Tesla and CEO Elon Musk will be in court this week to defend the massive compensation package that helped make him the world’s richest man.
The week-long trial in Delaware Court will examine the 2018 compensation plan the automaker’s board created for Musk. The automaker said at the time that he could be worth about $56 billion, the largest compensation package for anyone on earth by a public company, and today he has a net worth of $50.9 billion.
Even in the rarefied air of CEO pay, Musk’s compensation plan was different. Corporate executives at the biggest companies are often paid millions upon millions of dollars, but Musk’s pay plan was originally in the tens of billions as long as he met performance goals. It wasn’t in cash — top executive salaries rarely are — but in company stock. The higher Tesla rises, the more these shares will be valued, the more Musk will be rewarded, and the more valuable these shares will be. And as Tesla’s stock soared higher, it helped push it to a net worth of more than $300 billion at one point, while shareholders reaped potential profits.
But all the while, Musk was dividing his time between his many other endeavors. SpaceX has begun 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.
However, Musk isn’t the only one benefiting from the increase in the value of Tesla stock and options. There are also shareholders. Tesla’s market value has increased by more than 1,000% since confirming the payment package in March 2018.
The case could be significant for Tesla, given the serious questions raised about executive compensation, according to corporate governance experts. Tesla’s board of directors defended the compensation package.
The court may also intensify discussions about executive compensation, including the large stock grants they receive. S&P 500 CEOs paid an average of $18.3 million in compensation in 2021, which is 324 times the average salary at the companies. This difference has increased in recent years.
For example, Amazon CEO Andy Jassy received $212.7 million in compensation in 2021. Apple CEO Tim Cook received nearly $100 million last year. Microsoft CEO Satya Nadella received a salary of about $50 million in 2021.
Plaintiff Richard J. Tornetta claims on behalf of Tesla shareholders that Musk used his control over the company and its board to secure a large compensation package to “fund his personal ambition to colonize Mars.”
Musk entered March 2018, with a shareholder-approved compensation plan, ranked 41st on the Bloomberg Billionaires Index, largely due to his involvement in Tesla and SpaceX. At the time, Tesla was a promising but troubled automaker. It had lost nearly $2 billion a year earlier and struggled to overcome production delays as it produced the mass-market Model 3 sedan. Musk spoke of being in “production hell” as well as “delivery logistics hell” during the year, and he joked about going bankrupt.
Many questioned whether the company could survive as an independent automaker.
Tesla’s board of directors felt that if executed properly, the automaker could become one of the most valuable companies in the world and wanted to encourage Musk to lead for the long term. The compensation plan included a block of 12 shares that Musk would receive if milestones were reached, including Tesla’s market capitalization, as well as its revenue and adjusted earnings. (Each share lot will be earned if Tesla’s market capitalization rises an additional $50 billion above $100 billion. Other milestones included $35 billion in annual revenue and $3 billion in adjusted earnings.)
The plan, which was originally supposed to pay off over a decade, turned out to be wildly profitable for Musk, and at an astonishing time. Tesla was the best-performing US stock in 2020, making it America’s most valuable automaker ever. Its small SUV, the Model Y, recently became the best-selling car in Europe.
Musk has hit multiple milestones that trigger payments, and he’s expected to win the final batch early next year.
The payment plan helped make Musk the world’s richest person, with a fortune of $184 billion, according to the Bloomberg Billionaire’s Index. His true net worth can be difficult to estimate because a significant portion is invested in SpaceX, a privately held company that is not required to publicly disclose detailed financial statements that may show declines or increases in value. Tech stocks and the entire stock market have fallen sharply this year.
Richard Tornetta, who first filed the lawsuit in June 2018, alleges that Tesla’s board of directors breached their fiduciary duties over the waste and Musk breached their fiduciary duties over unjust enrichment.
Tornetta argued in a 2018 complaint that the compensation plan was unnecessary to incentivize Musk because he already owned a large stake in the automaker.
The lawsuit was certified as a class action by the court in January 2021. Due to the protracted nature of the litigation, including Tesla’s motion to dismiss the complaint, it took years for the case to move through the system.
Tornetta’s complaint alleges that the board that created Musk’s compensation plan was not sufficiently independent from him. 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 Hein, a professor of 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 the compensation and its creation process was fair.
“It’s a big package,” Hayne said of the compensation plan. “Did they have to give Musk so much of the company to align their interests and keep him as CEO?”
He noted that advisory firms Institutional Shareholder Services and Glass Lewis both recommended in 2018 that Tesla shareholders reject the compensation plan.
Institutional Shareholder Services warned that the plan “locks in opportunities for unprecedented high pay for the next decade,” noting that Musk already owns 22% of Tesla and aligns his interests with it. But shareholders approved the plan, he noted.
Hayne noted that Musk’s close relationship with board members could pose a problem for Tesla in this case.
“Given that the entire board is under Musk’s influence, it’s hard to know that anything they do will follow due process,” he said.
Tesla’s board of directors claimed it created the plan “after more than six months of careful analysis with a leading independent compensation consultant and discussions with Elon.”
“We have given Elon the ability to participate in promotion commensurate with the difficulty of achieving it,” they said.
Tesla did not respond to a request for comment and does not generally engage with professional news media.
The trial is expected to last a week. Collegiate court judges sometimes rule from the bench, but this is unusual. It may take weeks or months for a decision to be made.
Musk has become a regular fixture in the Delaware Court of Chancery. His acquisition of Twitter last month is about to be tried in court. He testified in court last year in the dispute over Tesla’s acquisition of SolarCity. This April, a judge ruled in Musk’s favor.
Musk’s unique management style will be the subject of discussion. He heads several ventures outside of Tesla: aerospace company SpaceX; his tunneling company, The Boring Co.; brain interface startup, Neuralink; and Twitter. It is unusual for executives to hold multiple CEO titles.
CNN’s Chris Isidore contributed to this report.