Apple (AAPL)

4. The Minor Role of Cash Compensation

Base Salaries. The Compensation Committee believes that base salaries are significantly less important than performance-based bonuses and long-term equity awards in meeting the Company’s compensation objectives. The minor role of salaries as part of total compensation is reflected in the following:

Performance-Based Cash Incentives. The Performance Bonus Plan, which has been approved by the Company’s shareholders, authorizes the Compensation Committee to issue plan-based cash incentive awards to compensate officers for achieving specific financial objectives that are established annually. The Compensation Committee believes that performance-based cash compensation is an important component of executive compensation; however, it represents a small percentage of total compensation because its effectiveness in meeting the Company’s compensation objectives is limited. It is a less significant factor in attracting new executive talent than equity compensation, and it promotes retention only in the short-term—over the performance period. Accordingly, the plan is modestly funded, as reflected by the following:

The Compensation Committee establishes performance goals each year based on revenue and operating income objectives in the Company’s internal business plan. The Compensation Committee has selected these performance goals because they are important indicators of increased shareholder value. These performance goals generally exclude the effects of extraordinary, unusual or infrequently occurring events or changes in accounting principles. The Company does not publicly disclose specific annual internal revenue or operating income objectives, as its business plan is highly confidential. Disclosing specific objectives would provide competitors and other third parties with insights into the planning process and would therefore cause competitive harm.

The Compensation Committee next determines the maximum amount of any cash incentive payment denominated as a percentage of base salary. The current payment structure is shown in the payout matrix below. Once the performance goals and payment structure are established, no one has the authority to modify or waive them.

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