Apple (AAPL)

EXECUTIVE SUMMARY

The Company’s goal for its executive compensation program is to attract and retain a talented, entrepreneurial and creative team of executives who will provide leadership for the Company’s success in dynamic, competitive markets. The Company seeks to accomplish this goal in a way that is aligned with the long-term interests of the Company’s shareholders. The Compensation Committee oversees the executive compensation program and determines the compensation for the Company’s executive officers. The Company believes the compensation program for the named executive officers was instrumental in helping the Company achieve strong financial performance in the challenging macroeconomic environment in 2009.

In 2009, the Company’s revenue grew to $36.5 billion, representing an increase of $4.1 billion or 12% over the prior year. Net income also increased to $5.7 billion in 2009, an increase of $870 million or 18% over the prior year, and the Company’s gross margin in 2009 was 36.0%, up from 34.3% in the prior year. The Company’s strong earnings and operational excellence helped drive a cash balance at the end of 2009 of $34 billion, an increase of $9.5 billion over the prior year. Further, the Company’s total shareholder return over the prior 1-, 3- and 5-year periods was 63%, 141% and 857%, respectively.

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In 2009, each named executive officer was a member of the Company’s executive team. Each named executive officer is expected to contribute as a member of the executive team to the Company’s overall success rather than merely achieve specific objectives within that officer’s area of responsibility. Each named executive officer has been an employee of the Company for at least 10 years and none has an employment agreement or severance arrangement.

The Company believes the executive compensation program has served the Company well. Therefore, no significant changes were made to the executive compensation program in 2009. The executive compensation program for the named executive officers, other than Mr. Jobs, consists of three elements: long-term equity awards in the form of RSUs, annual performance-based cash bonus awards, and base salaries. Mr. Jobs’s total compensation consists of a salary of $1 per year.

The Company continues to rely primarily on long-term equity awards in the form of RSUs to attract and retain an outstanding executive team and to ensure a strong connection between the executive compensation program and the long-term interests of the Company’s shareholders. In general, the Company’s RSU awards to the named executive officers, other than Mr. Jobs, have been made every two years and no shares vest prior to the end of an approximate four-year vesting period. Consistent with this philosophy, RSUs that were awarded to the named executive officers in 2008 will vest in 2012, but no RSUs were awarded to the named executive officers in 2009. Exceptions are made for executives who are promoted to the executive team or are recent hires, and in special cases as determined by the Compensation Committee.

The Company places less emphasis on total cash compensation than on long-term equity awards. Accordingly, the design of the Company’s annual performance-based cash bonus program for the named executive officers remained the same in 2009 as in 2008, with target bonuses set at 50% of base salary and maximum bonuses set at 100% of base salary. As noted below, these target and maximum bonus opportunities are substantially lower than the range commonly provided by peer companies.

In 2009, the Compensation Committee changed the performance criteria used in the Company’s bonus program from revenue and operating income prepared in accordance with US GAAP to adjusted sales and adjusted operating income. Adjusted sales and adjusted operating income differ from US GAAP in that they exclude the effects of subscription accounting related to sales of iPhones and AppleTV. Because the Company believes these measurements help evaluate the underlying performance of the business, the Company uses such measurements to evaluate management performance and determine appropriate levels of compensation.

The Compensation Committee set performance goals for the bonus program based on the adjusted sales and adjusted operating income objectives in the Company’s internal business plan. In 2009, the Compensation Committee awarded cash bonuses equal to 100% of the base salary for each of the named executive officers, other than Mr. Jobs (who does not participate in the bonus program), because the Company’s adjusted sales and adjusted operating income for 2009 exceeded the maximum performance goals established by the Compensation Committee.

In 2009, each of the named executive officers, other than Mr. Jobs, received an increase in base salary following a review of each named executive officer’s performance, the Company’s financial results and the competitive environment. This was the first salary increase for the named executive officers since 2006, other than increases for Mr. Mansfield and Mr. Forstall before they became members of the executive team in May 2008.

The first part of the Compensation Discussion and Analysis, entitled “Executive Compensation Philosophy,” discusses in greater detail the Company’s philosophy and approach to executive compensation. The second part of the Compensation Discussion and Analysis, entitled “Compensation Decisions for 2009,” discusses the Compensation Committee’s compensation decisions for the named executive officers in 2009.

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A. Executive Summary

This section explains the Company’s executive compensation program as it relates to the following “named executive officers” whose compensation information is presented in the tables following this discussion in accordance with SEC rules:

In fiscal 2008, each named executive officer was a member of the Company’s executive team, the Company’s most senior management committee. On November 3, 2008, Mr. Fadell became Special Advisor to the Chief Executive Officer, as discussed in the section entitled “F. Fiscal 2009 Compensation Decisions—3. Tony Fadell Agreement” below. In this new position, Mr. Fadell is no longer an executive officer of the Company.

