Tesla CEO Elon Musk’s attempt to have his record-breaking $56 billion 2018 pay package reinstated has failed. Delaware Court of Chancery Judge Kathaleen McCormick recently ruled that Musk was still not entitled to the largest compensation plan in U.S. history that she had ruled “excessive” in January even though Tesla shareholders voted to reinstate his compensation plan in June. Judge McCormick’s ruling asserts that shareholders don’t get to overrule a judge’s decision simply by voting to do so.
“Were the court to condone the practice of allowing defeated parties to create new facts for the purpose of revising judgments, lawsuits would become interminable,” she said in her 101-page opinion according to a report from Reuters.
Musk can appeal the ruling, but in the meantime the findings from the January decision come to the forefront. In January, McCormick found the pay package to be excessive, that Musk had improperly controlled the board’s process in negotiating his compensation and that Tesla shareholders were not sufficiently told how easy it was to reach the plan’s performance targets on market value, revenue and profitability. According to Reuters, the compensation plan awarded Musk “around one percent of Tesla’s equity each time the company achieved one of 12 tranches of escalating operational and financial goals.” Since the original ruling, a stock market rally has caused Tesla stock to surge, increasing the pay package from $56 billion to about $101 billion.
So, with the court’s new decision, what would you do if you were on the Tesla board? Here are some actions to consider:
Appeal the original ruling?
Elon Musk will undoubtedly appeal the original decision from January, but the board will have to decide whether to support his appeal with the vigor they exercised the first time. What more can the board offer in defense of the pay package that would have paid Musk a record $56 billion? Additionally, the board will have to determine if spending valuable time and resources appealing a ruling on a pay package that was found excessive at $56 billion—and would now almost surely be found even more excessive at its new valuation of about $101 billion—makes good business sense. Can directors make a case that vigorously appealing the ruling is good for the company and its shareholders? Will decisions made about defending this compensation plan affect their future careers as directors?
Submit a new compensation plan for Musk.
Clearly, Musk has done an admirable job increasing value for Tesla investors. He deserves to be paid. Since the original pay plan was found excessive by the courts, the board should consider developing an alternative compensation plan that would navigate around any of the issues that led to the original plan being rejected. The new plan would likely still be the most lucrative pay plan in U.S. history, and it would allow the board to move on from an issue that is not really adding to the ability of the company to increase revenue growth. Perhaps the board can reach out to compensation consultants to help them find a creative solution that would pay Musk at a rate that is appropriately above his industry peers, contains performance targets on market value, revenue and profitability that conform closer to industry norms and that establishes a level of pay that objective observers would NOT consider “excessive.”
Learn from the court ruling.
Every plan that a corporate board develops will not be successful. Whether it be business plans or compensation plans, when things don’t work out there is an opportunity to learn and grow from the experience. Directors could study the court ruling and examine what the court objected to, consider how they can remedy those objections and make the appropriate adjustments. Talk to the shareholders that disagreed with the pay plan and see if there is some common ground to be built upon. Every defeat doesn’t have to be taken as a loss. In this situation there could be room for growth.
