Compensation Discussion and Analysis

Apple reported another year of strong financial performance in 2019. We believe that the compensation of our named executive officers reflects and rewards their contributions to Apple’s success and demonstrates alignment with Apple’s annual financial results and the interests of our shareholders.

This Compensation Discussion and Analysis explains the guiding principles and practices upon which our executive compensation program is based and the compensation paid to our 2019 named executive officers:

Guiding Principles

Team-Based Approach. We apply a team-based approach to the compensation of our named executive officers with internal pay equity as a primary consideration.

Performance Expectations. We establish clear, quantitative performance goals focused on Apple’s overall success rather than on objectives specific to each named executive officer’s areas of responsibility.

Emphasis on Long-Term Equity Incentives. We emphasize long-term performance, retention, and alignment between the interests of our named executive officers and shareholders by significantly weighting the named executive officers’ compensation toward long-term equity awards.

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Discretion and Judgment of the Compensation Committee

The Compensation Committee, consisting entirely of independent directors, reviews and approves the compensation of Apple’s named executive officers and acts as the administering committee for Apple’s employee equity compensation plans.

Each year, the Compensation Committee conducts an evaluation of Apple’s executive compensation program to determine if any changes would be appropriate. In making this determination, the Compensation Committee may consult with its independent compensation consultant and management, as described below; however, the Compensation Committee uses its own judgment in making final decisions regarding the compensation paid to our named executive officers.

The Role of the Compensation Consultant. The Compensation Committee selects and retains the services of its own independent compensation consultant and annually reviews the performance of the consultant. As part of the review process, the Compensation Committee considers the independence of the consultant in accordance with SEC and Nasdaq rules.

During 2019, the Compensation Committee’s independent compensation consultant, Pay Governance, provided no services to Apple other than services for the Compensation Committee, and worked with Apple’s management, as directed by the Compensation Committee, only on matters for which the Compensation Committee is responsible.

At the Compensation Committee’s request, Pay Governance regularly attends Compensation Committee meetings. Pay Governance also communicates with the Compensation Committee or the Chair of the Compensation Committee outside committee meetings regarding matters related to the Compensation Committee’s responsibilities. In 2019, the Compensation Committee generally sought input from Pay Governance on a range of external market factors, including evolving compensation trends, appropriate market reference points, and market compensation data. Pay Governance also provided general observations about Apple’s compensation programs and about management’s recommendations regarding the amount and form of compensation for our named executive officers.

The Role of the Chief Executive Officer. At the Compensation Committee’s request, Mr. Cook provides input regarding the performance and appropriate compensation of the other named executive officers. The Compensation Committee considers Mr. Cook’s evaluation and his direct knowledge of each named executive officer’s performance and contributions when making compensation decisions. Mr. Cook is not present during voting or deliberations by the Compensation Committee regarding his own compensation.

The Role of Shareholders. We have discussions with many of our shareholders regarding various corporate governance topics, including executive compensation, and related trends, such as environmental, social, and governance considerations. Shareholders are also provided the opportunity to cast an annual advisory vote on the compensation of our named executive officers. Shareholders have indicated their strong support for the compensation of our named executive officers, with 94% of votes cast on the say-on-pay proposal at the 2019 Annual Meeting voted in favor of our executive compensation program. Based on this support from shareholders, our executive compensation program has not changed significantly year-over-year. The Compensation Committee will continue to consider shareholder feedback and the results of say-on-pay votes when making future compensation decisions.

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The Role of Peer Companies. The Compensation Committee reviews peer group composition each year. With the assistance of Pay Governance, the Compensation Committee identified groups of companies to serve as market reference points for compensation comparison purposes for 2019. A primary peer group was developed for reference consisting of U.S.-based, stand-alone, publicly traded companies in the technology, media, and internet services industries that, in the Compensation Committee’s view, compete with Apple for talent. The threshold revenue and market capitalization requirements for a company to be considered for the primary peer group for 2019 were $15 billion and $35 billion, respectively.

