The Tesla CEO Elon Musk had received 303 million split-adjusted stock options which were worth $51 billion as of Tuesday’s share price. However, a Delaware state court judge recently threw out the 2018 pay package, which helped Musk become one of the wealthiest people in the world.
What Was the Pay Package?
In 2018, Tesla granted Musk a pay package that included stock options that could be worth up to $55 billion if the company met certain performance targets. The package was approved by a shareholder vote, with 73% of the shares voting in favor of the package.
The Tesla attorneys argued that Musk was a key to the rise in the company’s market cap, which was valued at $54 billion at the time the package was approved. Therefore, they argued that the pay package was reasonable compensation for Musk’s role in the company’s success.
What Was the Judge’s Ruling?
The judge in the case ruled that Musk and the rest of the Tesla board failed to prove that the compensation plan was fair. He said that Tesla investors would benefit from the decision by having the “dilution from this gargantuan pay package erased”
Attorneys for Musk and the Tesla board argued that the package was approved by a shareholder vote. However, the judge determined that because Musk was a controlling shareholder with a potential conflict of interest, the pay package must be subject to a more rigorous standard.
The shareholder’s lawyers argued that the compensation package should be voided because it was dictated by Musk and was the product of sham negotiations with directors who were not independent of him. Musk downplayed the notion that his friendships with certain Tesla board members meant that they were likely to do his bidding.
The judge concluded that the only suitable remedy was for Musk’s compensation package to be rescinded. He wrote in his 200-page decision that the process leading to the approval of Musk’s compensation plan was “deeply flawed.”
What Does This Mean for Tesla?
The ruling will put the spotlight on Tesla’s next round of compensation negotiations with Musk. It also comes after Musk reiterated his desire for 25% voting control of Tesla.
The ruling is a victory for Tesla shareholders, who argued that the pay package was excessive and not necessary to ensure Musk’s dedication to the company. It is also a reminder that corporate boards must be mindful of potential conflicts of interest when negotiating executive pay packages.
Conclusion
The ruling on Elon Musk’s pay package is a reminder of the importance of corporate governance and the need to ensure that executive pay packages are fair and reasonable. The judge’s decision to strike down the pay package is a victory for Tesla shareholders, who argued that the package was excessive and not necessary to ensure Musk’s dedication to the company. It is also a reminder that corporate boards must be mindful of potential conflicts of interest when negotiating executive pay packages.