Tesla goes to court to defend Elon Musk’s pay

Washington DC

Tesla went to court today to defend a massive pay package that helped CEO Elon Musk become the richest man on earth.

The Delaware Chancery Court in Wilmington will host a week-long trial to review the automaker’s board’s 2018 compensation plan for Musk. The trial began at 9.15am on Monday.

Musk himself is expected to testify on Wednesday.

The automaker said at the time that the pay deal could be worth nearly $56 billion, making it the largest compensation package for a public company on the planet, with a net worth of $50.9 billion today.

Even in the face of thin CEO compensation, Musk’s compensation plan is different. Millions of dollars are typically squandered on corporate executives at large companies, but the plan to pay Musk initially totaled tens of billions of dollars as long as he hit performance targets. It’s not cash — executive compensation rarely is — but company stock. The higher Tesla rises, the higher the value of those shares, and the more rewards Musk receives, the higher the value of those shares. If Tesla’s stock soared, it would help push his net worth past $300 billion at one point, with potential gains for shareholders.

But all the while, Musk has split his time between his many other endeavors. SpaceX began regularly sending astronauts to the International Space Station. The Boring Company built a Loop beneath the Las Vegas Convention Center. Then, of course, he bought Twitter.

However, Musk isn’t the only one benefiting from the rising value of Tesla’s stock and options. The same goes for shareholders. Since the approval of his compensation package in March 2018, Tesla’s market value has soared more than 1,000%.

The case is significant for Tesla, according to corporate governance experts, given serious questions about its executive pay. Tesla board defends compensation package.

The trial could also spark debate over executive pay, including the large stock grants they receive. CEOs of S&P 500 companies will earn an average of $18.3 million in 2021, 324 times the median company pay. This gap has widened in recent years.

For example, Amazon CEO Andy Jassy received compensation worth $212.7 million in 2021. Apple CEO Tim Cook received nearly $100 million last year. Microsoft CEO Satya Nadella’s 2021 compensation is close to $50 million.

Plaintiff Richard J. Tornetta, on behalf of Tesla shareholders, alleges that Musk used his control over the company and its board of directors to obtain huge compensation to “fund his personal ambitions to colonize Mars.”

Musk entered March 2018, the month shareholders approved compensation plans, ranked No. 41 on the Bloomberg Billionaires Index, largely due to his involvement with Tesla and SpaceX. At the time, Tesla was a promising but troubled automaker. It lost nearly $2 billion the year before and struggled to overcome production delays as it built its mass-market Model 3 sedan.Musk talked about being in “production hell” and “delivery logistics hell” this year, and joke about bankruptcy.

Many questioned whether the company could survive as an independent automaker.

Tesla’s board believes the automaker can become one of the most valuable companies in the world if executed properly, and wants to encourage Musk to lead the company for the long term. The compensation plan includes 12 tranches of stock that Musk will receive when milestones are reached, including Tesla’s market capitalization and its revenue and adjusted earnings. (Each tranche of shares stands to gain if Tesla’s market capitalization rises another $50 billion above $100 billion. Other milestones include hitting $35 billion in annualized revenue and $3 billion in adjusted earnings.)

The plan, originally set to pay out over a decade, turned out to be very lucrative for Musk, and in amazing timing. Tesla is the best performing U.S. stock in 2020 and has become the most valuable U.S. automaker ever. Its small SUV, the Model Y, recently became the best-selling car in Europe.

Musk has hit a number of milestones to trigger the payments, and he is expected to get the final tranche early next year.

The payment plan helped make Musk the world’s richest man, with an estimated net worth of $184 billion, according to the Bloomberg Billionaires Index. His true net worth can be difficult to estimate because a large portion is invested in SpaceX, a private company that doesn’t require public disclosure of detailed financial information that could show a decline or increase in value. Tech stocks and the broader stock market have both fallen sharply this year.

Richard Tornetta, who originally filed the lawsuit in June 2018, alleges that Tesla’s board breached its fiduciary duty by being wasteful and that Musk breached his own fiduciary duty by taking unjust enrichment.

Tornetta argued in his original complaint in 2018 that the compensation plan was unnecessary to incentivize Musk because he already owns a large stake in the automaker.

The lawsuit was designated a class action by the court in January 2021. The case took years to work its way through the system due to the protracted nature of the litigation, including through Tesla’s motion to dismiss the complaint.

Tornetta both complained that the board that crafted Musk’s compensation plan lacked sufficient independence. Board members include 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 the UCLA School of Business, told CNN Business that the case is serious for Tesla because the automaker would have a heavy burden to justify compensation. And the process of creating compensation is fair.

“It’s a huge package,” Hayne said of the compensation plan. “Do they need to give up so much of the company to Musk to align his interests and keep him as CEO?”

She noted that two advisory firms, Institutional Shareholder Services and Glass Lewis, both recommended in 2018 that Tesla shareholders reject the compensation plan.

Institutional Shareholder Services warned that the plan “locks in unprecedented high-paying opportunities for the next decade,” noting that Musk already owns 22% of Tesla, aligning his interests with it. But she noted that shareholders did approve the plan.

In this case, Musk’s close relationship with board members could pose problems for Tesla, Hayne said.

“Given the entire board is heavily influenced by Musk, it’s hard to know that anything they do will follow proper process,” she said.

Tesla’s board claims it developed the plan “after more than six months of careful analysis with leading independent compensation consultants and discussions with Elon.”

“We allow Elon to share the proceeds in a way commensurate with the difficulty of achieving these goals,” they said at the time.

Tesla did not respond to a request for comment and generally does not engage with professional news outlets.

The trial is expected to last a week. Chancery judges sometimes rule from the bench, but this is not common. It may take weeks to months to reach a decision.

Musk has become a regular at the Delaware Chancery Court. Last month, he narrowly escaped court for his acquisition of Twitter. Last year, he testified in court over Tesla’s acquisition of SolarCity. In April, a judge ruled in Musk’s favour.

Musk’s unique management style will be a topic of discussion. He has led several ventures outside of Tesla: aerospace company SpaceX; his tunneling venture, The Boring Co.; brain interface startup Neuralink; and Twitter. It is not uncommon for an executive to hold multiple CEO titles.

CNN’s Chris Isidore contributed to this report.

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