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alt="messageImage_1569973618374.jpg" />messageImage_1569973608112.jpgmessageImage_1569973595064.jpgmessageImage_1569973576094.jpgmessageImage_1569973566807.jpgmessageImage_1569973555171.jpgmessageImage_1569973532407.jpgmessageImage_1569973521584.jpgmessageImage_1569973505955.jpgmessageImage_1569973440228.jpganalyze Apple's executive and director compensation structure (e.g. salary, bonus,

stock-based compensation, etc.). Provide suggestions on how to resolve any

potential problems?


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W14736
APPLE: CORPORATE GOVERNANCE AND STOCK BUYBACK'
Professor Won-Yong Oh and Seoyeon Park wrote this case solely to provide material for class discussion. The authors do not
Intend to Mustrate either effective or Ineffective handling of a managerial situation. The authors may have disguised certain names
and other Identifying Information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order coples or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, NOG ON1; (t) 519.061.3208; (e) [email protected]; www./veycases.com.
Copyright @ 2015, Richard Ivey School of Business Foundation
Version: 2015-03-27
At the end of 2013, Carl Icahn, an activist shareholder who had invested a significant amount in Apple's
stock, proposed a more than US$50 billion share repurchase program during the 2014 fiscal year. If this
proposal was approved at the annual shareholder's meeting, Apple would be in a position to buy back a
significant portion of its own shares on the stock market, which would drive up the stock price. However,
Apple's executives and board of directors opposed Icahn's proposal and recommended that shareholders
vote against it.
As of the end of December 2013, there were 892,553,950 shares, held by 26,522 shareholders. Apple's
annual shareholder's meeting was scheduled to be held on February 28, 2014. Shareholders could either
vote for Icahn's proposal or follow the recommendation of Apple's board.
COMPANY OVERVIEW*
Apple was incorporated in California in January 1977, with the original name of Apple Computer, Inc.
Apple's business areas included mobile communication and media devices (e.g., iPhone, iPad), personal
computers (e.g., Mac), portable digital music players (e.g., iPod), various related services, software (e.g.,
iOS, OS X, iTunes Store, App Store and iCloud) and peripherals (e.g., Apple TV). Apple's key strength
lay in its unique computing ecosystem, 10S, rather than its superior hardware; iOS provided users with an
integrated and seamless experience across multiple devices.' Apple sold its products and services
worldwide through its retail stores in 13 countries, as well as in online stores, through direct sales forces
and through third-party retail channels (e.g., cellular network carriers and other wholesalers and retailers).
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This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
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presented in this case are not necessarily those of Apple Inc. or any of its employees
All currency amounts are shown in U.S. dollars unless otherwise noted.
Company proxy statement (20141. p.4.
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Apple's strategy was well known for its strong emphasis on a positive user experience through innovative
hardware, software and services, and its historical financial performance was well above the industry
average (see Exhibit 1).
The markets for Apple's products and services were very competitive, characterized by the frequent
introduction of new products and by rapid technological advancement and innovation. The industry
within which Apple had been competing included many large, well-funded and skilled competitors, such
as Samsung. Given that the industry was characterized by high competition based on technological
development, Apple's future success relied heavily on the continuous introduction of competitive
products, services and technologies to the market. The company continued to invest in research and
development (R&D) in order to enhance its existing products and to expand its new product offerings.
Total R&D expenditure was $6.0 billion, $4.5 billion and $3.4 billion in 2013, 2012 and 2011,
respectively."
While Apple clearly possessed some key strengths, including strong market positions with innovative
products, a clear and simple marketing plan and a higher margin structure, analysts expressed some
concerns about its weaknesses. The iPhone was no longer considered a cutting-edge product, and the
strategy of targeting the premium market segments, rather than the mass market, limited the company's
growth potential. Finally, a high dependence on a few core products (Phone and iPad) and a relatively
weak position in the corporate sector represented some of Apple's weaknesses as well (see Exhibit 2)
Annual Meeting"
The annual meeting agenda contained 11 items for discussion, including four items initiated by a
shareholder's proposal, which were listed on the company's proxy statement (i.e., SEC form DEF 14A).
