Thomas W. Horton as well as other current and former named executive officers.

As you may remember, Mr. Horton was promoted to chair and CEO of AMR and American Airlines in November 2011, the day prior to AMR filing for bankruptcy protection. He received no salary raise with the promotion, having previously served as CFO, and his compensation remaines fairly modest as he attempts to guide the company through Chapter 11. According to the 10-k, Mr. Horton received a base salary of $618,135, the same as the prior two years. He also got a small cash bonus of $83 (customer service component of the Annual Incentive Plan) though received no other bonuses when performance metrics went unsatisfied. Mr. Horton's perks were just under $32,000.

The company does not plan to distribute the nearly $2.7 million in stock and option awards expensed as compensation to Mr. Horton in the summary compensation table; the Chapter 11 filing and delisting of AMR shares renders these grants virtually worthless.

There is, however, an additional compensation element to resolve, that of AMR pension and non-qualified deferred compensation (NQDC) earnings. The summary compensation table shows an increase of $871,138 for Mr. Horton and an increase of more than $2 million in pension and NQDC for former chairman and CEO Gerard Arpey in 2011. The present value of these benefits is about $4.4 million for Mr. Horton and more than $6.7 million for Mr. Arpey. In Mr. Horton’s case, he has received almost four additional years of age and service credit under the NQDC plan – worth about $1.5 million – and, despite leaving the company from 2002-2006, had prior credited service in each plan reinstated. Similarly, former Executive Vice President Robert Reding was able to earn two years of credited service in the NQDC plan for each year of credited service. Mr. Reding “earned” 10 additional years of service credit under the NQDC plan with an estimated value of nearly $1.7 million.

The question left unresolved in the AMR 10-k is exactly what will happen with these pension and deferred amounts at AMR. Specific 10-k excerpts include:

We also currently have substantial pension funding obligations and we cannot predict whether or to what extent our pension funding obligations will be reduced during the proceedings in Chapter 11. Our substantial indebtedness and other obligations could have important consequences. For example, they could: limit our ability to obtain additional funding for working capital, capital expenditures, acquisitions, investments and general corporate purposes, and adversely affect the terms on which such funding can be obtained; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and other obligations, thereby reducing the funds available for other purposes; and limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions.

Working Capital AMR (principally American) historically operates with a working capital deficit. In addition, the Company has historically relied heavily on external financing to fund capital expenditures. More recently, the Company has also relied on external financing to fund operating losses, employee pension obligations and debt maturities.

A couple of weeks ago, the WSJ posted an article that the Pension Benefit Guaranty Corp. was in the process of filing liens against AMR’s international assets. The move came in response to AMR Corp’s decision to pay just $6.5 million of the $100 million the company was scheduled to contribute to pension plans by January 15, 2012. The article goes on to mention that AMR indicated it may trim pensions owed to about 130,000 workers and retirees as part of the restructuring effort. This news comes in addition to a restructuring plan to lay off 13,000 workers which has been met with picketing; both plans were reiterated in the 10-k filing:

“On February 1, 2012, the Company announced the principal terms of a new business plan. The chief components of this business plan include targets of an annual $2 billion in cost savings and $1 billion in revenue enhancement. The business plan contemplates, among other things, reducing headcount by approximately 13,000, terminating American’s defined benefit pension plans, and discontinuing subsidized retiree medical coverage for current employees.”

From the WSJ article: "‘American is sitting on a pile of cash $4 billion high,’ said PBGC spokesman Jioni Palmer. ‘By failing to make its required pension payments, it is threatening the retirement security of 130,000 families.’ Also, the article explained, “The PBGC puts the funding level of American's pension plans at about 45%, with about $8.3 billion in assets covering $18.5 billion in liabilities. PBGC officials said Monday that at least $1 billion of American's pension shortfall comes from a law passed by Congress in 2007 that allowed American and a few other airlines to contribute less cash to their pension plans.”