A secondary peer group of premier companies that have iconic brands or are industry or category leaders, rely on significant research and development and innovation for growth, and require highly-skilled human capital was also developed as an additional reference set for the Compensation Committee.

Based on the above criteria, Visa was added to the primary peer group and Pfizer and UnitedHealth Group were added to the secondary peer group for 2019.

The chart below lists the companies in the primary and secondary peer groups. References in this Compensation Discussion and Analysis to peer companies include both the primary and the secondary peer group companies.

The Compensation Committee’s executive compensation determinations are subjective and the result of the Compensation Committee’s business judgment, which is informed by the experience of the members of the Compensation Committee and, as described above, input provided by its independent compensation consultant, our CEO (other than with respect to his own compensation), and shareholders. The Compensation Committee also considers peer group data provided by the Compensation Committee’s independent compensation consultant and reviews compensation practices and program design at peer companies to inform its decision-making process so it can set total compensation levels that it believes are commensurate with the relative size, scope, and performance of Apple. The Compensation Committee, however, does not set compensation components to meet specific benchmarks as compared to peer companies, such as targeting salaries at a specific market percentile.

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2019 Named Executive Officer Compensation

Our executive compensation program is designed to motivate and reward exceptional performance in a straightforward and effective way, while also recognizing the remarkable size, scope, and success of Apple’s business. The compensation of our named executive officers has three primary components: annual base salary, annual cash incentive, and long-term equity awards.

2019 Annual Base Salary. Base salary is a customary, fixed element of compensation intended to attract and retain executives. When setting the annual base salaries of our named executive officers, the Compensation Committee considers market data provided by its independent compensation consultant, internal pay equity, and Apple’s financial results and size relative to peer companies. The annual base salaries for Ms. Adams, Ms. Ahrendts, Mr. Maestri, and Mr. Williams remained at $1 million for 2019, and Ms. O’Brien’s annual base salary was set at $1 million when she was promoted to her current role. Mr. Cook’s annual base salary remained at $3 million for 2019.

2019 Annual Cash Incentive. Our annual cash incentive program is a variable, at-risk component of our named executive officers’ compensation that is aligned with Apple’s annual financial results. Net sales and operating income, as determined in accordance with generally accepted accounting principles, are used as the performance measures for the annual cash incentive program because they reflect commonly recognized measures of overall company performance and profitability and are drivers of shareholder value creation.

The annual cash incentive program provides payout opportunities based on the achievement of pre-determined financial goals that require our named executive officers to meet high standards of performance to receive a payout. Annual cash incentive payouts are determined based on an equal weighting for the net sales and operating income measures and are linearly interpolated for achievement between threshold, target, and maximum goals, as approved by the Compensation Committee. The target payout opportunity is 200% of each named executive officer’s annual base salary. If both of the threshold performance levels are reached, the total payout opportunity is 50% of the target payout opportunity, and if both of the maximum performance levels are reached, the payout opportunity is capped at 200% of the target payout opportunity. There is no payout for a particular performance measure unless the threshold goal is achieved with respect to that measure. The Compensation Committee may, in its discretion, reduce the actual payout of any individual’s annual cash incentive based on Apple’s performance and the Compensation Committee’s subjective assessment of the named executive officer’s overall performance.

The Compensation Committee establishes threshold, target, and maximum performance goals under the annual incentive program based on factors relevant to the fiscal year. The Compensation Committee also considers prior years’ financial results as a reference point, but focuses on setting goals that reflect current business conditions and drive an appropriate pay-for-performance outcome. When setting the goals for 2019, the Compensation Committee considered many factors, including, but not limited to, the macroeconomic environment, trade conditions, foreign exchange headwinds, long-term strategic investments, alignment between appropriate payout opportunities and performance levels, and the level of performance required by our named executive officers to deliver against the goals.