These items included the election of board members, the appointment of accounting firms, the approval of
executive compensation and a decision on the stock buyback program proposed by major shareholders.
Also, the board members provided voting recommendations for these items, based on their judgment as to
whether each proposal aligned with the shareholder's interest (recommend for ) or not (recommend
'against ). Icahn's proposal of stock repurchase was item No. 10, entitled "Shareholder proposal of a non-
binding advisory resolution relating to the company's capital return program," and the board had
recommended that shareholders vote against this proposal.
Shareholders could vote for or against Icahn's proposal of the stock repurchase program. Their task, then,
was to judge whether Icahn's proposal or the board's recommendation (i.e., to vote against the proposal)
would be beneficial to shareholder interests. Looking at the existing corporate governance characteristics
constituted an initial and important step, one that shareholders could not take lightly.
APPLE'S CORPORATE GOVERNANCE
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There were three important entities related to corporate governance: corporate executives, shareholders
and the board of directors. In addition, setting an appropriate executive compensation represented an
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important item for discussion at the annual meeting because it could affect the incentives of executives.
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Corporate Executives: People Who Manage the Company
Apple's senior management team consisted of eight executives, including chief executive officer (CEO)
Tim Cook and seven senior vice-presidents. Since August 2011, Tim Cook had served as CEO, having
previously held the position of chief operating officer (COO) since October 2005. Cook had joined the
company in March 1998 and worked as executive vice-president, Worldwide Sales and Operations from
2002 to 2005. Previously, Cook had served as senior vice-president, Worldwide Operations, Sales,
service and support (from 2000 to 2002) and as senior vice-president, Worldwide Operations (from 1998
to 2000). Outside of Apple, his previous appointments included serving as director of the National
Football Foundation & College Hall of Fame, Inc."
Other senior executives from Apple included the following:"
Eduardo Cue, senior vice-president, Internet Software and Services
.
Peter Oppenheimer, senior vice-president and chief financial officer
Craig Federighi, senior vice-president, Software Engineering
Daniel Riccio, senior vice-president, Hardware Engineering
Philip Schiller, senior vice-president, Worldwide Marketing
Bruce Sewell, senior vice-president, General Counsel and Secretary
Jeffrey Williams, senior vice-president, Operations
Ownership Structure: People Who Own the Company
Apple had attracted a number of major institutional shareholders to its roster (see Exhibit 3). Executives
and directors also possessed shareholdings (see Exhibit 4), a situation that was referred to as "insider
ownership." The total number of shares owned by 15 executive officers and directors as a group was
567,949, which represented less than 1 per cent of outstanding shares of the company's common stock.
In August 2013, Carl Icahn, who owned roughly $1 billion worth of Apple shares, " approached Tim
Cook and discussed the stock repurchase program. According to Icahn, the pair "discussed my opinion
that a larger buyback should be done now. We plan to speak again shortly." Icahn believed that Apple
was significantly undervalued."
However, even before Icahn's proposal, Apple was engaged in a major stock buyback program. In March
2012, the board authorized a quarterly dividend and stock buyback program worth of $45 billion. In April
2013, the company announced that it would double the size of its planned stock repurchase program and
dividend payments to $100 billion by the end of 2015.12
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" Company proxy statement, 2014, p. 10.
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Ibid., p. 17.
"David Benoit, "Icahn Ends Apple Push with Hefty Paper Profit," The Wall Street Journal, February 10, 2014,
www.ws com/articles/SB10001424052702304558804579374720149630510, accessed September 10, 2014.
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Board of Directors: People Who Oversee Executives
The board of directors oversaw the top executives, including the CEO, in order to ensure that the firm's
operations were competent, appropriate and ethical and that they aligned with the shareholders' long-term
interests. Apple's board of directors was composed of eight directors (see Exhibit 5) who were nominated
for re-election at the annual meeting each year (i.e., each one served a one-year term). The board
comprised a diverse group of people, mostly from the world of business. Most of these individuals held
senior leadership positions at large companies, and many of the directors also had experience both as
directors of other companies and at highly regarded academic, research, nonprofit and philanthropic
organizations.
