A Delaware judge has, again, ruled that billionaire Elon Musk is not entitled to a $56 billion pay package from his electric vehicle company Tesla Motors, resurrecting the debate on the compensation of top executives in the world's most influential companies.
Judge Kathaleen McCormick voided the pay, despite Tesla shareholders approving it in a June vote. Tesla had said in court filings that Mr Musk, the world's wealthiest person, deserved it based on the Texas-based company's success.
Ms McCormick disagreed, saying that Tesla’s board was not entitled to hit “reset” to restore the compensation, she said in her 101-page judgement.
“Were the court to condone the practice of allowing defeated parties to create new facts for the purpose of revising judgments, lawsuits would become interminable,” she said.
Checkered history
Mr Musk's staggering compensation first made its way to court in November 2022, just a month after he finalised his also dramatic $44 billion takeover of Twitter, known today as X.
It stemmed from one Tesla shareholder, Richard Tornetta, alleging that Mr Musk unfairly dictated the terms of his compensation package and set easily reached performance targets, and that investors were duped into approving it. Under the deal, Mr Musk did not even have to work at Tesla full-time.
That resulted in Ms McCormick voiding the pay in January, calling the compensation “an unfathomable sum” that was not fair to shareholders. The court also directed Mr Tornetta to work with Mr Musk's legal team on an order enacting the judge's decision.
Of course, Mr Musk disagreed, saying on X that “shareholders should control company votes, not judges”, in response to another post from Tesla that defended the compensation and called the ruling “wrong”.
“A Delaware judge just overruled a supermajority of shareholders who own Tesla and who voted twice to pay @elonmusk what he’s worth,” the company said.
“The court’s decision is wrong, and we’re going to appeal. This ruling, if not overturned, means that judges and plaintiffs’ lawyers run Delaware companies rather than their rightful owners – the shareholders.”
What does this say about CEO pay?
Mr Musk does not take any salary from Tesla; rather, his compensation is based on his shareholding in the company, in which he has a 13 per cent stake. With Tesla hitting a valuation of $1 trillion early in November, he became the first person to amass a net worth of $300 billion, according to Forbes estimates.
As of Tuesday, Mr Musk has a net worth of $336.8 billion according to Forbes and $353 billion according to the Bloomberg Billionaires Index. It is estimated that about three quarters of his wealth is tied to Tesla, with his other sources being the seven companies he founded, most notably SpaceX.
Mr Musk's $56 billion compensation packet is six times larger than the salaries of the top 200 chief executives combined in 2021, research firm Equilar had said at the time.
That becomes more staggering domestically: Mr Musk's compensation is nearly six times the combined salaries of the top 400 chief executives in the US alone in 2023, according to The National's calculations based on data from the American Federation of Labour and Congress of Industrial Organisations.
For comparison, Apple boss Tim Cook is 14th on AFL-CIO's list with an annual salary of more than $63.2 million, making him the highest-paid among Big Tech chiefs. Microsoft chief executive Satya Nadella is 25th with $48.5 million, while Nvidia head Jensen Huang is 50th with $34.2 million.
Jon Winkelried, the chief executive of private equity firm TPG, is No 1 overall, with “only” $198.7 million, and is only among seven bosses who have a compensation in the hundred-million range.
And since Mr Musk does not take a Tesla salary, as earlier mentioned, he is ranked dead last on the AFL-CIO rankings with a whopping annual pay of $0, in a tie with five other chief executives.
This is also an illustration of the stark reality regarding the pay gap between the wealthiest top executives and those further below the corporate ladder.
Growing gap
While salaries of chief executives declined last year, it remains enormous compared with the pay of other workers, according to the Economic Policy Institute.
From 1978 to last year, the compensation of chief executives rocketed 1,085 per cent, compared with a meagre 24 per cent rise in typical workers, the Washington, DC-based EPI said in a September report.
Last year alone, chief executives were paid 290 times as much as a typical worker, and were paid nearly 10 times as much as the top 0.1 per cent of US wage earners in 2022, showing “just how distorted chief executive pay increases have become”, EPI analysts said.
Chief executives are getting paid more “because of their leverage over corporate boards, not because of their skills or contributions they make to their firms”, analysts at the EPI said.
That exorbitant pay has contributed to “rising inequality in recent decades as it has likely pulled up the pay of other top earners – concentrating earnings at the top and leaving fewer gains for ordinary workers”.
The EPI, however, acknowledged that chief executive pay is linked strongly to the stock market, which held fairly steady last year, resulting in the uncharacteristic dip in their salaries.
The institute suggests to enforce policies that limit the ability of chief executives to collude with corporate boards to extract excessive compensation, “needed to prevent the US from becoming a winner-take-all society”.
These policies could include reinstating higher income tax rates at the top of the corporate ladder, using tax policy to incentivise lower packages for chief executives, making shareholder votes on their pay more binding and using antitrust regulations to rein in the market power of the largest companies, it said.
How companies structure the compensation of its chief executives is an important decision in order to attract, retain and motivate them, in hopes of these leaders steering their organisations to the desired paths.
However, extremely high payouts for chief executives also has implications for the company more broadly: excessive ones can demotivate employees, or it might cause a backlash from customers or other outside parties, said Dirk Jenter, a professor at the London School of Economics and Political Science.
Like in Mr Musk's case, “high executive pay makes headlines and affects how the public perceives the fairness of capitalism”, Prof Jenter said.
With the maximisation of long-term shareholder value in mind, “it should be possible to reach a consensus [between board directors and shareholders] on what optimal chief executive pay looks like”, he added.