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For 2019, the Compensation Committee established threshold goals that represented the minimum level of achievement for a named executive officer to receive an annual cash incentive payout. The target goals represented a level of performance that would be challenging to achieve based on the considerations noted above, but also representing strong financial performance commensurate with the target payout opportunity. The maximum goals represented exceptional financial performance. Accordingly, the performance goals under the 2019 annual cash incentive program were as follows:

We reported net sales of $260.2 billion and operating income of $63.9 billion for 2019, which exceeded the target goal for each performance measure and resulted in a combined attainment of 128% of the target payout opportunity under the annual cash incentive program. The charts below illustrate the year-over-year pay-for-performance alignment of our annual cash incentive program relative to our net sales and operating income results for each of the last three years.

The Compensation Committee determined that no downward adjustments to the payouts would be made based on Apple’s 2019 performance and the individual contributions of our named executive officers, and approved bonus payouts equal to 128% of the target payout opportunity for each of Mr. Cook, Ms. Adams, Mr. Maestri, and Mr. Williams. Ms. O’Brien’s total payout was adjusted to reflect her mid-year promotion to her current role. Ms. Ahrendts departed Apple during the fiscal year and was not eligible to receive a payout under the annual cash incentive program for 2019.

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Long-Term Equity Awards

The equity component of our named executive officers’ compensation emphasizes long-term shareholder value creation through performance-based and time-based RSU awards.

Performance-Based RSUs. RSU awards with performance-based vesting are a substantial, at-risk component of our named executive officers’ compensation tied to Apple’s long-term performance. The number of performance-based RSUs that vests depends on Apple’s total shareholder return relative to the other companies in the S&P 500 (“Relative TSR”) for the performance period. The Compensation Committee chose Relative TSR as a straightforward and objective metric to evaluate our performance against the performance of other companies and to align the interests of our named executive officers with the interests of our shareholders in creating long-term value.

We measure Relative TSR for the applicable performance period based on the change in each company’s stock price during that period, taking into account any dividends paid during that period, which are assumed to be reinvested in the stock. A 20-trading-day averaging period is used to determine the beginning and ending stock price values used to calculate the total shareholder return of Apple and the other companies in the S&P 500. This averaging period mitigates the impact on the long-term Relative TSR results of one-day or short-term stock price fluctuations at the beginning or end of the performance period. The change in value from the beginning to the end of the period is divided by the beginning value to determine total shareholder return.

Time-Based RSUs. RSU awards with time-based vesting align the interests of our named executive officers with the interests of our shareholders by promoting the stability and retention of a high-performing executive team over the longer term. Vesting schedules for time-based awards generally require continuous service over multiple years, as described below.

Mr. Cook’s Long-Term Equity Award

Mr. Cook last received an equity award when he was promoted to CEO in 2011 (the “2011 RSU Award”). At Mr. Cook’s request, the 2011 RSU Award was significantly modified in 2013 to put a portion of the award at risk through a performance condition based on Apple’s Relative TSR performance. The performance condition requires Apple to outperform two-thirds of the companies that were included in the S&P 500 for the entirety of each performance period in order for 100% of the performance-based RSUs allocated to that period to vest. The 2011 RSU Award has only downside risk to Mr. Cook. It does not contain any upside vesting opportunity above 100%, and there is no interpolation for results between the Relative TSR percentile levels set forth below.

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For the three-year performance period from August 25, 2016 through August 24, 2019, 280,000 performance-based RSUs were subject to the Relative TSR performance condition. As shown in the table below, Apple’s Relative TSR for the three-year performance period was at the 90th percentile of the companies that were included in the S&P 500 for the entire performance period. As a result, 100% of the 280,000 performance-based RSUs vested on August 24, 2019. Apple’s total shareholder return during this period was 100.20%.