As the only director who was also an employee of Apple, CEO Tim Cook served as a member of the
board. Arthur Levinson, chairman of Genentech, Inc., served as the chairman of Apple's board of
directors. According to the company's proxy statement, "The board also believes the current separation of
the chairman and CEO roles allows the CEO to focus his time and energy on operating and managing the
company and leverages the chairman's experience and perspectives."
Apple's board was composed of three committees: an audit committee (chaired by Dr. Ronald Sugar); a
nominating and corporate governance committee (chaired by William Campbell); and a compensation
committee (chaired by Andrea Jung). Each committee had three or four members, including a committee
chauperson, and they operated under written charters adopted by the board of directors.
The audit committee had the responsibility of evaluating the financial performance and transactions,
appointing the public account firm, assessing the accounting policies and internal control system,
reviewing the services performed by public accounting firm, and overseeing enterprise risk management.
During 2013, the committee met 10 times.
The nominating and corporate governance committee was responsible for evaluating potential nominees
(i.e., the director candidates proposed by shareholders) to the board, as well as for assessing the board's
effectiveness in monitoring executives and making recommendations regarding the size, structure and
composition of the board and its committees. The committee met four times during 2013, and, at the
annual shareholders meeting, it recommended to the full board the re-election of each of the incumbent
directors.
The compensation committee was involved in reviewing the executives' compensation, arranging equity
compensation plans (e.g., stock options) and overseeing the review of all board members' compensation.
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The compensation committee met eight times during 2013.
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Executive Compensation
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Interestingly, Steve Jobs, Apple's former CEO at the time, received only $1 per year as his compensation,
but he owned 5.5 million shares of the company's common stock (worth more than US$1.84 billion as of
January 2011).
ICAHN'S PROPOSAL: STOCK BUYBACK
Due to its successful past performance, Apple was sitting on a huge cash stockpile of $147 billion. Some
investors such as Carl Icahn were dissatisfied with the excess-cash situation and wanted Apple to put the
cash to work for the company's shareholders. Since much of Apple's cash was trapped overseas because
of the company's tax-saving policy, Icahn proposed that Apple should issue bonds and use the money to
repurchase shares on the public market. This stock repurchase program would drive up Apple's stock
price, which would in turn increase the shareholders' stock value, including Icahn's holdings.
On August 13, 2013, Icahn tweeted about his large stake in Apple. He claimed the company was
extremely undervalued and urged CEO Tim Cook to consider a stock buyback. Icahn's action made a
significant impact on Apple's stock price, which surged 5 per cent by close on August 13 and an
additional 1.82 per cent the next day. As a result, the stock price finally crossed a psychological threshold
of $300.
In an interview with CNBC on October 1, 2013, Icahn said, "I feel very strongly about this. I can't
promise you the stock will go up, and I can't promise you they will do the buyback. But I can promise
you that I'm not going away until they hear a lot more from me concerning this [issue]." 4
On October 24, 2013, Icahn reinstated his interest in the stock buyback program by disclosing a 4.7
million share position through a letter to Cook, which was made public. Later, Icahn recalled, "Cook's
assistant initially tried to schedule at 5 a.m. Pacific Time. That's usually when I go to bed! This guy's
tougher to get than the President," laughed Icahn. Icahn said, "Tim Cook is doing a good job with the
business . . . . I think he's good whether he does what I want or not." After the conversation with Cook,
Icahn said, "We've discussed a lot of things, and he asked a lot of questions and really listened. "15
On November 26, 2013, three days before the deadline for measures to be voted on at Apple's next annual
shareholders meeting, Icahn finally filed a $50 billion shareholder proposal, calling for Apple to pay out
some of its cash hoard to investors. Again, Icahn emphasized that he was not against the management of
the company; however, in an interview with Time Magazine, he said that Apple simply had "too much
money on [its] balance sheet . . . . Apple is not a bank."16
Why Vote for the Proposal?
