Tesla heads to court to defend Elon Musk’s pay

Elon Musk

Tesla headed to court today to defend the huge compensation package that helped make CEO Elon Musk the richest person on Earth.

Delaware’s Court of Chancery in Wilmington will host the week-long trial to examine the 2018 compensation plan that the automaker’s board of directors created for Musk. The trial kicked off at 9:15 a.m. Monday.

Musk himself is expected to testify Wednesday.

The automaker said at the time that the compensation deal could be worth nearly $56 billion, making it the largest pay package for anyone on Earth from a publicly traded company, and the net value today is $50.9 billion.

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. And as Tesla’s stock shot ever upwards, it helped propel him to a net worth of over $300 billion at one point, all while shareholders reaped the potential gains.

But all the while, Musk was sharing his time between his many other endeavors. SpaceX began regularly sending astronauts to the International Space Station. The Boring Company built a Loop under the Las Vegas Convention Center. And then, of course, he bought Twitter.

Massive CEO pay

Musk isn’t the only one to benefit from the rise in value of Tesla shares and options, however. So have shareholders. The market value of Tesla has soared more 1,000% since they approved his pay package in March of 2018.

The case could be significant for Tesla, given the serious questions raised about its executive compensation, according to corporate governance experts. Tesla’s board of directors has defended the compensation package.

The trial may 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.

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, Richard J. Tornetta, 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.”

Musk entered March 2018, the month shareholders approved the compensation plan, at No. 41 on the Bloomberg Billionaire’s Index, due largely to his involvement in Tesla and SpaceX. At the time, Tesla was a promising but troubled automaker. It had lost nearly $2 billion the year before and struggled to overcome production delays as it manufactured its mass-market Model 3 sedan.

Many questioned if the company could survive as an independent automaker.

Tesla’s board of directors felt that with proper execution the automaker could become one of the world’s most valuable companies and wanted to encourage Musk to lead it for the long term. The compensation plan included 12 batches of stock that Musk would receive if milestones were hit, including the market capitalization of Tesla as well as its revenue and adjusted earnings. (Each batch of stock would be earned if Tesla’s market capitalization increased an additional $50 billion above $100 billion. Other milestones included hitting $35 billion in annualized revenue and $3 billion in adjusted earnings.)

The plan, originally set to pay out over the course of a decade, turned out to be wildly lucrative for Musk and in astonishing time. Tesla was the best performing US stock in 2020 and became America’s most valuable automaker ever. Its small SUV, the Model Y, became the best-selling car in Europe recently.

Musk has reached many of the milestones that trigger the payouts, and he is expected to earn the final batch early next year.

The payment plan helped lead to Musk becoming the world’s richest person, with an estimated net worth of $184 billion, according to the Bloomberg Billionaire’s Index. His true net worth can be challenging to estimate as a significant portion is invested in SpaceX, a private company that does not have to publicly reveal detailed financials that could show a decline or increase in value. Tech stocks and the entire stock market more broadly have fallen sharply this year.

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