How hard should a corporate board fight to rationalize high compensation for its CEO? That’s a question most corporate boards will face at some point in time, and how the board deals with this issue could have lasting repercussions – for the company and the directors involved.
The Tesla Inc. board has gone on a public campaign to reinstate CEO Elon Musk’s unprecedented $56 billion compensation package that was revoked by a Delaware court after a shareholder lawsuit claimed the pay was excessive. Some governance observers and Tesla shareholders are asking “why is the board doing this?” Why is it so important to pay Elon Musk this specific compensation plan – a plan that the country’s legal system found unfair? As this situation unfolds, there is a lot at stake for the Tesla board and its shareholders.
According to news reports, the Tesla board has scheduled a shareholder vote to decide whether Musk should receive the pay originally agreed upon during the company’s annual meeting on June 13. The original pay package would have paid Musk $56 billion, but now he would receive about $47 billion because the automaker’s stock price has declined. Tesla’s chairperson Robyn Denholm released a video appeal that defended the pay package, suggesting that a judicial decision shouldn’t usurp the will of millions of Tesla shareholders and reinstating Musk’s pay package would be “incredibly important for the future of the company.”
The Tesla board maintains that the $47 billion package is fair compensation for Musk’s work increasing the company’s value from $53.7 billion to $790 billion. Denholm credits Musk with turning the company’s $2.2 billion loss into a $15 billion profit during his tenure, which sent Tesla shares soaring by 1,100%. Musk achieved outstanding performance for sure, but the bigger issue is whether compensation on this level for any executive is sustainable or ethical.
The outcome of Tesla’s vote to reinstate Musk’s compensation will be watched closely by corporate boards and governance professionals. Here are some aspects of this situation that will be debated:
• Will compensation packages like Musk’s become normal? If shareholders vote to approve this type of compensation package, will other CEOs try to convince their board of directors to enact similar plans? It’s possible there would be other attempts since CEOs sometimes compare their compensation with their peers. It’s unlikely that shareholders would approve paying one executive what amounts to three times what the company made in profits, but that’s the situation Tesla’s compensation plan has created. If this compensation is approved, it reignites the debate over whether CEO compensation is escalating to unsustainable levels. If a company is paying out most of its profits to executives, are shareholders receiving maximum benefit, and is the company being set up for long-term growth?
• What happens if shareholders reject the pay package? If shareholders reject Musk’s pay package, will the Tesla board try to pass another unprecedented compensation plan to reward him? Since a court of law decided that key information about the compensation plan was not given to shareholders before they voted on it, thereby making it unfair, the board has already shown that it is willing to disregard a legal decision to pay its CEO. What other measures would the board take to make sure Musk is paid similarly to the original pay agreement? What type of compensation package would shareholders want to see?
• Has the board’s support of Musk’s pay package gone too far? The way the Tesla board is fighting for this compensation package may not be helpful to the image of the directors involved. Some may believe Musk has too much influence over them. Directors may have to defend why the board is so adamant that Musk should be paid such a historic sum, and how that really benefits shareholders. Also, since the company is now experiencing a sharp stock price decline and slowing demand for its cars, the resources used to pay Musk could be re-directed toward helping the company recover from its current doldrums – which Musk is also responsible for. Directors who sit on the board’s audit and compensation committee may find themselves opposed for re-election. Some shareholders may also feel the board’s support for Musk’s pay package doesn’t demonstrate governance best practices and may even boarder on being unethical. There is the possibility of more litigation no matter what the outcome of the shareholder vote on Musk’s pay – which will cost the company more money that the company can ill afford.