So, yes, the total compensation figure attributed to CEO Thomas Horton for 2011 is misleading. He didn’t received $4.2 million in 2011 as it reads and the expensed amounts for equity awards can basically be disregarded. But I have little doubt that pensions for pilots, flight attendants, and other long-term employees could be reduced by the time this is sorted out. American Airlines plans to seek bankruptcy court approval to terminate the pension plans and it will be interesting to see how differently executive pensions are treated from those of non-executive employees as this situation continues to unfold.

For Charles

From our very own Mark Magee - Events Team Leader and Cartoonist Extraordinaire.

Quite simply the greatest novelist in the English language.

Eugene Isenberg Forfeits $100 Million in Severance at Nabors Industries Ltd.

by Greg Ruel- Research Associate

Nabors Industries Ltd. announced in a release this morning that chairman Eugene Isenberg voluntarily terminated his employment agreement entitling him to a $100 million termination payment. A payment he stood to received due to a "change in responsibility" marked by his stepping down as CEO and chairman to the role of...well....chairman. What, you don't think that kind of "change" most likely intiated by Mr. Isenberg himself is worth $100 million?

The news of the forfeiture came as a surprise to us and stands contrary to our typical coverage of executive compensation at Nabors. Such as this recent post from November 2011 following the announcement of the SEC investigation into Nabors' perks disclosure. Or this post from October 2011, when Paul Hodgson described the $100 million cash payment due to Mr. Isenberg as "one of the most egregious moments in the history of CEO compensation in the U.S." Indeed, Nabors has long been rated poorly by GMI Ratings, as well as predecessor firm The Corporate Library, for consistently paying for pulse over performance and for housing a board of long-tenured directors on a classified board seemingly too complacent to do anything about it.

It isn't as if Nabors' own shareholders weren't crying foul as well. In fact, there were multiple compensation-related shareholder proposals each proxy year from 2007-2010 asking management to discontinue tax gross-ups, stop any payment of post death benefits, and the most frequently filed proposal, linking pay to performance. In 2010, shareholders lent just 38% support to the company's advisory vote on executive compensation and in 2011, the advisory vote failed to pass yet again, this time garnering about 43% of the shareholder yes vote. In addition, compensation committee chairman John Lombardi received 48% votes withheld at his last board election in 2010 as fellow compensation committee members William Comfort and James Payne received 40% and 48% of votes withheld, respectively, upon their most recent board elections.

However, today is not the day to drone on about the $110 million in bonuses Mr. Isenberg has received in the past 4 years, the result of an outdated bonus formula un-tied to peer performance. Or the block of 3 million stock options granted to him at basement level strike prices during the economic downturn. Even Mr. Iseberg's perquisites (which routinely dwarf those granted to Nabors' Energy Equipment & Services industry peers despite underperforming the group) are off limits today as we note a very positive move for executive pay practice at Nabors.

Whether the decision to forfeit this "severance" payment was made to appease unhappy shareholders or to quell public outcry over pay policy at Nabors remains unclear. However, the announcement comes less than a month after the approval of a shareholder proposal to declassify the Nabors board, marking a second straight win for governance advocates at the company. Perhaps those at Nabors are starting to hear the music after all.

 

Ignoring shareholders' wishes at Apple

By Paul Hodgson - CCO and Senior Research Associate

In an article published on Sunday, the FT reports on CalPERS discontent about having its proposal on majority voting for directors at Apple ignored by the company, despite the fact that it was supported by 73 percent of shareholders at last year’s annual meeting. The article reports that of the 38 companies where CalPERS submitted a proposal, 36 have agreed to implement majority voting. Currently, Apple operates what is known as plurality voting, where a director need only get one vote to be elected as withhold votes do not count as “against” votes.

In its proxy statement, Apple claims that due to Californian corporate law, the majority vote rule is difficult to implement.

The unusual mechanics of California law create the risk that directors who enjoy overwhelming shareholder support may fail to be elected because an insufficient number of shareholders voted in the election. In addition, dissatisfied shareholders can make their voices heard in a number of ways ranging from correspondence with the Board to recall elections and alternative candidate nominations.

