Steve Jobs Receives Additional Stock Options
Earlier this week Apple disclosed that it had granted Steve Jobs an additional 7.5 million stock options at a strike price of $18.30 per share. The options were granted at the around the beginning of Apple’s current fiscal year (which began in October, 2001).
Steve Jobs was granted options on 20 million shares in 2000, before the precipitous sell off in Apple stock later that year. The strike price (or the price Mr. Jobs would be obliged to pay Apple on the exercise of each optioned share) is over $43.00. This means until AAPL trades above the strike price, the options provide Mr. Jobs with no benefit or financial gain.
Management as an incentive to keep key employees and reduce salary expense often uses stock options. Theoretically the employee doesn’t benefit from the options unless the stock’s trading price exceeds the strike price. Therefore, the employee doesn’t benefit financially unless all shareholders benefit from the increasing value of their investment
Recently stock option compensation has come under attack as a “hidden” salary expense. Often times executives and managers benefit greatly from stock option compensation. But the company does not pick up the monies made on stock options by employees as a conventional salary or bonus expense.
One way of looking at stock options is that they benefit the employee without increasing the company’s costs via of a salary expense. A different way of looking at options is to view the monies employees make on the exercise of options (the difference between the strike price and the trading price) as an indirect expense. For example, if an employee is granted options on a stock at $15.00 per share and the options are exercised at $25.00 per share, the employee makes $10 per share on the transaction. The company receives $15.00 and the employee pockets $10.00. If the company had issued those same shares in the market, the company would have received the full $25.00 per share, thus options are considered by many to be a real cost to the company.
Further, depending upon the way a company might count all or a portion of stock options outstanding in their calculation of fully diluted shares, the extent to which the options are counted reduces the company’s net earnings per share because the same net profit amount is divided by a larger number of shares when options outstanding or a portion of the options outstanding are counted.
Aside from the $1 per annum token salary received by Mr. Jobs (and possibly health insurance coverage for his family), and the stock options granted in 200 and 2001, the only compensation Mr. Jobs has received from Apple since his return in 1997 is a jet which was given to him around the time the original set of options were granted. The cost of the jet to Apple was about $90 million. The company covered the cost of the jet and the taxes Mr. Jobs otherwise would have paid upon receipt of the jet as compensation.
Steve Jobs is the co-founder of Apple and without his return to the company it might not have continued as an independent entity. The company might have been sold off for a fraction of its current value. Since his return to Apple, he has been the chief architect of one of the most stunning corporate turnarounds in American business history.
The 20 million options granted in 2000 currently have no value. However, if AAPL’s trading price again exceeds the strike price, Mr. Jobs would have the option to purchase in effect about 5% of the company at discount to its traded value. Further, the 7.5 million shares granted in October 2001 continue to grow in value as Apple’s share price moves higher.
Outside of the jet he received over 2 year ago, the compensation Mr. Jobs has received for his services at Apple is in the form of stock options and is directly tied to the stock price. In short, he only benefits if all shareholders benefit.
In light of the facts, do you think Steve Jobs is fairly compensated?
Personally, I think he is worth every penny.
Beautiful post! The nicest presentaton of these issues I have ever seen.
Robert should be a journalist.
If you do start a column, you might find a major publiction will have interest!
Here’s a take on the issue from Vnunet Apple chief’s $1 salary a cunning stunt .