By reducing the number of shares outstanding, the buyback would definitely make a positive impact on
Apple's share price, at least in the short term. Icahn believed that Apple had sufficient borrowing ability
to spend $50 billion in a stock repurchase without causing any liquidity problems or compromising its
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" Connie Guglielmo, "Carl Icahn Wasn't Joking about That $150 Billion Stock Buyback by Apple, " Forbes.com
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In addition, Ken Yook, a finance professor at the Johns Hopkins Carey Business School, mentioned that
interest on bonds was tax deductible. Also, he pointed out that interest rates remained at a historically low
level, even though they had risen recently. Yook said, "Apple should easily be able to sell tens of billions
of dollars more bonds . . . . Apple can enjoy the tax shields of debt financing and lower cost of capital,
among other benefits, without facing any significant issues."
Icahn said his proposal would call for only slightly more stock repurchase than Apple had already
committed to. In an open letter to Apple shareholders, he wrote, "We see no reason to persist with our
nonbinding proposal, especially when the company is already so close to fulfilling our requested
repurchase target."17"
Why Vote Against the Proposal?
Apple's executives and board had recommended that shareholders vote against Icahn's proposal. Some
other major shareholders, such as the California Public Employees' Retirement System pension fund,
publicly backed this stance. Mark Moskowitz, an analyst at J.P. Morgan, commented:
Apple sits on an enviable cash pile, and some of that cash needs to be returned to shareholders
over time, which the company already has committed to. We are concerned, however, that
Apple's accelerated stock buyback activity could be in response to some investors focusing too
much on capital allocation. We would prefer to see Apple assert a more balanced use of cash,
across [mergers and acquisitions], stock buybacks and dividends.18
The problem with Icahn's proposal was that sizable buyback programs could be a distraction for a high-
tech company that should be focusing on innovation in new products and services. Gerard Tellis, a
professor at the University of Southern California, Marshall School of Business, suggested that this was a
matter of "outstanding innovation" versus "financial engineering, " stating that "the growth of Apple's
stock price was driven by outstanding innovation, not financial engineering." Dr. Arun Sundararajan,
professor of information sciences at New York University, echoed this view, saying, "This kind of
financial engineering isn't in the long-term interest of Apple's shareholders .
. . [Apple is] still a
tremendously valuable company, but stock price boosts from financial engineering shouldn't distract from
the fact that [its] business model doesn't look as solid and dominant as it did four years ago." Further
Justin Pettit, vice-president at IHS Consulting, mentioned, "For a company like Apple, matters of
financial policy are very much second-order concerns."
Apple had already made a significant effort to increase shareholder returns. In March 2012, the board
approved the stock repurchase program of $45 billion, in addition to a quarterly dividend. In April 2013
Apple again authorized a significant increase in the size of the shareholder returns up to $100 billion,
raising the dividend and increasing the share buyback authorization to $60 billion.20
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THE DECISION
At the annual meeting in February 2014, Apple shareholders would vote to approve or reject Icahn's
stock buyback proposal. Icahn would have the option of withdrawing his proposal if he and the company
could come to an agreement before the annual meeting.
Tim Cook and the other senior executives could choose between the options of making an agreement with
Icahn or allowing shareholders to vote at the shareholder meeting. If no action was taken before the
shareholder meeting, each side could try to persuade shareholders to vote with them. The time had arrived
for Apple's 26,522 shareholders to make a decision.
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EXHIBIT 1: APPLE'S FINANCIAL DATA
2013
2012
2011
2010
2009
Net Sales
170,010 156.508
108 240 65,225 42,905
Net Income
37.037
41.733
25 022 14.013
8,235
Total cash, cash equivalents and marketable
securities
146,761 121.251
81.570 51 011 33,992
Total assets
207,000 178,064
4 116,371 75.183 47,501
Long-term debt
16,960
0
Total liabilities
83,451
57.854
30 756 27 302 15,861
Total shareholders' equity
123,549 118.210
76.815 47.791
Earnings per share
Basic
10.03
44.64
28.05
15.41
8.22
Diluted
30.75
44.15
27.68
15.15
9.08
Cash dividends declared per share
11.40
2.65
Note: Unit in millions, except earnings per share and cash dividends per share.
