On November 6, Tesla shareholders voted to approve Elon Musk’s $1 trillion executive compensation plan—and it may have farther reaching consequences for corporate boards than might have first been considered.
According to a Quartz news report, Musk’s latest pay package guarantees the mercurial CEO about $1 trillion in stock awards over a 10-year period if he meets several ambitious goals that include increasing Tesla’s market value from $1.5 trillion to $8.5 trillion, launching a fleet of one million self-driving robotaxis, and deploying one million humanlike robots.
Tesla’s chair, Robyn Denholm, has been pushing shareholders to vote in favor of Musk’s pay package, even though there has been a great deal of vocal opposition to the plan. Denholm has argued that the enormous pay package is needed as an incentive to keep Musk motivated, focused and productive as CEO. Without the lure of a package that rewards him financially and gives him company shares that increase his influence on decision making, she warned that he might leave.
Morningstar reports that at Tesla’s recent 3Q earnings call, Musk said he needed more control to successfully execute the company’s forays into the areas of robotics and autonomous vehicles. “There needs to be enough voting control to give a strong influence, but not so much that I can’t be fired if I go insane. I think that sort of number is in the mid-20s [in percentage terms],” he said.
Business Insider estimates that if Musk reaches all the compensation plan benchmarks, he could increase his voting stake in the company from 13 percent to about 29 percent. Denholm believes this would help keep Musk at Tesla long term. Proxy firms ISS and Glass Lewis strongly advised Tesla shareholders to vote against the compensation plan, which was one of the key reasons he threatened to leave. “I just don’t feel comfortable building a robot army here and then being ousted because of some asinine recommendations from ISS and Glass Lewis,” he said at the earnings call.
According to Business Insider, several large, influential Tesla shareholders weighed in on the controversial pay package. ARK Invest CEO Cathy Wood, billionaire Ron Baron’s investment firm, Baron Capital, and The State Board of Administration of Florida which manages over $280 billion in assets were all in favor of giving Musk his proposed $1 Trillion payday. Tesla investors that have publicly come out against the pay plan include the $284 billion New York State Retirement Fund, Norway’s $2 trillion sovereign wealth fund, and The California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the U.S.
In the end, Tesla shareholders voted yes, and, at least for now, Musk will stay. But how would your board handle such a dilemma? Would you pay more money to an executive than any CEO has ever been compensated and hand over voting rights that could disrupt the board’s oversight responsibilities while under threat that the executive will leave? Here are some issues boards may want to consider should they encounter a similar situation:
Will other CEOs demand record-breaking compensation or threaten to leave? If your current CEO sent a letter to your board with a proposal that would make them the highest paid CEO among your peers, then added, if you don’t go along with it, I’ll quit, what would you do? Clearly, that is not what happened at Tesla, but the reality is CEOs can demand anything at any given time, and they can quit at any given time—without notice. Since Musk has decided to continue to push the envelope with the value of his compensation packages in recent years, don’t think that other CEOs are not studying the type of compensation packages he has proposed and are considering whether they can put forth something similar. What will you do if such a proposal comes to your boardroom? It might be time for a review of your current executive compensation plan formula. Is your board prepared to defend its current compensation plan structure? And, is your board prepared to let an executive that threatens to quit walk out the door if they propose to receive compensation that far exceeds what the company has approved in the past?
What percentage of voting rights can begin to interfere with board oversight? This answer will likely be different for every company board, but every board needs to know how much voting control it needs to be effective. Of course, the company share structure will have a lot to do with this, but it’s simple: if the company gives too much voting control to the CEO, the board’s ability to exercise effective oversight over the management team will be muted or nullified. No board should allow itself to be placed in that position. Does your board have the voting power to exercise effective oversight of management?
Are directors who approve compensation plans that are considered excessive at greater risk of losing their board seat? Some Tesla shareholders have publicly said they would vote against Elon Musk’s compensation plan because they consider it excessive. Those votes against the compensation plan could also turn into votes against the three Tesla directors who are up for re-election this year: Ira Ehrenpreis, Joe Gebbia and Kathleen Wilson-Thompson. Board members should understand that there is a risk of being voted off boards that approve too many actions shareholders disapprove of. Executive compensation is a critical concern for shareholders, and over-compensating executives could hurt a director’s re-election efforts.
