Elon Musk

EXPLAINER: The case against Elon Musk’s $56-B pay package


This is AI generated summarization, which may have errors. For context, always refer to the full article.

EXPLAINER: The case against Elon Musk’s $56-B pay package

MUSK. Elon Musk, chief executive officer of SpaceX and Tesla and owner of X, formerly known as Twitter, attends the Viva Technology conference dedicated to innovation and startups at the Porte de Versailles exhibition centre in Paris, France, June 16, 2023

Gonzalo Fuentes/Reuters

A 2018 lawsuit claims that Musk's pay package was unfair, and such a package wasn't necessary to incentivize Musk to achieve success for Tesla

A Delaware judge on Tuesday, January 30, invalidated Elon Musk’s $56 billion pay package for his work as Tesla’s chief executive, siding with a Tesla shareholder who called the package unfair.

Musk is one of the world’s wealthiest people, according to Forbes Magazine, and his 2018 compensation package for leading the electric-vehicle maker much larger than any executive pay package to date.

Here is what the case is about:

Who sued and why?

An investor named Richard Tornetta sued Musk and several Tesla directors in 2018, claiming Musk’s pay package was unfair. While Tornetta held just nine Tesla shares, the deal had also been criticized by major pension fund California State Teachers’ Retirement System (CalSTRS) and proxy advisory firms, who viewed the deal as too large.

Musk’s 2018 pay package gave him stock grants worth around 1% of Tesla’s equity each time the company achieved one of 12 tranches of escalating operational and financial goals. Tornetta argued that shareholders were not told how easily the goals would be achieved when they voted on the package.

Tesla achieved the financial goals, helping make Musk one of the world’s wealthiest people.

Tornetta claimed the pay was not necessary to incentivize Musk to achieve success for Tesla, as Musk already owned around 22% of the automaker’s stock.

What was Musk’s defense?

Tesla’s board argued in court filings that the pay package was needed to align Musk’s incentives with shareholders and to keep him focused on the company as it ramped up production of the Model 3. It argued that Musk did not receive any compensation other than the stock options and that if Tesla had not achieved the targets in the pay package, Musk would not have received any money.

Shareholders were told that the goals tied to Musk’s pay were “challenging” yet “attainable.”

What happens next?

Musk is likely to appeal, experts said. Before that can happen, the judge will have to finalize the ruling and decide on compensation for the lawyers who represented Tornetta on a contingency basis.

Even without the pay package, Musk benefited from his 22% ownership share of Tesla’s stock at the time the package was adopted in 2018. Since then, Tesla’s stock has risen about 10-fold, raising the value of his stake by more than $100 billion.

Can Tesla pay Musk retroactively?

Musk said in January that discussions on a new pay package with the board were on holding pending the outcome of the case over the 2018 package.

The plaintiff’s legal team has said in court documents that the board could adopt a new plan to pay Musk for his work for the last five years, saying that this plan would have to be reasonable.

Experts said any such payment would likely pale in comparison with the stock grant and could lead to more legal headaches.

Jesse Fried, an executive pay expert and professor at Harvard Law School, said that while Delaware courts sometimes allow boards to make modest “gift” payments to executives for past performance, shareholders could easily sue over such a payment to Musk, claiming it was a waste of corporate resources.

“Musk has already generated value for the shareholders. If they were to write a check to him now for $10 billion for past performance, what exactly do the shareholders get from that?” he said. – Rappler.com

Add a comment

Sort by

There are no comments yet. Add your comment to start the conversation.

Summarize this article with AI
Download the Rappler App!