By Philip Elmer-DeWitt
June 22, 2013

FORTUNE — “The decline in Apple’s stock price over the last couple of quarters has been very frustrating to all of us,” Apple (AAPL) CEO Tim Cook told analysts during the company’s most recent earnings call.

That may have been small comfort to shareholders who suffered through the stock’s 2012-2013 meltdown, but now Cook has put his bonus where his mouth is.

In a pair of filings posted Friday, Apple’s board of directors alerted the SEC that its compensation committee has, at Cook’s request, modified the award of 1 million restricted stock units (RSUs) he was granted in August 2011 when he was promoted to CEO.

Starting next year, Cook will forfeit up to 50% of his annual bonus if the performance of Apple’s shares don’t keep pace with the S&P 500.

Originally he was to get the 1 million shares in two lump sums — assuming he stayed with the company — half in August 2016, the rest in August 2021. Now, if the stock doesn’t do better, Cook will feel the pain along with the rest of Apple’s shareholders.

A Form 8-K lays out the new rules:

Under the adopted modification, Mr. Cook will forfeit a portion of the 2011 CEO equity award, which was previously entirely time-based, if the Company does not achieve certain performance criteria. [See NOTE]

While the Committee generally believes that a performance-based award should have both a downside and an upside component, at Mr. Cook’s request, the modification does not contain an upside opportunity for overachievement of these criteria.

As a result of implementing a modification with only downside risk, the Committee has determined that a portion of the original grant should vest earlier than originally scheduled. This modification will not change the award’s original value for accounting expense purposes…

Because Mr. Cook faces only downside risk from the modification, the Committee believed that less than 50% should be placed at risk. Mr. Cook, however, expressed a strong desire to set a leadership example in the area of CEO compensation and governance and requested a larger at-risk percentage. Accordingly, the Committee is placing 50% of the RSUs at risk in each future annual performance-based tranche.

NOTE: The performance criteria compare Apple’s total shareholder return to that of the S&P 500 and reduce Cook’s annual reward according to the following formula:

  • If Apple’s performance is within the top third of that group, Cook’s RSUs for that year will vest in full.
  • If its performance is in the middle third, the RSUs for that year will be reduced by 25%
  • If its performance is in the bottom third, the RSUs will be reduced by 50%.

In the worst case scenario, Cook could lose 327,123 RSUs. At Friday’s closing price of $410.79, that’s a cut of $134 million.


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