But, as the article points out, many other Californian companies have successfully implemented majority voting. The proxy goes on to say that:

The Company believes its shareholders are satisfied with the composition of its Board and the Company’s financial performance, as all of the Company’s directors have consistently been elected by the affirmative vote of substantially more than a majority of its outstanding shares.

If that’s the case, and it is, according to GMI Ratings’ figures which shows that directors each received more than 98 percent of the votes cast, then the initial objection about insufficient numbers of shareholders voting is a smokescreen.

Thus Apple stands out in more ways than one: ignoring the wishes of a substantial majority of its shareholders, and claiming that Californian law makes it difficult to implement majority voting.

Two Thumbs Down for Netflix’s Governance

By Paul Hodgson - CCO and Senior Research Associate

Full disclosure first, I’m a subscriber. Just don’t tell my struggling local, independent DVD rental store.

Initial reservations aside, the news that on January 13, this year, a lawsuit was filed in U.S. District Court, Northern District of California, alleging that Netflix, Inc. and certain of its officers and directors issued false and misleading statements regarding the Company's business practices and its contracts with content providers, causing the Company's stock to trade at artificially inflated prices, was not news to GMI.

During the past four rated Quarters, the GMI Ratings Accounting Risk Score for the company has fallen precipitously from 60, on a scale of 100, to 5.  The company's GMI Ratings Litigation Risk score has also been cascading downwards and is currently in the 1^st percentile, that’s as bad as it can get, with a 25.5 percent probability of being sued by its shareholders. It is also rated in the 2^nd percentile, that’s almost as bad as it can get, for Equity Performance, indicating that its shares are very likely to substantially underperform the market.

So, here’s the details on the complaint. It alleges that the defendants knew, but concealed, the facts that increased licensing fees demanded by content providers would necessitate an increase in the pricing for its products, and that there was no way the earnings forecasts for 2011 would be met.  

In fact, prior to updating its third quarter guidance last year, company insiders sold 388,661 shares of their own stock at prices as high as $298.73 per share.  After the announcement that nearly a million subscribers had been lost because of recent price hikes, the stock price fell from $208.71 to $169.25. 

It fell again when it was disclosed that the company would begin charging separately for its online and DVD rental services and had raised prices. In October last year, it reported that it had lost 5.5 million subscribers. Finally, when it filed its quarterly report with the SEC, the company disclosed it had incurred obligations for content totaling $3.5 billion, debt in other words, causing another 35 percent drop in the share price, from $118.84 to $77.37.

But that’s not all. As if it ever is.

It’s not just specifically the misleading statements that indicate poor corporate responsibility, Netflix scores poorly (15^th percentile) in all governance areas: environmental, social, governance, and compensation issues. In fact, GMI Ratings gives them a D. Here are a few issues:

• It makes monthly stock option grants, lots of them in each grant, as well as annual ones. In fact the company is hemorrhaging stock options. In fact, over a quarter of its outstanding stock is taken up with stock options. A quarter! The tables about stock options in its 2011 proxy statement take up over seven pages.
• The board is classified, meaning that even if shareholders wanted to get rid of them it would take three years to do it and they can’t anyway because they’ll be elected even if they just get a single vote – it’s corporate America’s special version of democracy, and it’s going out of fashion at other companies where real democracy (ie you don’t get elected without a majority of votes) is coming into fashion.

Facebook, I want your money, I don’t want your interference

By Paul Hodgson - CCO and Senior Research Associate

Probably not since Google’s IPO, with its similarly disappointing showing in corporate governance, has there been so much interest generated in an internet IPO as that of Facebook.

But, although it is hoped to raise an enormous amount of investment, Facebook’s attitude towards governance is far more slapdash than anything demonstrated by Google.

There are similar issues with dual classes of share, A – one vote, B – 10 votes. Facebook is also a controlled company, with founder Mark Zuckerberg holding (pre-IPO) almost 57 percent of the voting power of the stock through ownership and voting power over other shareholders’ stock via what is known as an irrevocable proxy. You all know what irrevocable means.