The Company’s executive compensation program for the named executive officers, other than Mr. Jobs, consists of long-term equity awards in the form of RSUs and cash compensation in the form of performance-based cash incentives and base salaries. In fiscal 2008, Mr. Jobs’ entire compensation consisted of a base salary of $1. Each year, the Compensation Committee determines the compensation for the named executive officers. The Compensation Committee believes the Company’s compensation strategy has served the Company well. As a result, no significant changes were made to the Company’s executive compensation program in fiscal 2008.

The Company continues to rely on long-term equity awards in the form of RSUs to attract and retain an outstanding executive team and to ensure a strong connection between executive compensation and financial

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performance. The Compensation Committee annually reviews the outstanding, unvested equity awards of each named executive officer to determine whether additional awards are warranted in light of the officer’s performance, the competitive environment and the other factors discussed in the section entitled “D. Executive Compensation Program Design and Implementation—3. The Role of Long-Term Equity Awards” below.

The performance-based cash incentives are designed to compensate the named executive officers for achieving specific financial goals established annually by the Compensation Committee, as described in the section entitled “D. Executive Compensation Program Design and Implementation—4. The Role of Cash Compensation” below. The Compensation Committee sets aggressive performance goals each year based on the revenue and operating income objectives in the Company’s internal business plan. Payments are not automatic even if the goals are achieved, however, because the Compensation Committee may exercise its discretion to reduce (but not increase) the amount of any incentive payment based on an officer’s overall performance.

The Compensation Committee believes the compensation program for the named executive officers has been instrumental in helping the Company achieve its business objectives and is appropriate and fair in light of the Company’s strong financial performance relative to that of its peer group. In fiscal 2008, the Company’s revenue grew to $32.5 billion, representing an increase of $8.5 billion or 35% over the prior year. Net income also increased markedly, growing to $4.8 billion in fiscal 2008, an increase of $1.3 billion or 38% over the prior year. The Company’s strong earnings and operational excellence in fiscal 2008 helped drive an ending cash balance of $24.5 billion, representing growth of $9.1 billion or 59% over the prior year.

A. EXECUTIVE SUMMARY

This section explains the Company’s executive compensation program as it relates to the following “named executive officers:”

The Company’s executive compensation program for the named executive officers consists of long-term equity awards in the form of restricted stock units (“RSUs”) and cash compensation in the form of performance-based cash incentives and base salaries. Each year, the Compensation Committee, which is made up entirely of independent directors, determines the compensation for the named executive officers.

The Company relies heavily on long-term equity awards to attract and retain an outstanding executive team and to ensure a strong connection between executive compensation and financial performance. An RSU award gives the named executive officer the right to receive, at no cost, a specified number of shares of the Company’s common stock when the award vests, typically at intervals of two to four years. Because the value of the RSUs depends on the Company’s future share price, the award links compensation to future financial performance. The officer is generally not eligible to receive the shares if employment is terminated before the RSUs vest. The Compensation Committee reviews annually the outstanding, unvested equity awards of each named executive officer to determine, in the Compensation Committee’s discretion, whether additional awards are warranted in light of the officer’s performance, the competitive environment and the other factors discussed in the section entitled “Executive Compensation Program Design and Implementation—3. The Crucial Role of Long-Term Equity Awards” below.

The performance-based cash incentives compensate the named executive officers for achieving specific financial goals established annually by the Compensation Committee, as described in the section entitled “Executive Compensation Program Design and Implementation—4. The Minor Role of Cash Compensation” below. The Compensation Committee sets aggressive performance goals each year based on the revenue and operating income objectives in the Company’s internal business plan. Payments are not automatic, however, because the Compensation Committee may exercise its discretion to reduce (but not increase) the amount of any incentive payment based on an officer’s overall performance.

Based on the factors discussed in the section entitled “Executive Compensation Program Design and Implementation—3. The Crucial Role of Long-Term Equity Awards” below and the Compensation Committee’s belief that the outstanding, unvested equity awards still had significant retention value, the Compensation Committee made no new equity awards to the named executive officers in fiscal year 2007. The officers earned cash incentives in fiscal year 2007 at the maximum amount allowed by the plan—100% of base salary—because the Company’s financial performance significantly exceeded the annual performance goals set by the Compensation Committee. The Compensation Committee assessed both the amount and allocation of the compensation components for each officer based on the Company’s overall annual financial performance and each officer’s individual performance. The Compensation Committee did not increase base salaries for the named executive officers because it concluded that the total compensation for each officer was appropriate.

