Publish Date
Mar 01, 2024
Human Capital Today
In this article, we outline what all public companies should be mindful of, following the Delaware court ruling related to Elon Musk’s 2018 compensation package.
A Delaware court voided Elon Musk’s 2018 compensation package that was valued at approximately $55 billion at the time of the court’s decision. [1] The court found that Tesla’s board of directors breached their fiduciary duties by awarding Musk a 10-year performance-based option plan. The decision has raised many questions in terms of boards and compensation committees setting executive compensation.
The case dates back to April 25, 2023, when a claim was made that Tesla’s board had failed in their fiduciary duties by awarding Musk such a substantial compensation package. The package was performance-based and was based on Tesla’s stock appreciating, and milestones being achieved. At the time of grant, the performance options were valued at approximately $2.3 billion based on compensation disclosure in the summary compensation table, and the award was intended to cover compensation over the 10-year performance period ($230 million per year over the 10-year performance period). Mr. Musk received no additional compensation beginning in May 2019 when his base salary was eliminated. The court found that the size of the package was excessive, and the existence of performance metrics and the elimination of other forms of compensation was not enough to justify the performance option grant.
The court’s decision to void Musk’s pay package does not just have implications for Tesla’s board members, but also for Delaware companies more broadly. As the controlling stockholder with roughly 13% ownership in the company, Musk had significant influence over the board’s decisions; thus, concerns of his involvement in the compensation package’s creation arose. The ruling raises questions about executive compensation in general. The decision could set a precedent for other cases where shareholders or other parties challenge the size of executive pay packages. It may lead to more scrutiny of how boards make decisions about executive compensation and could prompt changes in how such packages are structured.
Companies need to balance the need to provide competitive compensation packages with the legal and fiduciary responsibilities of its board. Companies should also be cognizant of potential conflicts between executives and the board.
In summary, regarding how this impacts public companies more broadly, there are the following key takeaways to consider:
The need for independent advisors – For boards and compensation committees to minimize potential legal risks, it is important they consult with proper, well-informed advisors to ensure that they have up to date market data and market approaches to inform their decisions.
Process is important – Proper process when engaging governance matters is important to protect against any potential challenges to compensation programs.
Other companies should reassess their own arrangements – Even though this was somewhat of an outlier arrangement, the ruling can serve as a signal for other companies and their boards to reassess their current arrangements and ensure independence in their decision-making process regarding executive compensation arrangements.
Alvarez & Marsal’s Compensation & Benefits team is equipped to help companies understand the market for executive compensation packages and advise compensation committees and other stakeholders on the market and latest trends for companies.
[1] Hals, T. (2024, January 31). Judge voids Elon Musk’s ‘unfathomable’ $56 billion Tesla pay package. Reuters. https://www.reuters.com/legal/judge-rules-favor-plaintiffs-challenging-musks-tesla-pay-package-2024-01-30/
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