So this is what GMI wrote about Google:

Regarding takeover defenses, the company has a dual voting structure where each share of Class A common stock is entitled to one vote and each share of Class B common stock is entitled to 10 votes. As a result, Mr. Schmidt, Page, and Brin beneficially own more than 67% of the company’s voting power. This raises concerns that the interests of public shareholders may be subordinated to those of the Chairman and co-founders.

Substitute a few names and we’ll be writing this about Facebook too.

But Google has an independent board, just, with six outside directors, three insiders (the founders) and one investor director; what we call at GMI an outside-related director. Facebook doesn’t even manage that.

The board consists of Marc L. Andreessen, Erskine B. Bowles, James W. Breyer, Donald E. Graham, Reed Hastings, Peter A. Thiel.  And of course, Mr. Zuckerberg. Messrs. Andreessen, Graham, and Hastings were elected as designees of Mr. Zuckerberg. Messrs Breyer and Thiel were elected by stockholders of, respectively, the holders of a majority of the shares of Series B preferred stock and Series A preferred stock. They are investor directors. Not necessarily a bad thing to have on a board at this stage of a company’s development. Of course, Messrs. Breyer and Thiel have also entered into irrevocable proxy agreements with Mr. Zuckerberg, so it is unlikely that they will act independently of the CEO and chairman even should they wish to.

But that’s not all. Two other directors, Messrs. Graham and Hastings also have relationships with the company that go beyond the boardroom.

This is what the S-1 registration document says:

During 2009, 2010, and 2011, Netflix purchased $1.9 million, $1.6 million, and $3.8 million, respectively, of advertisements on our website. Mr. Hastings, a member of our board of directors, is the Chief Executive Officer of Netflix.

And isn’t Netflix being sued…? So a reputational risk there, also.

And Mr. Graham has not one, not two, but three relationships beyond the boardroom. Again from the S-1:

During 2009, 2010, and 2011, The Washington Post Company and its related companies purchased $0.6 million, $4.8 million, and $4.2 million, respectively, of advertisements on our website. Mr. Graham, a member of our board of directors, is the Chief Executive Officer of The Washington Post Company. In addition, The Washington Post Company is affiliated with an advertising agency, Social Code LLC, that has advertising clients that do business with us.

Molly Graham, the daughter of Donald E. Graham, a member of our board of directors, is employed by us. During 2009, 2010, and 2011, Ms. Graham had total cash compensation, including base salary, bonus and other compensation, of $98,058, $133,620, and $189,168.

AND DONALD GRAHAM IS DESIGNATED THE LEAD INDEPENDENT DIRECTOR?

So that leaves Marc L. Andreessen and Erskine B. Bowles who of course were nominated by Mr. Zuckerberg.

All in all, not the most independent board we’ve ever seen at GMI, just independent under NASDAQ listing rules, the exchange Facebook has elected to be listed on.

Not only that, but since the company is a controlled company, it doesn’t actually have to have an independent board, or a nominating or a compensation committee. The fact that it has any of these things – which is doubtful – is a sop thrown to shareholders. In fact, its nominating committee consists of the entire board, with the chairman being… Mr. Zuckerberg.

That all adds up to “we want your money, not your interference.”

Chevron, What Does "Notably Higher" Mean?

Adapted from the second post I wrote for the Chief Compliance and Ethics Officer Network:

Today executives on Chevron’s securities analyst call about its fourth quarter 2011 earnings are sure to get some questions on the meaning of the term “notably higher.”  The company’s recent press release noted cryptically that "The company’s general guidance for the quarterly net after-tax charges related to corporate and other activities is between $250 million and $350 million.  Total net charges for the fourth quarter are expected to be notably higher than the general guidance range [emphasis added]."  Analysts will want to know whether this vague reference reflects Chevron’s putting aside reserves to cover the Ecuador environmental litigation-related costs, such as the bond to appeal to the Ecuador Supreme Court or a possible settlement of the $18 billion judgment just upheld by the court, and if not, how that will be accounted for.

