How Much Is Too Much for Musk?

Our position on the proposal

Segal Marco Advisors took the position that the multibillion amount was excessive even within the context of strong financial performance from the electric car company. Our philosophical approach is that no CEO, no matter how gifted, achieves corporate success alone. Financial rewards should be shared with employees and, ultimately, should enhance the investment of the shareholders.

Proxy advisors Glass Lewis and ISS also recommended against the 2018 vote. At the time, ISS reported the grant:

is the single largest award contemplated for any executive in history and therefore it should be expected that such an award be conditioned on the achievement of truly historic performance goals, with full vesting requiring Tesla to become one of the largest companies in the world.

Lawsuits followed

Despite shareholder approval, an individual shareholder sued Tesla on the grounds the pay was excessive and won the case in January 2024. The Delaware Chancery Court found Tesla directors did not provide a compelling case that the award met a fairness standard under Delaware law. The court also found the directors were conflicted in their interests and failed to make proper disclosures on the pay packages and performance hurdles. The court wrote, “In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit. The process arrived at an unfair price.” (The decision is available online.)

So, what happened next? Tesla appealed the court’s decision, which is pending, and the Tesla board is turning to investors for support. At Tesla’s upcoming June 13 shareholders’ meeting, the company is recommending investors vote again to approve the 2018 option award. The options vested in 2023 at a valuation of $56 billion, according to Meridian Compensation Partners.

The choice before investors

Taking a step back to assess the decision on the ballot for shareholders this proxy season, few voters have policies to vote against compensation plans simply due to a magnitude of pay metric. As an example, Segal Marco’s assessment of executive compensation compares company performance against a peer group and evaluates alignment. We also take into account several other plan features, such as retention requirements for equity grants and the CEO-to-median-worker ratio.

In this case, it’s clear Musk led Tesla to inspiring levels of growth. A shareholder who bought one Tesla share at IPO in June 2010 paid $17. After multiple stock splits, that one share is now 15 shares. With Tesla trading at $177.45 on May 17, 2024, that is a return of 15,658 percent, despite its almost 30 percent decline so far in 2024, according to Morningstar. Equity awards also align the interest of executives and shareholders by creating a “skin-in-the-game” incentive.

Still, the highest paid CEO in 2023 earned $161 million, according to Equilar.

Tesla’s median worker earns $45,811, according to the company’s April 29, 2024 proxy statement. In April 2024, Tesla announced a 10 percent cut to its global workforce or approximately 14,000 jobs in response to decreased sales, Reuters reported.

How would you vote?