Tesla and CEO Elon Musk will spend this week in court to defend the massive compensation package that made him the world’s richest man.
A week-long trial in the Delaware Court of Chancery will examine the 2018 compensation plan created for Musk by the automaker’s board of directors. At the time, the automaker said he could be worth nearly $56 billion, making him the largest compensation package for anyone on Earth from a publicly traded company, and he has a net worth of $50.9 billion today.
Even in the rarefied atmosphere of CEO pay, Musk’s compensation plan was different. Millions and millions of dollars are often spent on corporate executives of the biggest companies, but the plan was to initially pay Musk tens of billions if he met performance goals. It wasn’t in cash—a top executive’s salary rarely is—but in company stock. The higher Tesla would go, the more these shares would be valued, the more Musk would be valued, and the more these shares would be worth. And as Tesla’s stock continued to rise, it helped him reach a net worth of over $300 billion at one point, while shareholders reaped potential profits.
But all along, Musk has been splitting his time between his many other endeavors. SpaceX has begun regularly sending astronauts to the International Space Station. The Boring Company built the Loop under the Las Vegas Convention Center. And then of course he bought Twitter.
But Musk isn’t the only one benefiting from the increase in the value of Tesla stock and options. So are shareholders. Tesla’s market value has risen over 1,000% since they approved his pay package in March 2018.
The case could be significant for Tesla, given the serious questions surrounding executive compensation, according to corporate governance experts. Tesla’s board defended the compensation package.
The court may also reinvigorate the debate over executive compensation, including the large stock grants they receive. S&P 500 CEOs had an average compensation of $18.3 million in 2021, which is 324 times the company’s median salary. This difference has been increasing in recent years.
Amazon CEO Andy Jassy, for example, received $212.7 million in compensation 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, Richard J. Tornetta, on behalf of Tesla shareholders, alleges that Musk used his control of the company and its board to secure a huge compensation package to “fund his personal ambition to colonize Mars.”
Musk entered March 2018, the month shareholders approved the compensation plan, ranked 41st on the Bloomberg Billionaire’s Index, largely due to his involvement in Tesla and SpaceX. At the time, Tesla was a promising but troubled automaker. It lost nearly $2 billion the year before and struggled to overcome production delays on its Model 3 sedan. Musk spoke of being in “manufacturing hell” as well as “delivery logistics hell” during the year. he joked about bankruptcy.
Many questioned whether the company could survive as an independent automaker.
Tesla’s board felt that if done right, the automaker could become one of the most valuable companies in the world and wanted to encourage Musk to lead it for the long term. The compensation plan included 12 stock grants that Musk would receive if milestones were reached, including Tesla’s market capitalization, as well as its revenue and adjusted earnings. (Each batch of shares would earn if Tesla’s market capitalization rose another $50 billion above $100 billion. Other milestones included reaching $35 billion in annual sales and $3 billion in adjusted earnings.)
The plan, which was originally supposed to pay off over the course of ten years, turned out to be hugely lucrative for Musk, and in a staggering amount of time. Tesla was America’s top performing title in 2020, becoming the most valuable American automaker of all time. Its small SUV, the Model Y, has recently become the best-selling car in Europe.
Musk has hit a number of milestones that trigger payouts, and is expected to receive the final batch early next year.
The payment plan helped make Musk the world’s richest person, with an estimated net worth of $184 billion, according to the Bloomberg Billionaires Index. His true net worth may be difficult to estimate because a significant portion is invested in SpaceX, a private company that does not have to publicly disclose detailed financial data that could show a decline or increase in value. Tech stocks, and the broader stock market as a whole, have fallen sharply this year.
Richard Tornetta, who originally filed the lawsuit in June 2018, alleges that Tesla’s board breached its fiduciary duties for the waste and Musk breached his own fiduciary duties for unjust enrichment.
Tornetta argued in his original 2018 complaint that the compensation plan was unnecessary to motivate Musk because he already had a large ownership stake in the automaker.
The lawsuit was certified as a class action case by the court in January 2021. The case took years to work its way through the system due to the lengthy nature of the litigation, including processing a motion from Tesla to dismiss the complaint.
Tornetta’s complaint alleges that the board that created Musk’s compensation plan lacked sufficient independence from it. The board included Musk’s brother Kimbal, as well as friends Anthony Gracias and Steve Jurvetson. (Jurvetson and Gracias have since left Tesla’s board.)
Carla Hayn, a professor who teaches corporate governance at UCLA’s business school, told CNN Business that the case is serious for Tesla because it will be a heavy burden for the automaker to prove that the compensation and the process of creating it was fair.
“It’s a huge package,” Hayn said of the compensation plan. “Did Musk need to hand over so much of the company to align his interests and keep him as CEO?”
She noted that Institutional Shareholder Services and Glass Lewis, a consulting firm, both recommended in 2018 that Tesla shareholders reject the compensation plan.
Institutional Shareholder Services warned that the plan “locks in unprecedented high-wage opportunities for the next decade,” noting that Musk already owns 22% of Tesla, aligning his interests with that. But shareholders approved the plan, she noted.
Hayn noted that Musk’s close relationship with board members could be problematic for Tesla in this case.
“With the whole board being heavily influenced by Musk, it’s hard to know that anything they did would follow the proper process,” she said.
Tesla’s board said it created the plan “after more than six months of careful analysis with a leading independent compensation consultant, as well as discussions with Elon.”
“We have given Elon the opportunity to participate in the rise in a way that is commensurate with the difficulty of achieving it,” they said at the time.
Tesla did not respond to a request for comment and does not generally communicate with professional news media.
The trial should last a week. Chancery Court judges occasionally rule from the bench, but this is unusual. It may take weeks or months for a decision to be issued.
Musk has become something of a regular at the Delaware Court of Chancery. Last month, his acquisition of Twitter almost went to court. He testified in court last year in the dispute over Tesla’s acquisition of SolarCity. A judge ruled in Musk’s favor this April.
The topic of discussion will be Musk’s unique management style. He runs several ventures outside of Tesla: aerospace company SpaceX; his tunneling business, The Boring Co.; brain interface startup, Neuralink; and Twitter. It is not common for executives to hold multiple CEO roles.
CNN’s Chris Isidore contributed to this report.
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