Apple 2007 Annual Report Download - page 107

less than two years after the grant date. This ensures that a meaningful portion of a named executive officer's awards will vest
every two years—a strong incentive to continue employment with Apple. The following table shows the grant and vesting
patterns for ongoing RSU grants for the named executive officers since fiscal 2004 (excluding those who were not named
executive officers at the time of grant).
Vesting Conditions. As noted above, the vesting of all RSUs is generally contingent on the named executive officer's continued
employment with Apple, rather than on performance with regard to specific business objectives. From time to time, the
Compensation Committee has considered various forms of performance-based vesting. After careful evaluation, the Committee
has concluded that performance-based vesting would not serve Apple's current objectives as effectively as the program described
above. The Committee generally grants RSUs with two to four year vesting periods to maximize the award's retention value. This
retention value would be undermined if a named executive officer's equity awards (which represent approximately 85% of the
officer's compensation) were at risk based on performance measures that were determined two or even four years prior to the
vesting date. Given the intensely dynamic business environment in which Apple operates, it would be extremely difficult to craft
meaningful objectives with such a long horizon. Apple imposes no requirement that the named executive officers hold their
common stock for any period after vesting.
Annual Burn Rate Averages Less Than 2.5%. In fiscal 2005, Apple committed to an annual "burn rate" (the total number of all
equity award shares granted during the fiscal year divided by the total shares outstanding at the end of the fiscal year) of 2.5%
from fiscal 2005 through fiscal 2007. This commitment represented a significant reduction from an average burn rate of 4.8%
from fiscal 2002 through fiscal 2004. In fact, Apple's average annual burn rate from fiscal 2005 through fiscal 2007 was
approximately 1.6%.
Overhang from Equity Plans at 12.9%. Overhang (granted and outstanding equity awards plus shares reserved for future
awards, divided by the sum of total shares outstanding, granted and outstanding equity awards, and shares reserved for future
awards) is another measure of equity dilution. The efficient use of equity awards, combined with the substantial exercise of
employee stock options due to the significant increase in Apple's stock price over the past few years, has caused Apple's overhang
to decline from approximately 14.5% at the end of fiscal 2005 to approximately 12.9% at the end of fiscal 2007.
Frequency and Size of Equity Awards. The named executive officers typically receive equity awards every two years, rather
than every year. This practice is consistent with the long time horizon and lengthy vesting periods of the awards. By making
awards less frequently, the Committee can provide larger grants, which in turn promotes greater retention.
To determine the size of RSU grants, the Compensation Committee first establishes a target compensation value that it wants to
deliver to the named executive officers through long-term equity awards. In doing so, the Committee considers various factors,
including the following:
•
Equity Awards
FY05
vesting
FY06
vesting
FY07
vesting
FY08
vesting
FY09
vesting
FY10
vesting
Fiscal 2004 RSU
(excluding CEO)
—
50
%
—
50
%
Fiscal 2006 RSU
(excluding CEO)
— —
—
—
—
100
%
The practice of granting equity only every two years
•
The heavy weight placed on equity in the mix of total compensation
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