Tesla and CEO Elon Musk will spend this week in court defending the massive compensation package that helped make him the richest man on earth.
The week-long trial in the Delaware Court of Chancery will examine the 2018 compensation plan that the automaker’s board of directors created for Musk. The automaker said at the time it could be worth nearly $56 billion, making it the largest compensation package for anyone on earth from a public company, and the net worth today is $50.9 billion.
Even in the thin air of CEO pay, Musk’s compensation plan stood out. Millions and millions of dollars are often squandered on the executives of the largest companies, but the plan to pay Musk initially amounted to tens of billions as long as he hit performance targets. It wasn’t in cash — top executive salaries are rare — but in company stock. The higher Tesla went, the more those stocks would be valued, the more Musk would forgive, and the more those stocks would be worth. And as Tesla’s stock continued to soar, it helped it eventually topping $300 billion in net worth while shareholders reaped the potential gains.
But all along, Musk split his time between his many other ventures. SpaceX began sending astronauts to the International Space Station on a regular basis. 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 appreciation in Tesla stock and options, however. shareholders too. Tesla’s market value has increased by more than 1,000% since they approved his pay package in March 2018.
The case could be significant for Tesla amid serious executive pay issues, corporate governance experts say. Tesla’s board of directors has defended the compensation package.
The trial could also liven up debate about executive compensation, including large stock grants they receive. S&P 500 CEOs received an average of $18.3 million in compensation in 2021, 324 times the median company salary. This discrepancy has grown in recent years.
For example, Amazon CEO Andy Jassy received $212.7 million in compensation in 2021. Apple CEO Tim Cook was paid nearly $100 million last year. Microsoft CEO Satya Nadella received nearly $50 million in 2021.
Plaintiff, Richard J. Tornetta, alleges on behalf of Tesla shareholders that Musk used his control of the company and its board of directors to secure the huge compensation package to fund “his personal ambition to colonize Mars.”
Musk climbed to No. 41 on the Bloomberg Billionaire’s Index in March 2018, the month that shareholders approved the compensation plan, largely due to his holdings in Tesla and SpaceX. Back then, Tesla was a promising but struggling automaker. The company had lost nearly $2 billion the year before and was struggling to overcome production delays in making its mass-market Model 3 sedan. Musk spoke of finding himself in both “production hell” and “delivery logistics hell” over the course of the year joked about going bankrupt.
Many questioned whether the company could survive as an independent automaker.
Tesla’s board of directors believed that if done right, the automaker could become one of the most valuable companies in the world and wanted to encourage Musk to run it for the long term. The compensation plan included 12 stock packages that Musk would receive if milestones were met, including Tesla’s market cap and its earnings and adjusted earnings. (Each batch of shares would be earned if Tesla’s market cap increased by another $50 billion above $100 billion. Other milestones included achieving $35 billion in annual sales and 3 percent adjusted earnings billion dollars.)
The plan, originally set to pay off over a decade, has turned out to be hugely lucrative for Musk, and in astonishing time. Tesla was the best-performing US stock in 2020 and became America’s most valuable automaker of all time. His small SUV, the Model Y, recently became the best-selling car in Europe.
Musk has met many of the milestones that trigger the payouts and is expected to earn the final batch early next year.
The payment plan helped Musk become the richest person in the world with an estimated net worth of $184 billion, according to the Bloomberg Billionaire’s Index. Its true net worth can be difficult to estimate as a significant portion is invested in SpaceX, a private company that is not required to publicly disclose detailed financial data that could show a decline or appreciation in value. Tech stocks and the broader stock market have fallen sharply this year.
Richard Tornetta, who originally filed the lawsuit in June 2018, alleges that Tesla’s board of directors breached its fiduciary duties for waste and Musk breached its own fiduciary duties for unjust enrichment.
Tornetta argued in his original 2018 complaint that the compensation plan was unnecessary to motivate Musk since he already had a large stake in the automaker.
The lawsuit was admitted by the court as a class action in January 2021. Due to the lengthy litigation, the case has taken years to progress through the system, including processing a motion by Tesla to dismiss the lawsuit.
The Tornetta lawsuit alleges that the board that created Musk’s compensation plan was not sufficiently independent of him. The board included Musk’s brother Kimbal and 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 Business School, told CNN Business that Tesla’s case is serious because it will be a heavy burden for the automaker to prove the compensation and the process to create it Be fair.
“It’s a huge package,” Hayn said of the compensation plan. “Did they have to give away so much of the company to Musk to align his interests and keep him as CEO?”
She noted that in 2018, consulting firms Institutional Shareholder Services and Glass Lewis recommended that Tesla shareholders vote against the compensation plan.
Institutional Shareholder Services warned that the plan “includes unprecedented high reward opportunities over the next decade,” noting that Musk already owns 22% of Tesla and aligns his interests with it. But shareholders approved of the plan, she noted.
Hayn noted that Musk’s close ties to the board members in the case could pose problems for Tesla.
“Given that this entire board is very much under Musk’s influence, it’s hard to know that everything they’ve done is following due process,” she said.
Tesla’s board of directors has claimed that 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 have given Elon the opportunity to share in the benefits in a way commensurate with the difficulty of achieving them,” they said at the time.
Tesla has not responded to a request for comment and generally does not cooperate with the professional news media.
The process is expected to take a week. Judges at the Chancellor’s Court sometimes decide from the bench, but that’s unusual. It can take weeks to months for a decision to be made.
Musk has become something of a regular at the Delaware Court of Chancery. Last month, his takeover of Twitter nearly went to court. He testified in court last year in a dispute over Tesla’s acquisition of SolarCity. A judge ruled in Musk’s favor in April.
Musk’s unique leadership style will be a topic of discussion. He runs several companies outside of Tesla: aerospace company SpaceX; his tunneling company, The Boring Co.; a brain interface startup, Neuralink; and Twitter. It is unusual for executives to hold multiple CEO titles.
CNN’s Chris Isidore contributed to this report.