 

Aguinda v. ChevronTexaco is one of the most complicated and drawn-out global lawsuits in history, seeking damages for the environmental and health impacts of oil extraction in Ecuador dating back to the 1960s. It's the subject of a superb documentary called Crude from director Joe Berlinger and has been featured on 60 Minutes.  Chevron, the successor defendant following its purchase of Texaco, has filed a series of appeals but lost the latest round this month when an Ecuadorian court upheld the $18 billion judgment against the company. It was Chevron's decision to have the case litigated in Ecuador instead of the United States.  Both sides have accused the other of corruption. 

 

An independent report released last year criticized the financial, operational, and reputational risks of Chevron's response to the suit. It will be dismissed by some because it was commissioned by Amazon Watch and Rainforest Action Network, who are frank about their own point of view. (Their website is called ChevronToxico: The Campaign for Justice in Ecuador.)   But the company has not successfully refuted the findings by Simon Billenness and Sanford Lewis that Chevron’s admissions about its liability risks in court documents were inconsistent with its financial reports and that its legal and public relations strategy poses an unacceptably high risk.  This week’s call is another opportunity to push the company to provide better information about what the impact of the judgment will be. 

 

Three shareholder proposals filed by Chevron investors also reflect these concerns.  One calls for appointment of a director with environmental credentials.  Another calls for separating the chairman and CEO positions to provide independent oversight.  The third asks that shareholders be given the right to call a special meeting.  Sponsors of the proposals include the New York State pension fund, Amnesty International, and Zevin Asset Management.  

 

Investors understand that this is a reputational issue with direct financial consequences.  A Huffington Post piece by Kerry Kennedy about her visit to the Ecuador site prompted comments from readers like these: “And to think I've been buying gas at Chevron lately! I hate reading stuff like this, it makes me sick for the future of our children & grandkids.” “Chevron: typical fossil fuel business culture. Their management is every bit as slimy, toxic, and destructive as their product.”  Companies need to consider that for consumers and investors the way they address environmental liabilities is a critical indicator of credibility and operational sustainability. 

 

 

Supplier Risk

I was honored to be invited to post a series of five short essays on governance and compliance issues for the blog of the Association of Compliance and Ethics Professionals.  This is adapated from my initial post:

Otto von Bismark famously said that to retain respect for laws and sausages, one must refrain from watching how they are made.  In an increasingly global but increasingly transparent world, we have to add consumer goods to that list.  Mike Daisey's one-man show about his journey to the Chinese manufacturing facility that produced the Apple products he loved has been performed widely across the country.  Daisey was a passionately devoted Apple customer until he read about some haunting test photographs of a factory accidentally left on an iPhone.  His disturbing discoveries about the working conditions at the factory operated by Foxconn included employees who were 12 and 13 years old, occupational safety violations, and a high rate of employee suicides.  This month, Daisey's story ran on the NPR program "This American Life" with a follow-up report corroborating his findings that included fact-checking by NPR investigators and independent assessments from a Hong Kong-based NGO.  The New York Times is also running a series on the issue of outsourcing with a focus on Apple and Foxconn.

Apple responded to Daisey's NPR report quickly by changing its policy to disclose its list of suppliers and submit to audits from the Fair Labor Association. 

Reputational risk management is an increasing problem for corporations and supply chains are an increasing part of that risk.  Last year, I wrote about the problems created by a sub-licensee of Warner Brothers when the an advocacy group self-dubbed the Harry Potter Alliance wrote a letter to the studio behind the Potter films, NBC Universal and Time-Warner asking them to make sure that the chocolate sold in Harry Potter wrappers meets Time-Warners' own ethical sourcing guidelines, with copies to Potter author J.K. Rowling, the corporations behind the theme park, and, of course, the press.  Four members of the movie's cast joined in, calling on the children of America to insist on chocolate manufactured without exploiting children in Africa. 

