Can Tesla Defend Elon Musk’s Pay Package?


Sep. 23 2019, Updated 3:37 p.m. ET

According to a Delaware judge, Tesla’s (TSLA) board must defend CEO Elon Musk’s pay package. Tesla shareholder Richard Tornetta filed a lawsuit alleging corporate waste and unjust enrichment of the CEO in 2018.

Notably, Tesla asked the court to dismiss the lawsuit. CNBC reported on September 20 that Vice Chancellor Joseph Slights of the Delaware Court of Chancery ruled against this dismissal.

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Tesla’s board to defend Musk’s pay package

Now, Tesla’s board must defend Musk’s pay package in court. In a February 2018 statement, Tesla noted, “Elon will receive no guaranteed compensation of any kind — no salary, no cash bonuses, and no equity that vests by the passage of time. Instead, Elon’s only compensation will be a 100% at-risk performance award, which ensures that he will be compensated only if Tesla and all of our stockholders do extraordinarily well.”

Musk’s package approved in March 2018

Notably, Tesla’s shareholders approved this package in March 2018. CNBC reported that Tesla estimated this package’s value at $2.6 billion in March 2018. However, if the company’s market capitalization increased tenfold, Musk’s pay package would also balloon.

At the time of the recommendation of this package, proxy advisory firm Institutional Shareholder Services (or ISS) had advised shareholders to vote against it. CNBC reported that ISS said the package “locks in unprecedented high pay opportunities for the next decade, and seemingly limits the board’s ability to meaningfully adjust future pay levels in the event of unforeseen events or changes in either performance or strategic focus.”

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Delaware judge: Musk’s award in excess of peers

The Delaware court judge said in a ruling that the award is “well in excess of that paid to Musk’s peers.” CNBC reported that the judge stated that he “would have dismissed the lawsuit” if the package had been negotiated by truly independent directors.

Musk’s versus peers’ awards

According to Observor.com, Amazon (AMZN) CEO Jeff Bezos has received the same cash salary for the past 20 years. In 2018, he received $81,840. Notably, most of his other expenses were covered by “security costs.”

Plus, Bezos didn’t receive any additional bonuses or stock awards. Observor.com noted that in 2018, Berkshire Hathaway (BRK.B) CEO Warren Buffett received a salary of $100,000. Buffett recorded $289,000 in security expenses.

Musk tweeted on May 29, “I paid most of my Tesla-related expenses too. Tesla last year was actually net negative comp for me.”

Tesla’s stock price performance

Tesla stock has lost more than 27% of its value year-to-date due to profitability concerns, high executive turnover, and other concerns. During its second-quarter earnings report, Tesla reported a loss of $1.12 per share. Notably, analysts expected a loss of $0.36 per share.

Lately, there have been several positive developments for the company, including a 10% purchase tax break and impressive progress at its Gigafactory 3. Plus, Tesla’s Model 3 received the top safety rating from the IIHS (Insurance Institute of Highway Safety).

You can read more about analyst sentiment for Tesla in Tesla Stock: Why Analysts Think It’s Undervalued.


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