Tesla and CEO Elon Musk will spend this week in court defending the massive compensation package that helped make him the world’s richest man.
A week-long trial in the Delaware Court of Chancery will investigate 2018 compensation plan that the automaker’s board of directors is made for musk. Automaker said at the time it could be worth almost $ 56 billion, so that biggest compensation package for anyone on Earth from a publicly traded company, with a current net worth of $50.9 billion.
Even in the rarified air of CEO pay, Musk’s compensation plan stands apart. Millions upon millions of dollars are often provided for corporate executives of the largest companies, but the plan to pay Musk initially amounts to tens of billions, as long as he meets performance goals. It’s not in money — top executive salaries are rare — but in company stock. The higher Tesla goes, the more it will cost, the more musk will be awarded and the more it will be worth. And when Tesla’s stock shot ever higher, it helped him to a net worth of more than $300 billion at one point, while shareholders received potential profits.
But in the meantime, Musk splits his time between his many other ventures. SpaceX began regularly sending astronauts to the International Space Station. The boring company built the Loop under the Las Vegas Convention Center. Then, of course, he bought Twitter.
Musk isn’t the only beneficiary of the rising value of Tesla’s stock and options. So have shareholders. Tesla’s market value has risen over 1,000% since they approved their 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 has defended the compensation package.
The hearing could also heighten the debate over executive compensation, including the large stock grants they receive. S&P 500 CEO an average of $18.3 million in compensation in 2021, 324 times the median salary in the company. That disparity has grown in recent years.
Amazon CEO Andy Jassy, for example, take compensation worth $ 212.7 million in 2021. Apple CEO Tim Cook take nearly $100 million last year. Microsoft CEO Satya Nadella has been paid almost $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 secure a large compensation package in order to “finance his personal ambition to explore Mars.”
Kasturi entered March 2018, the month shareholders approved the compensation plan, in No. 41 on the Bloomberg Billionaire Index, due to his extensive involvement in 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 when it produced its mass-market Model 3 sedan. musk speak being in “production hell” as well as “delivery logistics hell” for a year, and jokes about bankruptcy.
Many questioned if the company could survive as an independent automaker.
Tesla’s board of directors felt that with the right execution, the automaker can become one of the most valuable companies in the world and wants to encourage Musk to lead it for the long term. The compensation plan includes 12 batches of stock Musk will receive if milestones are hit, including Tesla’s market capitalization as well as adjusted revenue and earnings. (Each batch of shares will be earned if Tesla’s market capitalization increases an additional $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 off over a decade, turned out to be quite lucrative for Musk and at a surprising time. Tesla is US stocks are the best performers in 2020 and become our American most valuable automaker ever. His small SUV, Model Y, became the best-selling car in Europe recently.
Kasturi has reached many milestones that trigger the payouts, and he is expected to earn the final bet early next year.
The payment plan helped Musk become the richest person in the world, with an estimated net worth of $184 billion, according to the report Bloomberg Billionaire Index. His true net worth can be challenging to estimate as a significant portion is invested in SpaceX, a private company that does not have to publicly disclose full financials that can indicate a decline or increase in value. Tech stocks and the broader stock market as a whole have fallen hard this year.
Richard Tornetta, who originally filed the lawsuit in June 2018, argued that Tesla’s board of directors had breached its fiduciary duty for waste, and Musk had breached his own fiduciary duty for unjust enrichment.
Tornetta argued in the original 2018 complaint that the compensation plan was unnecessary for Musk’s incentives because he already had a large ownership stake in the automaker.
The lawsuit was certified as a class action case by the court in January 2021. The case has taken years to move through the system due to the drawn-out nature of the litigation, including working through a motion from Tesla to dismiss the complaint.
Tornetta’s complaint alleges that the board of directors that created Musk’s compensation plan did not have enough independence from him. The board includes 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 UCLA’s business school, told CNN Business that the case is serious for Tesla because it will put a heavy burden on the automaker to prove compensation and the creation process are fair.
“It’s a big package,” Hayn said of the compensation plan. “Why should they give so much of the company to Musk to align his interests and keep him as CEO?”
He said Institutional Shareholder Services and Glass Lewis, an advisory firm, both recommended in 2018 that Tesla shareholders reject the compensation plan.
Institutional Shareholder Services warned that the plan “locks in unprecedented high-paying opportunities over the next decade,” and noted that Musk already owns 22% of Tesla, aligning his interests with it. But shareholders approved the plan, he said.
Hayn said Musk’s close relationship with board members could be problematic for Tesla in the case.
“Given that all those boards are heavily influenced by Musk, it’s hard to know that anything they do will follow due process,” he said.
Tesla’s board of directors has I that it created the plan “after more than six months of careful analysis with leading independent compensation consultants as well as discussions with Elon.”
“We give Elon the ability to share upside in a way that is commensurate with the difficulty of achieving it,” they said said at that time.
Tesla did not respond to requests for comment and generally does not engage with professional news media.
The trial is expected to last a week. Chancery court judges sometimes rule from the bench, but that’s rare. It may take several weeks to months before a decision is issued.
Musk has become commonplace in the Delaware Court of Chancery. Last month the acquisition of Twitter was almost tried in court. He testified before a court last year in a dispute over Tesla’s acquisition of SolarCity. A the judge ruled in favor of musk this April.
Musk’s unique management style will be a topic of discussion. He leads several ventures outside of Tesla: aerospace company SpaceX; his tunneling business The Boring Co.; a brain interface startup, Neuralink; and Twitter. It is common for executives to hold multiple CEO titles.
CNN’s Chris Isidore contributed to this report.