A new book, Business Ethics and Corporate Sustainability (edited by Antonio Tencati and Francesco Perrini) has a chapter on supply chain that suggests customers may be better suited and motivated to act as monitors of supply chain sustainability issues.  There is no question that concerns about customer defection prompted Apple's response to the Daisey broadcast.  Apple's reputation for coolness could collapse quickly if iPads and iPhones become associated with mistreatment of teenage workers. That makes this an issue for shareholders, too.  Nearly 40 shareholder proposals on sustainability reporting were filed in 2010 because investors believe that portfolio companies are critically underestimating the economic risk of supply chain vulnerability.  Significantly, a majority of those proposals were withdrawn following negotiations with the companies.  Every board should have an annual agenda item to make sure that supply chain issues are evaluated, disclosures meet the top global standards and facilities are audited by independent international organizations to ensure that their operations are not the next stop on Mike Daisey's itinerary.

 

Las Vegas Sands in the hands of Sheldon Adelson

Yesterday, Las Vegas Sands’ CEO’s wife, Dr. Miriam Adelson, has given a further $5 million to Winning Our Future, a so-called “super PAC” set up to support Newt Gingrich’s presidential candidacy, on top of
the $5 million already given by the CEO himself, Sheldon Adelson. These actions give us at GMI pause for thought. Such political action committees (PACs) can take in unlimited donations from corporations, unions and individuals. This much support makes the Adelsons among the largest known individual contributors to the current Republican primaries. But coming from individuals who have a controlling interest in a company – Las Vegas Sands – that is so beset with governance and social issues, the reputation of the super PAC and the campaign it is supporting might be impugned. For example, elections are typically something over which Mr. Adelson exercises considerable control, since his position as controlling shareholder and his membership on the board’s nominating committee
means that he can nominate and elect the entire board.

Here’s the detail: control of the Las Vegas Sands is largely in the hands of Mr. Adelson, who, along with his wife, controls roughly 57 percent of shares. As the controlling shareholder, Mr. Adelson elects the
entire board. Possibly as a consequence, only half of the board can be judged to be independent. And that’s not all, there are many unusual transactions between the company or its subsidiaries and entities controlled by Mr. Adelson. These include aircraft lease agreements, administrative agreements, and the
purchase of restaurants owned by entities affiliated with Mr. Adelson. In addition, the company employs the CEO’s stepdaughter and son-in-law. They were paid $51,000 and $286,000, respectively, in 2010. All this is detailed in the company’s 2011 proxy statement.

But governance is not the only problem. We at GMI also have issues with a whole range of executive compensation problems at the company. For example, at more than $2.5 million, the cost of providing security during 2010 to Las Vegas Sands’ CEO Sheldon Adelson and his family is more expensive than at any other company in the Russell 3000. The next highest costs are only just over $1 million for the CEOs of Dell, Oracle, and Amazon. Someone had to be first, but $2.5 million is a very large amount of money indeed to be spending on security services. In fact, the cost of providing security along with his other perquisites, such as the provision of a car and chauffeur, exceeds the value of Mr. Adelson’s salary and his stock option award together. While his latest stock option grant is not excessive, the fact of Mr. Adelson receiving a stock option award at all sits a little oddly with his control of over 57 percent of the outstanding stock in the company. Likewise, his position as controlling shareholder would seem to
make the need for an employment agreement between him and the company somewhat superfluous; but employment agreement he has.

Other perquisites are also a little unusual, a note to the Summary Compensation Table in the 2011 proxy statement says:

Our executive officers, as well as certain other employees, are entitled to use workout facilities at the Canyon Ranch Spa at The Venetian Resort Hotel Casino and The Palazzo Resort Hotel Casino and to receive dry cleaning services. The Company provides certain of its executive officers with access to corporate memberships at country clubs for business purposes. The Company requires these executives to reimburse it in full for personal use of these facilities. On certain occasions, an executive officer’s spouse or other immediate family member has accompanied the executive officer on flights on aircraft that we own, lease or provide pursuant to interchange or time sharing arrangements. The Company also permits its executive officers to use Company personnel for home repairs during business hours on a limited basis. The Company requires that these executives reimburse it in full for these services. There is no incremental cost to the Company for any of these benefits.

