Elon Musk to be tried for payment that made him the richest in the world

Tesla and its CEO Elon Musk will spend this week in court to defend the massive compensation package that helped make him the richest man in the world.

The week-long trial in Delaware’s chancellery court will adjudicate the 2018 pay plan that the automaker’s board of directors created for Musk.

The automaker said at the time the payments could total nearly $56 billion, making it the largest compensation package ever paid by a publicly traded company to anyone on earth. The current net value is R$50.9 billion (about R$270 billion).

Even amidst the secretive world of CEO salaries, Musk’s compensation plan stood out. Millions and millions of dollars are often squandered by executives at the biggest companies, but Musk’s pay package ran into the billions as long as he met company performance goals. It wasn’t a cash payment (senior executives are rarely paid that way), but in company stock.

The more Tesla grew, the more the stock would appreciate, the more Musk would earn, and the more his shares would rise. With Tesla shares skyrocketing, Musk’s net income exceeded $300 billion at one point as shareholders recouped potential gains.

However, throughout this time, Musk has divided his time between various businesses. SpaceX began regularly sending astronauts to the International Space Station. The Boring Company built a loop (type of tunnel for fast pods) under the Las Vegas Convention Center. And then, of course, he bought Twitter.

Giant payout to the CEO

However, Musk isn’t the only one to benefit from the rise in the value of Tesla’s stock and options. Shareholders also profited. Tesla’s market cap has increased by a further 1,000% since it approved the payout package in March 2018.

The case could be significant for Tesla given the serious questions raised about its executive compensation, according to corporate governance experts. Tesla’s board of directors defended the compensation package.

The judgment could also reinvigorate the debate over executive pay, including the large stock packages they receive. CEOs of companies that are part of the S&P 500 index had an average compensation of $18.3 million (about R$97 million) in 2021, 324 times the average salary of the same companies. The disparity has grown in recent years.

Amazon CEO Andy Jassy, ​​for example, received compensation worth $212.7 million regularly in 2021. Apple CEO Tim Cook received nearly $100 million (about R$ 530 million) last year. Satya Nadella, CEO of Microsoft, received about US$ 50 million (about R$ 265 million) in 2021.

The plaintiff in the lawsuit against Musk and Tesla, Richard J. Tornetta, alleges, on behalf of the company’s shareholders, that the founder exploited his control over the company and its board of directors to secure the massive compensation package in order to “fund your personal ambition to colonize Mars”.

In March 2018, the month that shareholders approved the compensation plan, Musk was ranked No. 41 on Bloomberg’s list of billionaires, due in large part to his involvement in Tesla and SpaceX. At this point, Tesla was a promising but troubled automaker. The automaker had lost nearly $2 billion in the previous year and was struggling to overcome production delays by making its Model 3 sedan for the mass market. Musk said he experienced “production hell” as well as “delivery logistics hell” during the year, and joked about the possibility of bankruptcy.

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

Tesla’s board of directors felt that with proper execution, Tesla could become one of the most valuable companies in the world and encouraged Musk to lead it for the long term. The compensation plan included 12 shares of stock that Musk would receive if targets were met, including Tesla’s market capitalization, as well as its adjusted earnings and earnings. Each share lot would be won if Tesla’s stock market capitalization increased by more than US$50 billion (approximately R$265 billion) above 100 billion (approximately R$530 million). Other goals included reaching US$35 billion (about R$185 billion) in annualized revenues and US$3 billion (about R$16 billion) in adjusted revenues.

Originally slated to be paid out over a decade, the plan turned out to be hugely profitable for Musk, and in a surprising amount of time. Tesla was the best performing US stock in 2020 and became the most valuable automaker of all time in the United States. Recently, its compact SUV, the Model Y, has become the best-selling car in Europe.

Musk has reached many of the milestones that trigger compensation payouts, and he is expected to win the final batch early next year.

The pay plan helped Musk become the richest person in the world, with an estimated net worth of $184 billion, according to the Bloomberg Billionaires Index. Musk’s true net worth can be difficult to estimate, as a significant portion of his fortune is invested in SpaceX, a private company that doesn’t have to publicly disclose detailed financial data that could show a decline or increase in value. Tech stocks and the entire stock market have dropped sharply this year.

Duty to shareholders

Richard Tornetta, who filed the lawsuit in June 2018, claims that Tesla’s board of directors violated its fiduciary obligations regarding waste, and Musk violated his own fiduciary obligations because of unfair enrichment.

The plaintiff argued in its original 2018 lawsuit that the compensation plan was unnecessary to incentivize Musk, as he already had a large equity stake as owner of the automaker.

The lawsuit was certified as a class action lawsuit by the court in January 2021. The case took years to pass through the court system due to the litigation nature, including dealing with an appeal by Tesla to overturn the lawsuit.

Tornetta’s indictment alleges that the board of directors that created Musk’s compensation plan did not have sufficient independence from Musk himself. The board included Musk’s brother Kimbal as well as friends Anthony Gracias and Steve Jurvetson (the latter two have since left the Tesla board.)

Carla Hayn, a professor of corporate governance at the UCLA business school, told CNN Business that the case is serious for Tesla, as it will be complicated for the automaker to prove that the compensation and the process to create it was fair.

“It’s a huge package,” Hayn said of the compensation plan. “Was it necessary to pay all this to Musk to align his interests and stay as CEO?”, asked the professor.

She noted that consultancy Institutional Shareholder Services and Glass Lewis recommended in 2018 that Tesla shareholders reject the compensation plan.

Institutional Shareholder Services warned that the plan “blocked unprecedented high pay opportunities for the next decade” and noted that Musk already owned 22% of Tesla, aligning his interests with the company. But shareholders approved the plan anyway.

Influence on the board

Hayn noted that Musk’s close relationships with board members could be problematic for Tesla in the case.

“Given that the entire administration is very much under Musk’s influence, it’s hard to imagine that any action by Musk could go in a proper direction,” he said.

Tesla’s board of directors claimed it created the plan “after more than six months of careful review with a leading independent compensation advisor, as well as discussions with Elon.”

“We gave Elon the ability to share the discharge in a way that was proportionate to the difficulty of getting there,” the board said at the time.

Tesla did not respond to a request for comment and generally does not speak to professional media outlets.

The trial is expected to last a week. Chancery court judges often decide as a single body, but this is no longer common. That is, the issuance of a verdict can take weeks or months.

Musk became a frequent figure in this Delaware court. Last month, its takeover of Twitter nearly ended up on trial in court. He also testified in court last year in a dispute over Tesla’s acquisition of SolarCity. In April of this year, a judge ruled in favor of Musk.

Musk’s quirky management style will be a topic of discussion. He leads several ventures outside of Tesla: the aerospace company SpaceX; its Boring Co. underground excavation venture; a brain interface startup, Neuralink; and Twitter. It is unusual for executives to hold multiple CEO titles.

Chris Isidore of CNN contributed to this story.