Elon Musk is heading to court over the Tesla pay that made him the world’s richest person


washington dc
CNN

Tesla and CEO Elon Musk will go to court this week to defend the huge 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 the automaker’s board created for Musk. The automaker said at the time that it could be worth nearly $56 billion, making it the largest compensation package for anyone on Earth at a publicly traded company, and net worth today is $50.9 billion.

Even in the rich air of CEO pay, Musk’s compensation plan stood out. Corporate executives at the biggest companies are often lavished with millions upon millions of dollars, but the plan to pay Musk initially ran into the tens of billions as long as he met performance targets. It wasn’t in cash (top executive pay rarely is), but in company stock. The higher Tesla was, 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 climbed higher and higher, they helped propel it to a net worth of more than $300 billion at one point, all while shareholders reaped the potential earnings.

But all the while, Musk was splitting 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.

Musk isn’t the only one benefiting from the increased value of Tesla stock and options, however. So have the shareholders. Tesla’s market value has soared more than 1,000% since they approved their pay package in March 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 reinvigorate the debate over executive compensation, including the large stock grants they receive. S&P 500 CEOs averaged $18.3 million in compensation in 2021, 324 times the companies’ median pay. This inequality 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 received almost $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 in March 2018, the month shareholders approved the compensation plan, at No. 41 on the Bloomberg Billionaires Index, largely due to his stake in Tesla and SpaceX. At the time, Tesla was a promising but troubled automaker. It had lost nearly $2 billion the previous year and struggled to overcome production delays while making its mass-market Model 3 sedan. Musk spoke of being in “production hell” as well as “delivery logistics hell” for the year, and he joked about going bankrupt

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

Tesla’s board felt that, with proper execution, 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 lots of stock that Musk would receive if milestones were met, including Tesla’s market capitalization as well as its revenue and adjusted earnings. (Each lot of shares would be earned if Tesla’s market capitalization rose an additional $50 billion above $100 billion. Other milestones include reaching $35 billion in annualized revenue and $3 billion in adjusted earnings.)

The plan, originally slated to pay off over the course of a decade, turned out to be very lucrative for Musk and in surprising time. Tesla was the best-performing US stock in 2020, becoming the most valuable US automaker. Its small SUV, the Model Y, recently became the best-selling car in Europe.

Musk has hit many of the milestones that trigger the payments, and is expected to win the final batch early next year.

The payment plan helped make Musk the richest person in the world, with an estimated net worth of $184 billion, according to the Bloomberg Billionaire’s Index. His true net worth can be difficult to estimate since a significant portion is invested in SpaceX, a private company that does not have to publicly disclose detailed financial data that could show a decrease or increase in value. Tech stocks and the entire stock market in general have fallen sharply this year.

Richard Tornetta, who originally filed the lawsuit in June 2018, claims Tesla’s board of directors 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 wasn’t necessary to incentivize Musk since he already had a large stake in the automaker.

The suit was certified as a class action case by the court in January 2021. The case has taken years to move through the system due to the lengthy nature of the litigation, including working through a Tesla motion to dismiss the complaint

Tornetta’s complaint alleges that the board of directors that created Musk’s compensation plan lacked sufficient independence 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 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 put a heavy burden on the automaker to prove that compensation and the process to create it was fair.

“This is a huge package,” Hayn said of the compensation plan. “Did they have to cede that much of the company to Musk to align his interests and keep him as CEO?”

He noted that Institutional Shareholder Services and Glass Lewis, advisory firms, recommended in 2018 that Tesla shareholders reject the compensation plan.

Institutional Shareholder Services warned that the plan “offers unprecedented high pay opportunities for the next decade” and noted that Musk already owned 22% of Tesla, aligning his interests there. But shareholders approved the plan, he noted.

Hayn noted that Musk’s close relationship with board members could be problematic for Tesla in the case.

“Given that the entire board is very much under Musk’s influence, it’s hard to know that anything they do would follow due process,” he said.

Tesla’s board of directors has 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 gave Elon the ability to share the lead in a way commensurate with the difficulty of getting them,” they said at the time.

Tesla did not respond to a request for comment and does not generally engage with professional media.

The trial is expected to last a week. Chancery judges sometimes rule from the bench, but this is rare. It may take weeks or months before a decision is made.

Musk has become a fixture in the Delaware Court of Chancery. Last month, its acquisition of Twitter almost went to trial. He testified in court last year in a dispute over Tesla’s acquisition of SolarCity. A judge ruled in Musk’s favor this April.

Musk’s unique management style will be a topic of discussion. He leads several companies outside of Tesla: aerospace company SpaceX; his tunneling company The Boring Co.; a brain interface startup, Neuralink; and Twitter. It is rare for executives to hold multiple CEO titles.

CNN’s Chris Isidore contributed to this report.

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