Elon Musk is being taken to court over allegations that suggest the $2.6 billion compensation package he received as CEO of Tesla were under pretences that involved the exploitation of its shareholders.
This week, Tesla and CEO Elon Musk will spend time in court to defend the compensation package that helped make him the world’s richest man. The week-long trial in Delaware Court of Chancery will examine the 2018 compensation plan that the automaker’s board of directors created for Musk. The automaker said at the time it could be worth nearly $56 billion, making it the largest compensation package for anyone on Earth from a publicly traded company.
Even in the rarified air of CEO pay, Musk’s compensation plan stood apart. Millions upon millions of dollars are often lavished on corporate executives of the biggest companies, but the plan to pay Musk initially totaled in the tens of billions, as long as he met performance goals. It wasn’t in cash – top executive pay rarely is – but in shares of the company.
The higher Tesla went, the more those shares would be valued, the more Musk would be awarded and the more those shares would be worth. This was a huge bet on Musk and Tesla, but it also turned out to be a great deal for Musk. As of January 2019, the value of his award had risen to about $30 billion – more than twice what he initially could have earned under the plan.
At the time, some Tesla investors sued, saying the plan amounted to corporate waste because it lavished such an extraordinary amount of compensation on a single person. The trial will focus on whether the compensation plan was improper under Delaware law and whether it should be overturned.
This trial of Tesla CEO Elon Musk over his massive compensation package could have far-reaching implications for how executives are paid. The trial, set to begin next week in Delaware, will pit Musk against shareholders who say he didn’t deserve the $2.6 billion stock grant he received in 2018. The case could upend how such compensation is awarded and set a new precedent for how much CEOs can be paid.
Musk’s attorneys have argued that the compensation was fair and approved by shareholders. But the plaintiff, Richard J. Tornetta, claims that Musk exploited his control over the company and its board of directors to secure the huge payment.
The trial could also invigorate debate over executive compensation, including large stock grants they receive. S&P 500 CEOs averaged $18.3 million in compensation in 2021, 324 times the median pay at the companies. That disparity has grown in recent years.
According to CNN Business, Amazon CEO Andy Jassy, for example, received compensation valued at $212.7 million in 2021. Apple CEO Tim Cook received nearly $100 million last year. Microsoft CEO Satya Nadella was paid nearly $50 million in 2021.
The plaintiff claims on behalf of Tesla shareholders that Musk exploited his control over the company and its board of directors to secure the huge compensation package in order to “fund his personal ambition to colonize Mars.”
On the surface, it may seem like shareholders would be better off if Tesla CEO Elon Musk is successful in his trial to keep his $2.6 billion compensation package.
After all, if Musk is successful, it would mean that Tesla’s share price would have to increase by a factor of 10 for him to vest his stock options. And if Tesla’s share price increases by that much, shareholders would see their investment increase in value as well.
However, closer examination reveals that if Musk is successful in his trial, shareholders may actually be worse off than they are now. The reason for this is that Musk’s compensation package is designed to incentivize him to take risks. If he is successful in his trial, then he would no longer be incentivized to take risks, thereby reducing shareholder value.
In conclusion, the trial of Tesla CEO Elon Musk over his compensation package could have far-reaching implications for Tesla, Musk, and shareholders. It’s important to understand the potential implications of the trial before it begins. While you’re shopping, don’t forget to check out these Tesla Interior Accessories that are sure to make your Tesla even more stylish.