The Company’s shareholders have been generously rewarded for the Company’s success, with a three-year annualized shareholder return of 101% through the end of fiscal year 2007. The Compensation Committee believes the compensation of the named executive officers has been appropriate and fair in light of the Company’s performance.

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A.    EXECUTIVE SUMMARY

This section explains Apple's executive compensation program as it relates to the following "named executive officers:"

Apple's executive compensation program for the named executive officers consists of long-term equity awards in the form of restricted stock units ("RSUs") and cash compensation in the form of performance-based cash incentives and base salaries. Each year, the Compensation Committee, which is made up entirely of independent directors, determines the compensation for the named executive officers.

Apple relies heavily on long-term equity awards to attract and retain an outstanding executive team and to ensure a strong connection between executive compensation and financial performance. An RSU award gives the named executive officer the right to receive, at no cost, a specified number of shares of Apple common stock when the award vests, typically at intervals of two to four years. Because the value of the RSUs depends on Apple's future share price, the award links compensation to future financial performance. The officer is generally not eligible to receive the shares if employment is terminated before the RSUs vest. The Compensation Committee reviews annually the outstanding, unvested equity awards of each named executive officer to determine, in the Committee's discretion, whether additional awards are warranted in light of the officer's performance, the competitive environment and the other factors discussed in Section D3 below.

The performance-based cash incentives compensate the named executive officers for achieving specific financial goals established annually by the Compensation Committee, as described in Section D4. The Committee sets aggressive performance goals each year based on the revenue and operating income objectives in Apple's internal business plan. Payments are not automatic, however, because the Committee may exercise its discretion to reduce (but not increase) the amount of any incentive payment based on an officer's overall performance.

Based on the factors discussed in Section D3 below and the Committee's belief that the outstanding, unvested equity awards still had significant retention value, the Committee made no new equity awards to the named executive officers in fiscal 2007. The officers earned cash incentives in fiscal 2007 at the maximum amount allowed by the plan—100% of base salary—because Apple's financial performance significantly exceeded the annual performance goals set by the Committee. The Committee assessed both the amount and allocation of the compensation components for each officer based on Apple's overall annual financial performance and each officer's individual performance. The Committee did not increase base salaries for the named executive officers because it concluded that the total compensation for each officer was appropriate.

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Apple's shareholders have been generously rewarded for Apple's success, with a three-year annualized shareholder return of 101% through the end of fiscal 2007. The Committee believes the compensation of the named executive officers has been appropriate and fair in light of Apple's performance.

A.    EXECUTIVE SUMMARY

This
section explains Apple's executive compensation program as it relates to the following "named executive officers:"

Apple's
executive compensation program for the named executive officers consists of long-term equity awards in the form of restricted stock units ("RSUs") and cash compensation in the form
of performance-based cash incentives and base salaries. Each year, the Compensation Committee, which is made up entirely of independent directors, determines the compensation for the named executive
officers.

Apple
relies heavily on long-term equity awards to attract and retain an outstanding executive team and to ensure a strong connection between executive compensation and financial
performance. An RSU award gives the named executive officer the right to receive, at no cost, a specified number of shares of Apple common stock when the award vests, typically at intervals of two to
four years. Because the value of the RSUs depends on Apple's future share price, the award links compensation to future financial performance. The officer is generally not eligible to receive the
shares if employment is terminated before the RSUs vest. The Compensation Committee reviews annually the outstanding, unvested equity awards of each named executive officer to determine, in the
Committee's discretion, whether additional awards are warranted in light of the officer's performance, the competitive environment and the other factors discussed in Section D3 below.

The
performance-based cash incentives compensate the named executive officers for achieving specific financial goals established annually by the Compensation Committee, as described in Section D4. The
Committee sets aggressive performance goals each year based on the revenue and operating income objectives in Apple's internal business plan. Payments are not automatic, however, because the
Committee may exercise its discretion to reduce (but not increase) the amount of any incentive payment based on an officer's overall performance.

Based
on the factors discussed in Section D3 below and the Committee's belief that the outstanding, unvested equity awards still had significant retention value, the Committee made no new equity
awards to the named executive officers in fiscal 2007. The officers earned cash incentives in fiscal 2007 at the maximum amount allowed by the plan—100% of base salary—because
Apple's financial performance significantly exceeded the annual performance goals set by the Committee. The Committee assessed both the amount and allocation of the compensation components for each
officer based on Apple's overall annual financial performance and each officer's individual performance. The Committee did not increase base salaries for the named executive officers because it
concluded that the total compensation for each officer was appropriate.

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Apple's
shareholders have been generously rewarded for Apple's success, with a three-year annualized shareholder return of 101% through the end of fiscal 2007. The Committee believes the
compensation of the named executive officers has been appropriate and fair in light of Apple's performance.