Source: Company annual report, 2014, p.23.
EXHIBIT 2: SWOT ANALYSIS
Strengths
Weaknesses
Superior historical financial results
- High sales growth and operating margins
High prices and limited product range
- Strong cash flow
Lack of innovation for future products offering
High focus on design
High dependence on key products (iPhone and
. . .
iPad)
Brand awareness and reputation
Proprietary systems (e.g., OS)
Relatively weak position in the corporate sector
Innovative products (MAC, iPad, iPhone, iPod)
Dependence on product upgrades
Skilled manufacturing and distribution networks
Lack of product breadth (at different pricing
ranges)
of scale)
Higher margin structure (e.g.. low R&D, economies
Opportunities
Threats
Emerging markets (e.g., China)
Product upgrades, generating refresh purchases
Saturation in Smartphone market
Increased competition
Increasing corporate demand
- Android OS and Samsung dominate
.
Wearable gadgets
smartphone market.
Synergies of products: complementary effects
Rapid product cycles
among products
Lawsuits over patent issues (e.g., Samsung)
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EXHIBIT 3: MAJOR SHAREHOLDERS PROFILE (AS OF JUNE. 30, 2014)
Top 10 Major Shareholders
%
Shares
Shares
Shares
Value of Equity
Chang
Change
Assets
Vanguard Group. Inc
5.40
323.102.515
3,905.194
-1.19
1.581,890.55
State Street Global Advisors (US)
4.03
241.237.830
7.604.496
3.08
89,364.85
BlackRock Institutional Trust
Company
3.7
225,989.756
-11,197.754
4.7
1.286,241.24
Fidelity Management & Research
3.0
182 282.153
16,434.436
9.9
51,443.21
Invesco PowerShares Capita
Management LLC
1.0
82.768.833
7.010.191
-10.05
78.692 18
TIAA-CREF
0.9
55,575.277
1,973.197
3.68
262,386.61
Icahn Associates Corporation
0.88
52.760.848
0.00
36,873.84
T. Rowe Price Associates, Inc
0.87
51.856.730
-8,934.058
-11.79
601,753.67
Northern Trust Investments, Inc.
0.86
51.566,318
2,885.198
5.30
202,671.20
Capital Research Global Investors
0.81
48.580.205
4,762.450
10.87
443,403.34
Note: Filing dates, June 30, 2014. The number of total outstanding shares is 892,553,950 and unit of Value of Equity Assets
is $MM.
Source: Thompson One Database, accessed October 12, 2014.
EXHIBIT 4: SHARE OWNERSHIP BY EXECUTIVES AND DIRECTORS (AS OF DECEMBER 26, 2013)
Number of common
stock shared
Executives
Timothy Cook
37.316
Eduardo Cue
3,120
Peter Oppenheimer
4,834
Daniel Riccio
2,258
Jeffrey Williams
317
Directors
William Campbell
48,112
Millard Drexler
1.533
Al Gore
01.920
Robert Iger
5.616
Andrea Jung
22.280
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Arthur Levinson
240,040
Ronald Sugar
1.718
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Note: The number of total outstanding shares is 892,553,950.
Chume: Commenw pomer statement 2014 n 19
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EXHIBIT 5: DIRECTOR PROFILES
Director
Profile
Timothy Cook
Apple's CEO since August 2011
- age: 53
Company's Chief Operating Officer since October 2005
- director since 2011
Served as Executive Vice-President, Worldwide Sales and Operations
(2002-2005)
in March 1908
Wiliam Campbell
Chairman of Intuit Inc. ("Intuit ") since August 1098
- age: 73
CEO and director of Intuit (1994-1908)
- director since 1997
Director of GSV Capital Corp. (since October 2012) and the National
Football Foundation & College Hall of Fame, Inc.
