A Delaware judge has struck down a compensation package for Tesla CEO Elon Musk potentially worth over $55 billion, ruling that it was unfair to the electric vehicle maker’s shareholders. The decision throws Tesla’s future into uncertainty and has wider implications for executive pay.
Judge Finds Package “Unfair” and “Coercive”
Vice Chancellor Kathaleen St. Jude McCormick of Delaware’s Court of Chancery ruled that Tesla’s board failed to properly oversee the 2018 pay package, which she deemed “unfair” and “coercive” to shareholders. The deal would have given Musk huge stock grants based on Tesla hitting certain market capitalization and operational milestones. So far it has netted Musk over $50 billion as Tesla’s value soared over 1,000% since 2018.
McCormick admonished the board for allowing Musk to set the terms of his own pay, which also required directors to do nothing as Musk negotiated the package on his own behalf. She ordered Musk to return the stock he has received so far. Tesla and Musk plan to appeal the ruling.
Tesla Shares, Musk’s Wealth Take Hit
The court decision sent Tesla shares tumbling 8% on Tuesday, erasing $46 billion from its market value. Musk himself lost over $20 billion from his net worth as Tesla’s stock fell, knocking him from the perch of world’s richest person.
The share drop shows investors’ concerns that the charismatic CEO may be distracted by the legal fight or possibly leave Tesla altogether. Musk himself asked Twitter followers in a poll if Tesla should move its headquarters from California to Texas or Nevada after the ruling.
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Without Musk at the helm, Tesla may struggle to maintain its dominate position in electric vehicles as traditional automakers ramp up their efforts. The uncertainty comes as the company faces a major expansion drive for factories, products and sales.
What’s Next for Tesla and Musk
Musk could be forced to surrender over 20 million Tesla shares under the ruling, which would be worth around $25 billion currently. It’s also possible the board renegotiates a new, smaller pay package that could pass legal muster. Or Musk might leave Tesla altogether – he now spends significant time on his other major companies SpaceX and Twitter.
If Musk departs Tesla, it could jeopardize the automaker’s ambitious plans. The CEO has aggressive targets to expand Tesla sales by over 50% annually, open multiple massive new vehicle and battery factories around the world, bring out new vehicles like the Cybertruck and Semi, fully develop self-driving technology, and ultimately reach an annual production rate of 20 million electric vehicles. He also aims to make Tesla’s solar roof and energy storage products mainstream.
Without Musk pushing his uncompromising vision and demanding extraordinary execution on these goals, Tesla could lose its industry-leading pace of innovation. On the other hand, Musk’s oversight of so many endeavors has led to questions if his attention is spread too thin.
Wider Implications for Executive Pay
While Musk’s potential $55 billion payday is an outlier, the court decision signals tighter scrutiny on executive compensation broadly. Shareholder activists and corporate governance experts hailed the ruling as a wake-up call for boards to exert more control over C-suite pay.
University of Pennsylvania law professor Jill Fisch said the decision “reflects broader concerns over excessive executive compensation.” The judge ruled Tesla directors breached their fiduciary duty by approving an excessive package. Corporate boards may now limit pay packages or insist on more oversight to avoid litigation.
Some observers argued Musk deserves such high compensation given Tesla’s incredible growth under his leadership. But others say no executive pay should dwarf that of an average worker to such an extreme degree.
As the highest profile executive in the world, Musk’s epic pay saga is sure to influence conversations around income inequality and appropriate standards for executive compensation. The ultimate outcome of Tesla’s court appeal could set new legal precedents in these areas.
Musk’s Pay Deal Explained
In 2018, Tesla’s board granted Musk a pay package deal valuing up to $55 billion at today’s share price. The highly unusual performance-based plan did not guarantee Musk would receive any pay. Instead, it laid out 12 tranches or portions of Tesla stock Musk could earn based on hitting predetermined targets.
Each of the 12 tranches consists of 1% of Tesla’s total outstanding shares at the time of the grant. Musk earns a tranche only if Tesla hits progressively higher operational and financial milestones within a defined timeframe. These include targets for Tesla’s market capitalization, total revenue, and adjusted profit.
So far Musk has earned seven tranches as Tesla has soared past targets on car deliveries, revenue, and other metrics. If Tesla continues its current trajectory, Musk could earn most or all of the tranches, which if he holds onto the stock could make him the world’s first trillionaire.
Tesla and Musk argue the pay DEAL incentivizes and rewards Musk for continuing Tesla’s outstanding performance. Shareholders suing to invalidate the deal called it unjustified and exorbitant. Judge McCormick ultimately sided with the shareholders in a verdict Musk labeled the “absurd Tesla judgment”.
What Are the Legal Grounds for Overturning the Pay Package?
Shareholder Richard Tornetta sued Musk and Tesla’s board alleging the 2018 pay package was unfair and invalid. His case centered on claims the board breached its fiduciary duty by:
- Failing to properly oversee the deal
- Allowing Musk to set his own pay terms as a conflicted party
- Agreeing to unreasonable and unnecessary performance benchmarks
- Not gaining enough shareholder approval for a deal of this size
Vice Chancellor McCormick upheld these assertions in a brutal opinion accusing the board of “lacking common sense.” Her ruling overrides Tesla’s prior shareholder votes approving the pay plan.
Legal experts say the problems stemmed mainly from directors allowing Musk to negotiate his own pay deal and set easy milestones. This amounted to a dereliction of the board’s duty.
Stronger oversight could have led to a smaller, still generous package based on targets benefiting shareholders more directly. The outcome shows courts won’t tolerate boards rubber-stamping deals not demonstrably in a company’s best interest.
Conclusion: Tesla Future Uncertain but Company Remains Formidable
Tesla finds its ambitious plans – and Musk’s role in shaping them – thrown into doubt by the court overturning of the CEO’s colossal pay deal. Tesla may renegotiate a package for Musk that assuages the court’s concerns over board oversight and reasonableness to incentives. Or the ruling could ultimately push Musk out of the company he molded into the world’s most valuable automaker.
In the near term, Tesla and Musk will appeal aspects of the decision they believe have legal merit. But considerable uncertainty hangs over Tesla’s future leadership structure. This is a fluid situation to monitor for anyone with business dealings tied to Tesla or investments in the company.
At the same time, Tesla remains an industrial powerhouse today. Its brand, products, technology, factories and sales network still lead the electric vehicle industry by impressive margins. And Musk is executively involved for now working to propel rapid expansion. Tesla has formidable strengths to navigate market uncertainty and build on its first mover advantage in sustainable transport. But keeping Musk’s drive and vision will be critical.
The coming months promise legal fireworks, boardroom drama and no shortage of Musk headline-stealing antics surrounding his pay saga. Tesla’s trucking towards its ambitious goals hangs in the balance.
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