Other Named Executive Officers’ Long-Term Equity Awards

In 2019, the Compensation Committee granted performance-based and time-based RSUs to Ms. Adams, Ms. Ahrendts, Mr. Maestri, Ms. O’Brien, and Mr. Williams (the “2019 RSU Awards”). All unvested RSUs granted to Ms. Ahrendts, including the 2019 RSU Awards, were canceled upon her departure from Apple.

2019 Performance-Based RSU Awards. The performance-based RSUs awarded to Ms. Adams, Ms. Ahrendts, Mr. Maestri, and Mr. Williams were granted on September 30, 2018, which was the first day of Apple’s 2019 fiscal year and the first day of the performance period applicable to the awards. These awards have a three-fiscal-year performance period from the beginning of 2019 through the end of 2021. As described above, all unvested RSUs granted to Ms. Ahrendts were canceled upon her departure from Apple. The performance-based RSUs awarded to Ms. O’Brien were granted on February 5, 2019 in connection with her promotion to Senior Vice President, Retail + People, and have a performance period from that grant date through the end of 2021.

Similar to the methodology used in 2018, the target number of performance-based RSUs granted to Ms. Adams, Ms. Ahrendts, Mr. Maestri, and Mr. Williams was determined by dividing $10 million by the closing stock price on the date of grant. The target number of performance-based RSUs granted to Ms. O’Brien was determined based on her mid-year promotion date. The grant date fair values for these awards are reported in the table entitled “Summary Compensation Table – 2019, 2018, and 2017.”

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Between zero and 200% of the target number of performance-based RSUs will vest on October 1, 2021, subject to continued employment through that date, depending on Apple’s Relative TSR percentile ranking for the applicable performance period, as follows:

If Apple’s total shareholder return for the performance period is negative, the number of performance-based RSUs that will vest is capped at 100% of the target number of performance-based RSUs regardless of our percentile ranking. If Apple’s Relative TSR percentile ranking is above the 25th percentile and between the other levels shown in the table above, the portion of the performance-based RSUs that will vest is linearly interpolated between the two nearest vesting percentages.

2019 Performance-Based RSU Payout Results. During 2019, Ms. Ahrendts, Mr. Maestri, and Mr. Williams each vested in performance-based RSUs that were granted on October 5, 2015. Similar to the design of the 2019 RSU Awards described above, between zero and 200% of the target number of these performance-based RSUs were scheduled to vest based on Apple’s Relative TSR percentile ranking for the applicable performance period, with a maximum 200% vesting for performance at or above the 85th percentile. For the three-year performance period from the beginning of 2016 through the end of 2018, Ms. Ahrendts, Mr. Maestri, and Mr. Williams each vested in 130,528 performance-based RSUs, representing 200% of the target number of performance-based RSUs. As shown in the table below, Apple’s Relative TSR was at the 89th percentile of the companies that were included in the S&P 500 for the three-year performance period, and Apple’s total shareholder return during this period was 107.36%.

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2019 Time-Based RSU Awards. The time-based RSUs awarded to Ms. Adams, Ms. Ahrendts, Mr. Maestri, and Mr. Williams were granted on September 30, 2018, which was the first day of Apple’s 2019 fiscal year. The number of time-based RSUs granted to each of these named executive officers was determined by dividing $10 million by the closing stock price on the date of grant. The number of time-based RSUs granted to Ms. O’Brien was determined based on her mid-year promotion date. The grant date fair values for these awards are reported in the table entitled “Summary Compensation Table – 2019, 2018, and 2017.”

The time-based RSUs granted to Ms. Adams, Ms. Ahrendts, Mr. Maestri, and Mr. Williams vest over approximately four and one-half years, with three equal installments vesting annually commencing on April 1, 2021 (approximately two and one-half years following the grant date), subject to continued employment through each vesting date. The April vesting dates for the time-based RSUs were selected to balance the October vesting of the performance-based RSUs and provide regular vesting intervals. As described above, all unvested RSUs granted to Ms. Ahrendts were canceled upon her departure from Apple. The time-based RSUs granted to Ms. O’Brien on February 5, 2019, the date she was promoted to her current role, vest over four and one-half years, with three equal installments vesting annually commencing on August 5, 2021, subject to continued employment through each vesting date.

