Elon Musk heads to court over Tesla pay that made him the world’s richest person


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CNN

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

The week-long trial in the Delaware Court of Chancery will examine the 2018 compensation plan the automaker’s board created for Musk. The automaker said at the time it could be worth nearly $56 billion, making it the biggest compensation package for anyone on Earth from a publicly traded company, and the net worth is today. $50.9 billion today.

Even in the thin air of CEO compensation, Musk’s compensation plan stands out. Millions and millions of dollars are often lavished on top corporate executives, but Musk’s compensation plan was initially in the tens of billions, as long as he met his performance goals. It wasn’t cash — executive compensation rarely is — but company stock. The more Tesla went up, the more those shares would be valued, the more Musk would be awarded, and the more those shares were worth. And as Tesla’s stock rose steadily, it propelled it to a net worth of more than $300 billion at one point, while reaping potential shareholder gains.

But all the while, Musk was dividing his time between his many other businesses. SpaceX has begun regularly sending astronauts to the International Space Station. The Boring Company has built a loop under the Las Vegas Convention Center. And then, of course, he bought Twitter.

However, Musk isn’t the only one benefiting from Tesla’s rising stock and option values. So have shareholders. Tesla’s market value has soared more than 1,000% since they approved his salary 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 lawsuit may also energize the debate over executive compensation, including the large stock grants they receive. S&P 500 CEOs received an average of $18.3 million in compensation in 2021, 324 times the median corporate salary. This disparity has widened in recent years.

Amazon CEO Andy Jassy, ​​for example, received compensation valued at $212.7 million in 2021. Apple CEO Tim Cook received nearly $100 million last year. . Microsoft CEO Satya Nadella was paid nearly $50 million in 2021.

The plaintiff, Richard J. Tornetta, claims on behalf of Tesla shareholders that Musk exploited his control over the company and its board of directors to obtain the huge compensation to “fund his personal ambition to colonize Mars.”

Musk entered March 2018, the month shareholders approved the compensation plan, at No. 41 on the Bloomberg Billionaire Index, largely due to his involvement in Tesla and SpaceX. At the time, Tesla was a promising but struggling automaker. It had lost nearly $2 billion the previous year and was struggling to overcome production delays as it manufactured its mainstream Model 3 sedan. Musk has spoken of being in “production hell” as well as “delivery logistics hell” during the year, and joked to go bankrupt.

Many wondered if the company could survive as an independent automaker.

Tesla’s board believed that with proper execution, the automaker could become one of the world’s most valuable companies and wanted to encourage Musk to lead 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 adjusted revenue and earnings. (Each batch of shares would be earned if Tesla’s market capitalization increased an additional $50 billion above $100 billion. Other milestones included reaching $35 billion in annualized revenue and $3 billion dollars of adjusted earnings.)

The plan, originally slated to pay off over the course of a decade, proved hugely lucrative for Musk and in astonishing time. Tesla was the best performing US stock in 2020 and became the most valuable US automaker of all time. His small SUV, the Model Y, recently became the best-selling car in Europe.

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

The payment plan made Musk the richest person in the world, with an estimated net worth of $184 billion, according to the Bloomberg Billionaire Index. His true net worth may be difficult to estimate because a significant portion is invested in SpaceX, a private company that does not have to publicly reveal detailed financial information that could show a drop or rise in value. Tech stocks and the broader stock market in general have fallen sharply this year.

Richard Tornetta, who originally filed the lawsuit in June 2018, claims Tesla’s board breached its fiduciary duties for waste, and Musk breached his own fiduciary duties for unjust enrichment.

Tornetta argued in its original 2018 complaint that the compensation plan was not necessary to incentivize Musk because he already had a large stake in the automaker.

The lawsuit was certified as a class action by the court in January 2021. The case took years to work its way through the system due to the drawn-out nature of the litigation, including the crafting of a motion by Tesla to dismiss the complaint.

Tornetta’s complaint alleges that the board that created Musk’s compensation plan lacked sufficient independence from him. The board included Musk’s brother, Kimbal, as well as 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 business school, told CNN Business that the matter is serious for Tesla because it will be a heavy burden for the automaker to prove that compensation and the process to create it were righteous.

“It’s a huge package,” Hayn said of the compensation plan. “Did they need to turn over such a part of the company to Musk to align his interests and keep him as CEO?”

She noted that 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 compensation opportunities for the next decade,” and noted that Musk already owns 22% of Tesla, aligning his interests with it. But shareholders approved the plan, she noted.

Hayn noted that Musk’s close relationship with board members could be problematic for Tesla in this matter.

“Since this whole board is very much under the influence of Musk, it’s hard to know that anything they did would go through a proper process,” she said.

Tesla’s board said it created the plan “after more than six months of in-depth analysis with a leading independent compensation consultant as well as discussions with Elon.”

“We gave Elon the ability to share the benefits in a way proportional to the difficulty of achieving them,” they said at the time.

Tesla did not respond to a request for comment and generally does not engage with trade media.

The trial is expected to last a week. Chancery court judges sometimes rule from the bench, but this is rare. It can take weeks to months before a decision is made.

Musk has become a regular at the Delaware Court of Chancery. Last month, its acquisition 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 favor of Musk in April.

Musk’s unique management style will be a talking point. 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 rare for executives to hold multiple CEO titles.

CNN’s Chris Isidore contributed to this report.

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