While the company claims that there is no incremental cost to these benefits, the existence of such arrangements calls into question the effectiveness of decisions made by the compensation committee.

But there’s more on top of the governance and compensation issues. After his dismissal as Sands China’s chief executive officer in 2010, Steven Jacobs filed a lawsuit for wrongful termination against Sands China and Las Vegas Sands. Mr. Jacobs alleges that he was fired because of conflicts with Mr. Adelson, who sought to conduct business with Macau authorities and local banks in a variety of ways that were improper and possibly illegal. Mr. Jacobs’ allegations are said to be the basis for investigations by the SEC, DOJ, FBI, and the Hong Kong Securities and Futures Commission over possible violations of the anti-bribery Foreign Corrupt Practices Act. Prior to this case, one of Sands’ overseas units paid a fine of around $1.6 million in 2010 to China's State Administration of Foreign Exchange related to certain payments the company had made to counterparties and other vendors.

All in all, not the most effectively governed company.

Timothy Cook Receives More Than $376 Million in Stock as new Apple CEO

By Greg Ruel, Research Associate

Mr. Cook took over as CEO of Apple, Inc. in August 2011, receiving one million RSUs as a "promotion and retention award" on the same day Mr. Jobs resigned. Half the award will vest five years from the grant date and the other half will vest a decade after grant. As long as he stays with Apple, the entirety of the stock grant is his in ten years and should comprise the majority of his compensation over this period. While there is no telling what these shares will be worth when they vest, with a stock price of $376.18 at the grant date, Mr. Cook's award was immediately valued at $376,180,000.

There is no doubt this is a retention award. Restricted stock awards more typically have annual vesting provisions that start after about three years with full vesting with five years. Mr. Cook will have to serve five years as CEO to receive any of these shares and a full decade to reap the full benefits of his granted stock. There is very little insight however into how the board arrived at this retention package in the annual proxy released yesterday.

The Board’s determination of the amount of the RSU award was subjective. There was no formula or peer group “benchmark” used in determining the award amount. Rather, the award was the product of the Board’s business judgment, which was informed by the experience of the Board members, the input received from Mr. Jobs, and the Board’s assessment of Mr. Cook’s performance in assuming responsibility for the Company’s day-to-day operations during Mr. Jobs’s prior leaves of absence.

Mr. Cook had been well-compensated in prior periods when he filled in for Mr. Jobs. In March 2010, this same compensation committee awarded him $17 million worth of RSUs to go with a discretionary cash bonus of $5 million when he filled in as CEO during a leave of absence. This was followed by another RSU grant in September 2010, this time worth more than $35 million. All told, Mr. Cook was granted more than $52 million in 2010, slightly less than his September 2008 equity grants worth more than $58 million and scheduled to vest in full by next spring. His total 2010 compensation was $59 million and he profited almost $69 million on the vesting of 300,000 restricted shares in 2010 alone.

So, is $376 million in new stock too much for 2011? It certainly would be if this were an annual grant. In terms of a 10-year award it is quite a lot as well, coming to about $37 million a year, though that works out to much less annually than the $52 million he got in equity awards for 2010. The simple answer at this point is yes, it's a lot, but we are talking about Apple for which benchmarking and peer comparisons can prove difficult, though the compensation committee didn't even try to justify the award in those terms.

The Apple board views the retention of Mr. Cook as critical to the success of the company and for a smooth transition in leadership. As if to emphasize the point, he's received one of the most valuable equity grants in the history of Corporate America. Only time will tell the true value of this stock grant but one thing is for sure. There isn't one good reason I can think of for him to be granted any additional equity over the next decade. Inclusion in annual salary and bonus programs also seem unnecessary given these valuable equity holdings. The success of Mr. Cook as CEO of Apple may very well be judged in large part by the change in value of this 2011 retention award.

Read Paul Hodgson's thoughts on the compensation package for Apple's new CEO here.