Dividend Equivalents

At Mr. Cook’s request, none of his RSUs participate in dividend equivalents. All other RSUs granted to employees have dividend equivalent rights, which entitle RSU holders to the same dividend value per share as our shareholders. Dividend equivalents are subject to the same vesting and other terms and conditions as the corresponding RSUs. Dividend equivalents are accumulated and paid when the underlying RSUs vest.

Other Benefits

Our named executive officers are eligible to participate in our health and welfare programs, Employee Stock Purchase Plan, 401(k) plan, charitable gift matching program, vacation cash-out program, and other benefit programs on the same basis as other employees.

Security and Private Aircraft. We provide risk-based, business-related and personal security services to our employees, including our named executive officers, as determined to be appropriate by our security team. We consider the security measures provided to our named executive officers to be reasonable and necessary expenses for the benefit of Apple and not a personal benefit. However, in accordance with SEC disclosure rules, the aggregate incremental cost of these services is reported in the table entitled “Summary Compensation Table – 2019, 2018, and 2017.”

In the interests of security and efficiency based on our global profile and the highly visible nature of Mr. Cook’s role as CEO, the Board requires that Mr. Cook use private aircraft for all business and personal travel. Mr. Cook recognizes imputed taxable income and is not provided a tax reimbursement for personal use of private aircraft.

Relocation Assistance. Relocation assistance, including a gross-up for taxable relocation benefits, is provided to employees when necessary based on business needs. Ms. Adams was provided relocation assistance to move closer to Apple’s headquarters in connection with her hiring. Ms. Adams had 18 months from her date of hire to complete her relocation, and the portion of her relocation expenses incurred in 2019 is reported in the table entitled “Summary Compensation Table – 2019, 2018, and 2017.”

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Governance and Other Considerations

Tax Deductibility of Compensation Expense. Section 162(m) of the Internal Revenue Code generally places a $1 million limit on the amount of compensation a publicly held company can deduct in any tax year on compensation paid to “covered employees.” Prior to the passage of the 2017 Tax Cuts and Jobs Act, performance-based compensation paid to our “covered employees,” such as annual cash incentives and performance-based RSUs, was generally excluded from this $1 million deduction limit. As a result of changes in the tax law, this previously-available exclusion for performance-based compensation is generally no longer available after 2018. The Compensation Committee considers tax deductibility as one of many factors in determining executive compensation, including the impact of these tax law changes. However, the Compensation Committee retains discretion to award compensation that it determines to be consistent with the goals of our executive compensation program even if such compensation is not tax deductible by Apple and to modify compensation that was initially intended to be tax deductible if it determines that such modifications are consistent with Apple’s business needs. Thus, executive compensation arrangements may not be tax deductible or, if initially intended to be tax deductible, may not actually receive this treatment.

Compensation Clawback. The terms of all outstanding RSU awards held by our named executive officers allow us to recoup any shares or other amount that may be paid in respect of RSUs in the event the individual engages in certain acts of misconduct. Effective for 2020, the Compensation Committee has extended its compensation recoupment policy to the annual cash incentives awarded to our named executive officers. Apple may recover compensation in the event the named executive officer commits a felony while employed by Apple or, while employed by Apple or at any time thereafter, the individual engages in a breach of confidentiality, materially breaches any agreement with Apple, commits an act of theft, embezzlement or fraud, or if Apple is required to prepare an accounting restatement as a result of the named executive officer’s misconduct.

Prohibition on Hedging, Pledging, and Short Sales. We prohibit short sales, hedging, and transactions in derivatives of Apple securities for all Apple personnel, including directors, officers, employees, independent contractors and consultants. In addition, we prohibit pledging of Apple stock as collateral by directors and executive officers of Apple. We allow for certain portfolio diversification transactions, such as investments in exchange funds.

