In a recent ruling by a judge in Delaware, Tesla's CEO Elon Musk saw his colossal pay package invalidated, citing flawed processes and unfair pricing. The judge, Chancellor Kathaleen St. Jude McCormick, described Musk's compensation opportunity as 'the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude.' This decision resulted in Musk being bumped from the top spot on Forbes' list of wealthiest individuals, with his net worth being reduced to $185.3 billion.
Critics have long argued that CEO pay packages are exorbitant, particularly when compared to the average worker's salary. The median compensation for CEOs of S&P 500 companies was valued at $14.8 million, a staggering sum that would take an average worker over 185 years to earn. Musk's compensation package, initially estimated at $2.28 billion in 2018, has grown as Tesla's stock price soared. In sharp contrast, the median worker at Tesla earned $34,084 in 2022.
Under Musk's pay plan, he received stock options whenever Tesla's market value increased by $50 billion. This arrangement allowed him the opportunity to purchase nearly 304 million shares at a price of $23.34 each. As Tesla's stock price rose from $21 at the start of 2018 to approximately $191, Musk met each performance hurdle outlined in the package.
However, the recent ruling highlights the lack of independence on Tesla's board concerning Musk's compensation package. While Musk's lawyers argued that the package needed to be generous to incentivize him to stay with the company, the judge dismissed this reasoning. Chancellor McCormick raised the critical question of whether such a massive compensation plan was necessary for Tesla to retain Musk and achieve its goals.
Many of Musk's supporters argue that he should not be paid on par with other CEOs because he is exceptional in his role. Musk and Tesla are regarded as practically inseparable, with his leadership seen as crucial to the company's growth. Musk's visionary approach and the success of Tesla have solidified its position as the most valuable automaker globally, outselling its competitors in the electric vehicle market. Additionally, Musk's influence and star power save the company significant sums on advertising, ultimately contributing to Tesla's phenomenal growth and impact on the auto industry.
Determining appropriate CEO compensation can be complex, with companies often benchmarking against their rivals. General Motors, for example, considers the salaries of executives at other major corporations and employs intricate formulas when determining CEO compensation. Mary Barra, CEO of GM, earned total compensation valued at $29 million in 2022, while Jim Farley, CEO of Ford, received $22 million in compensation that year.
Tesla, often considered more as a tech company than an automaker, is also subject to comparisons with Big Tech stocks. These companies are known for their disruptive nature and impact on industries and people's lives. For instance, Apple's CEO, Tim Cook, earned compensation valued at $63.2 million in 2023, with a significant portion coming from stock awards. It is important to note that these figures represent the estimated value of the compensation package and not the actual take-home pay of the CEOs.
The recent ruling regarding Musk's pay package raises questions about the future of executive compensation at Tesla. Experts suggest that any new package is likely to face legal challenges unless substantial changes are made to protect shareholders' interests. Charles Elson, a retired corporate law professor and founder of the corporate governance center at the University of Delaware, describes the situation as a 'mess' for Tesla, emphasizing the need for a meticulous process or the resignation of Tesla's board members to address the issue effectively.
Notably, it is the first time in over three decades that a judge has invalidated an executive compensation plan at a public company. Elson also highlights the lack of transparency in Musk's negotiations, where shareholders were seemingly unaware that Musk was negotiating with himself. This revelation raises speculation about the outcome if shareholders had been fully informed.
As the legal battle continues, the ruling on Musk's pay package showcases the ongoing debate surrounding executive compensation and the need for more transparent and fair processes. The case serves as a reminder that CEOs, no matter how influential, are accountable to their shareholders and that their compensation should be aligned with company goals and shareholder interests.
