In today’s Finshots, we tell you why Tesla’s shareholders approved Elon Musk’s $45 billion pay package, despite a Delaware court cancelling it a couple of months ago.
The Story
In 2018, Tesla’s Board of Directors and most shareholders approved a sparkling pay package for the company’s CEO, Elon Musk. And despite none of this pay hike being in cash, it was corporate America’s largest by far. Musk would gradually get 12% more shares in the company, over the next few years depending on whether he’d achieve goals the Board had set for him.
To put things in perspective, these goals were split into multiple milestones. Say, pushing up Tesla’s market capitalisation, increasing revenues or earnings before tax. And for every milestone Musk fulfilled, he’d receive 1% more shares than he already held. The final aim though, was to make Tesla a $650 billion company or simply multiply its market value (from the levels of 2018) by nearly 11 times over the next few years.
Yup, sounds like an audacious target, we know. But Musk was able to accomplish most of them by 2022. So, he was obviously entitled to receive the pay he was promised.
But Richard Tornetta, one of the shareholders, didn't think so. He took Musk straight to court because he felt that Musk didn’t deserve such a mammoth payout. And he may have had some substance to his allegation because the court actually sided with him. It declared Musk’s pay at Tesla excessive and cancelled it.
Why, you ask?
Well, for starters, Musk apparently controlled Tesla to the extent that other employees even considered him a tyrant. He not just occupied the most powerful roles of the Chair, Founder and CEO at Tesla, but also had his way with most things.
For instance, he made up positions and titles for himself without even consulting the Board. In 2021, Musk appointed himself “Technoking”. In Musk’s defence, it was a Chief Technology Officer that had more confidence and “great dance moves and sick beats”. His antics even extended to pausing Tesla’s acceptance of Bitcoin despite the Board’s approval. Or even deploying 50 Tesla engineers to help him evaluate Twitter’s engineering team. Again, without taking the Board’s permission.
You could blame this behaviour on the Board’s relationship with Musk. Musk and his brother Kimbal made up 25% of the entire board of directors. And the rest of them weren’t really independent because many of them were friends who he was going off to vacations with.
So, this level of comfort with his so-called Board may have made him feel like he could always inform them of his decisions later. They could be Tesla’s governing body just on paper but for Musk they were friends after all! And that meant that Musk decided how things would be done at the company.
He could use this control to prevent the Board from negotiating his pay by comparing it with packages offered to other high level executives of his calibre in the past. It was 250 times greater than the median peer CEO compensation in 2017. In fact, the plan’s closest comparison, as you can imagine, was Musk’s earlier compensation plan as of 2012. They’d even have to go chop-chop on his pay approval because it was Musk who dictated how much time or rather how unreasonably less time they’d get to review it.
Now, shareholders obviously didn’t know of his dealings with the Board or the kind of power he exercised on them simply because they weren’t informed of it earlier. That’s what must have probably got them to sign off on his pay. They’d assume that an independent Board, unrelated to Musk and unbiased by his influence, approved Musk’s pay.
And all of this put together convinced the court that Musk had extreme influence over the whole process. Control was Musk’s quick fix to get the pay he imagined for himself. After all, his personal ambitions of colonising other planets like Mars, were just as expensive. So he had to find a way to fund it.
But here’s the thing. A few days ago, Tesla’s shareholders sort of reinstated Musk’s package by approving it in a meeting all over again. Yeah, we’re talking about the same set of shareholders that the court felt had approved his pay nearly 6 years ago on the basis of misinformation and deceit.
So, why did they do it, you ask?
You could say “Hey, that’s probably what shareholders really want. Maybe their votes aren’t influenced by Musk’s control. Maybe he’s just a Superstar CEO who’s earning every penny of his pay but came across as intimidating to the court.”
Well, some shareholders may have thought in that direction, no doubt. But the real reason they redeemed his pay all over again may have simply been “control” itself.
Let’s explain.
Look, Musk has his fingers in many pies. There’s SpaceX, The Boring Company, Neuralink and now X (formerly Twitter). And not approving Musk’s pay would simply mean that he could make surprising decisions like quitting from Tesla itself. And this isn’t something we’re making up. That's a threat that Musk himself had issued through a post on X. If he didn’t get a total of 25% of Tesla, he’d simply leave.
Knowing Musk, this is something that shareholders thought could surely pan out if they’d disagree with his pay. And that would drive down Tesla’s share prices, leaving them sandwiched in a court fight between Richard Tornetta and Musk himself.
Their best bet? Keep Musk happy.
And who knows? Maybe this will just motivate him to deliver even more value to shareholders. Maybe they really don't want to bet against Elon Musk.
Until then…
Don't forget to share this story on WhatsApp, LinkedIn and X.
📢Finshots is also on WhatsApp Channels. Click here to follow us and get your daily financial fix in just 3 minutes.
Why you MUST buy a term plan in your 20s 👇🏽
The biggest mistake you could make in your 20s is not buying term insurance early. Here's why:
1) Low premiums, forever
The same 1Cr term insurance cover will cost you far less at 25 years than at 35 years. And once these premiums are locked in, they remain the same throughout the term!
So if you’re planning on building a robust financial plan, consider buying term insurance as early as you can.
2) You might not realise that you still have dependents in your 20s
Maybe your parents are about to retire in the next few years and funding your studies didn't allow them to grow their investments — making you their sole bread earner once they age.
And although no amount of money can replace you, it sure can give that added financial support in your absence.
3) Tax saver benefit
Section 80C of the Income Tax Act helps you cut down your taxable income by the premiums paid. And what's better than saving taxes from early on in your career?
So maybe, it's time for you to buy yourself a term plan. And if you need any help on that front, just talk to our IRDAI-certified advisors at Ditto.
With Ditto, you get access to:
- Spam-free advice guarantee
- 100% free consultation from the industry's top insurance experts
- 24/7 assistance when filing a claim from our support team
Speak to Ditto's advisors now, by clicking the link here.