Stock Ownership Guidelines. Under our stock ownership guidelines, Mr. Cook is expected to own shares of Apple stock that have a value equal to 10 times his annual base salary. All other executive officers are expected to own shares that have a value equal to three times their annual base salary within five years of the officer first becoming subject to the guidelines. Each executive officer currently holds shares in excess of these guidelines. Shares may be owned directly by the individual, owned jointly with or separately by the individual’s spouse, or held in trust for the benefit of the individual, the individual’s spouse, or the individual’s children.

Risk Considerations. In establishing and reviewing Apple’s executive compensation program, the Compensation Committee considers whether the program encourages unnecessary or excessive risk-taking and has concluded that it does not. See the section entitled “Corporate Governance–Board Oversight of Risk Management” above for an additional discussion of risk considerations.

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Executive Compensation Tables

Summary Compensation Table – 2019, 2018, and 2017

The following table, footnotes, and related narrative show information regarding the total compensation of each named executive officer for 2019, 2018, and 2017, except in the case of Ms. Adams and Mr. Williams who were not named executive officers in 2017, and Ms. O’Brien who was not a named executive officer in 2018 or 2017.

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The amounts in the salary, bonus, and non-equity incentive plan compensation columns of the “Summary Compensation Table – 2019, 2018, and 2017” reflect actual amounts earned in the relevant years, while the amounts in the stock awards column reflect accounting values. The tables entitled “Outstanding Equity Awards at 2019 Year-End” and “Stock Vested – 2019” provide further information on the named executive officers’ potential realizable value and actual value realized with respect to their equity awards. The “Summary Compensation Table – 2019, 2018, and 2017” should be read in conjunction with the Compensation Discussion and Analysis and the subsequent tables and narrative descriptions.

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Description of Plan-Based Awards

Non-Equity Incentive Plan Awards. Each of the “Non-Equity Incentive Plan Awards” shown in the table entitled “Grants of Plan-Based Awards – 2019” was granted under the Apple Inc. 2014 Employee Stock Plan (the “2014 Plan”), which provides flexibility to grant cash incentive awards and equity awards; however, as described in that table and accompanying footnotes, the cash incentive opportunities awarded to Ms. O’Brien prior to her promotion on February 5, 2019 were granted under Apple’s other performance-based cash bonus programs offered to our Vice Presidents. The material terms of the 2019 non-equity incentive awards granted under the 2014 Plan are described under “Executive Compensation – Compensation Discussion and Analysis” in the section entitled “2019 Annual Cash Incentive.”

All Other Stock Awards. Each of the time-based and performance-based RSUs shown in the table entitled “Grants of Plan-Based Awards – 2019” was granted under, and is subject to, the terms of the 2014 Plan. The Compensation Committee administers the 2014 Plan.

Time-Based RSUs. The material terms of the time-based RSUs granted to Ms. Adams, Ms. Ahrendts, Mr. Maestri, and Mr. Williams, and the time-based RSUs granted to Ms. O’Brien in connection with her promotion, are described under “Executive Compensation – Compensation Discussion and Analysis” in the section entitled “Other Named Executive Officers’ Long-Term Equity Awards.” The time-based RSUs granted to Ms. O’Brien on September 30, 2018, prior to her promotion, vest over four years, in eight equal semi-annual installments commencing on April 15, 2019, subject to continued employment with Apple through each applicable vesting date.

Performance-Based RSUs. The material terms of the performance-based RSUs granted to Mr. Maestri, Ms. Adams, Ms. Ahrendts, Ms. O’Brien, and Mr. Williams are described under “Executive Compensation – Compensation Discussion and Analysis” in the section entitled “Other Named Executive Officers’ Long-Term Equity Awards.”

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