Apple announced John Ternus's pay package, which gives the new CEO a major financial incentive to outperform many of the biggest companies in the U.S.

Ternus took over as CEO of the tech giant from Tim Cook on Tuesday. The same day, Apple published a filing with the Securities and Exchange Commission that broke down the compensation packages for Ternus and Cook now that the two have changed roles.

Ternus will have a salary of $3 million, with additional compensation coming in the form of stock. Importantly, Apple's People and Compensation Committee approved an annual equity award for Ternus with a target value of $55 million for fiscal 2027. But there's a catch: 75% of the equity award will be granted in performance-based restricted stock units that will vest based on Apple's total shareholder return relative to other companies in the S&P 500.

"It's not as if they're planning to reward him for meeting a specific earnings target or profitability target or number of product launches," Jo-Ellen Pozner, associate professor of management and entrepreneurship at Santa Clara University's Leavey School of Business, tells Barron's. "Instead, they're saying, 'you need to do better in terms of stock price return than the S&P average to earn this contingent pay.'"

That won't be an easy task. Apple stock has already gained 19% this year and 36% over the past 12 months, compared with gains of 12% and 19% for the S&P 500 over those respective periods. Shares are also trading at 34.4 times earnings expected over the next 12 months, well above their five-year average of 27.9 times forward earnings. That means the bar is high for Apple to deliver on Wall Street expectations.

The overall environment is also challenging for multiple reasons. Apple is dealing with a memory shortage that has driven up costs and is pressuring margins. The company is also getting set to release new products, including a foldable iPhone, which is expected to be expensive. Then there are investors' lofty expectations for artificial intelligence, an area where Apple has so far struggled to deliver.

Ternus is taking the wheel at a company facing significant headwinds, and Apple will need to perform if he is to maximize his compensation.

So why would Ternus agree to this type of pay package?

Pozner says that this type of compensation "feels like it could be an insurance policy against a market downturn."

"If the benchmark is relative to the rest of the S&P, if the whole market tanks, then he won't be penalized for that," says Pozner. She also believes it's likely that Ternus is confident in what's in store for Apple down the line.

Investors are likely happy to see this kind of incentive in the compensation package. Now it's time for Ternus to deliver.