A judge in Delaware just voided Elon Musk’s pay package and for good reason too. CEOs and other C-suite executives are among the most well-compensated members of just about any organization but there are usually limits to just how big their payouts are. Elon Musk’s compensation from Tesla included a $56 billion pay package that many of the Tesla shareholders had approved back in 2018, but not all of them were convinced this was fair compensation. The Elon Musk compensation lawsuit was pursued by one of the investors, Richard Tornetta, who claimed that the full extent of the compensation plan was not fully shared with them before it was pushed in front of them. Elon Musk’s Tesla payout wasn’t guaranteed and hinged on the company making it to some pretty far-fetched milestones, but even theoretically, it was difficult to prove a pay package like that as being “fair.”
Elon Musk Pay Package Denied—Musk Has the Option to Appeal
It’s not every day you hear about someone being granted the “largest compensation plan in public corporate history,” but that’s what Chancery Court Chancellor Kathaleen McCormick had to say about Elon Musk’s pay package that was approved by shareholders at Tesla. The judge ruled that the board of directors were unable to definitively prove that the compensation plan was fair or that any substantial negotiations had taken place to arrive at a reasonable agreement between the parties. According to the judge, it appeared that many of the members were almost akin to co-conspirators, many of them with “extensive ties” to Musk and very willingly to overlook their duties to the company in favor of their loyalties to him.
McCormick has quite a noteworthy career in dealing with major corporate cases as well as with Musk himself, having overseen his previous investments during the takeover of Twitter in 2022. In another case, Reuters also reports that she significantly reduced legal fees by more than 90 percent for lawyers who were involved in a questionable lawsuit filed by shareholders of Magellan Health, emphasizing that when lawsuits lack merit, the attorneys should receive lower compensation. Considering these instances of her previous rulings, her stance on this case is unsurprising, and her 200-page statements on the case have also been interesting to read.
Musk’s reaction to the news is being well documented by himself on X/Twitter where he states that one should “Never incorporate your company in the state of Delaware,” resharing posts that claim the decision by McCormick is perhaps a political move. Earlier, he opened up a poll to his followers on whether he should move the state of incorporation to Texas instead. With 87.1 percent follower support in favor of the move, we’ll have to see if that’s enough for the company to make an official transition out of Delaware.
The public vote is unequivocally in favor of Texas!
Tesla will move immediately to hold a shareholder vote to transfer state of incorporation to Texas. https://t.co/ParwqQvS3d
— Elon Musk (@elonmusk) February 1, 2024
What Did Elon Musk’s Compensation Include
The Elon Musk compensation lawsuit claimed that Musk himself was behind the compensation plan and that the investors were unaware of the board’s loyalty to the billionaire over the company. From Musk’s brother to other close associates, the board was predisposed towards his authority within the organization. The compensation that Elon Musk was awarded had very specific guidelines in place for him to qualify for receiving the compensation and during the lawsuit, the defendants had to prove that the compensation plan was fair, which is where they failed to make a case for themselves. They also failed to prove that the stockholder voters were fully informed of the matter they were voting on, preventing them from shifting the burden of proof as well.
“The plan offers Musk the opportunity to secure 12 total tranches of options, each representing 1% of Tesla’s total outstanding shares as of January 21, 2018. For a tranche to vest, Tesla’s market capitalization must increase by $50 billion and Tesla must achieve either an adjusted EBITDA target or a revenue target in four consecutive fiscal quarters. With a $55.8 billion maximum value and $2.6 billion grant date fair value, the plan is the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude—250 times larger than the contemporaneous median peer compensation plan and over 33 times larger than the plan’s closest comparison, which was Musk’s prior compensation plan.”
—Judge Kathaleen McCormick putting Elon Musk’s proposed pay package into perspective
Stating that the grant is not “too complex to unscramble,” the judge has asked for a rescission, denying any claims that Musk will be left uncompensated if this move is made considering his existing investments in the company. The CEO and founder had made a public note of his desire for a 25 percent ownership over Tesla but how that story will evolve remains unclear. Elon Musk’s shareholding in Tesla stands at 13 percent and it will likely stay there for a while until the board of directors can come up with a better offer that appears for Tesla shareholders as well. The board will likely come up with a new proposal that is only slightly less excessive as Musk’s position as “the richest” man might waver if the package is not extensive. If the company truly moves out of Delaware, they might have a renewed chance of passing off a similar plan but that is hypothetical as of now.
While Musk battles to secure a cushy pay package, employees at Tesla and SpaceX have been battling the big boss over various claims of workplace negligence and unsafe working conditions within the company. Unionization efforts have been mustering in Sweden and the company could perhaps witness such efforts gain support in America as well. How all of these stories collectively unfold remains to be seen.