Chair of the Board of Trustees of Columbia University
Malard Drexler
Chairman and CEO of J.Crew Group since January 2003
- age: 69
(1983-2002)
President and CEO of The Gap (1995-2002), director of The Gap
- director since 1999
Director of Warby Parker since 2013 and Teach for America since 2011
Al Gore
Chairman of Generation Investment Management since 2004
- age: 65
Partner of Kleiner Perkins Caufield & Byers since 2007
- director since 2003
Chairman of The Climate Reality Project
U.S. House of Representatives (four times), U.S. Senate (two times),
Vice-President of the United States (served two terms)
Executive Chairman of Current TV (2002-2013)
Robert Iger
Chairman and Chief Executive Officer of The Walt Disney Company
- age: 63
(Disney) since March 2012
- director since 2011
President and CEO, Disney (2005-2012)
President and COO. Disney (2000-2005)
Director of the National September 11 Memorial & Museum, the Lincoln
Center for the Performing Arts, and the U.S.-China Business Council
Andrea Jung
Senior advisor to the board of directors of Avon Products, Inc.
- age: 55
Executive chairman, Avon (2012)
- director since 2008
Chairman of the board of directors and CEO, Avon (2001-2012)
Member of the supervisory board of Daimler AG since April 2013
Director of General Electric Company since 1908
Member of the New York Presbyterian Hospital Board of Trustees.
Arthur Levinson
Chairman of the board
Chairman of Genentech, Inc. ("Genentech") since September 1909,
- age: 63
- director since 2000
CEO of Genentech (1995-2009)
Director of the Roche Holding Ltd. since March 2010
Chairman of the board of Amyris and a director of NGM
Biopharmace
aceuticals, and the Broad Institute of Harvard and MIT
Dr. Ronald Sugar
Retired chairman of the board and CEO of Northrop Grumman
- age: 65
Corporation ("Northrop Grumman") (2003-2010)
- director since 2010
President and chief operating officer, Northrop Grumman (2001-2003)
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Director of Air Lease Corporation since 2010, of Amgen Inc. since 2010.
and of Chevron Corporation since 2005.
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Source: Company proxy statement, 2014, pp. 10-12
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EXHIBIT 6: EXECUTIVE AND DIRECTOR COMPENSATION (YEARS 2013, 2012, 2011)
Executives
Year
Salary
Bonus
Stock award
Non-equity
All other
incentive plan
Total (S)
Timothy Cook
2013 1.400,006
comp.
2,800,000
CEC
2012 1.357.718
52,72
4,252.727
2,800,000
2011 900.017
17.274
4,174,092
80.000
200,000
16,520 377.996.537
Peter Oppenheimer
2013
866.061
Senior Vice-President
2012 805.400
1.750,000
16,791
2,832.85
66.169,750
1.600,000
CFO
700.014
16,412 68,591,56
Eduardo Cue
2013
700,000
16,129
866.061
1,416,143
1,750,000
Senior Vice-President
2012 805.400
31,044
2,647
47.875,262
1,600,000
39,753
50,420,41
2011
607.704
51.852.000
444,615
48,858
Daniel Riccio
2013 866,061
52,952,975
1.750,000
16.791
2,832,852
Senior Vice-President
Jeffrey Williams
20138
1,750,000
16,791
Senior Vice-President
2012 805.400
2,632,852
66.269,800
1.600,000
16,412 68,691,612
Directors
Fees paid in
cash
Stock
award
All other
compensation
Total (S)
William Campbel
65,000
249,848
823
Millard Drexler
315.671
50,000
249,848
5,969
305,817
Al Gore
50,000
249.848
3,918
303.766
Robert ger
0,000
249,848
5,341
305.189
Andrea Jung
70,000
249,848
Arthur Levinson
250,000
249,848
6,444
326 292
8,385
75,000
508.213
Ronald Sugar
240,848
1,984
326.832
Source: Company proxy statement, 2014, pp. 16 and 33.
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