What Musk’s Fight for His Promised Pay Might Say About Delaware Business Ownership
Elon Musk has once again lost a bid for approval of his $56 billion dollar compensation package, promised to him back in 2018. Denied by Delaware Court of Chancery Chancellor Kathaleen McCormick, this situation provides an example of a rare exercise of state power that can directly effect a business’s operations. While CEO compensation may be a pain point for many Americans, the details of this situation reveal some nuance that should be considered as a small business owner.
What Compensation Was Musk Promised?
In 2018, Tesla shareholders voted on and approved a 10-year, stock-option-based compensation package, valued at $56 billion at the time, to be paid out to Musk in increments based on reaching certain milestones. These milestones, called tranches, were based on the total market cap of the company itself.
Put simply, reaching each of the 12 tranches would allow Musk to purchase an agreed-upon number of shares (nearly 304 million upon reaching the final milestone, to be exact) at a set rate of $23.33, regardless of share value at the time the award is granted. Currently worth around $101 billion dollars, this package would be about 275 times a typical CEO’s annual pay.
Elon’s incentive to grow Tesla
Since Musk’s pay would be based on the Tesla’s market cap, and the award would be issuing additional shares of stock, he had a strong incentive to increase both Tesla’s market cap as well as individual share value. This reflects a common basis for the pay of company CEOs and aims to encourage long-term success of the company. Musk also needed to agree to hold his shares for an additional 5 years before selling, further pushing him to ensure the company’s long-term success.
Both Sides Of The Compensation Conflict
Delaware’s Court of Chancery and Elon Musk, alongside Tesla shareholders, represent both sides of the compensation issue at hand. Most states aim to avoid interfering in the affairs of businesses, but publicly traded companies, like Tesla, are subject to a fair bit of scrutiny. While they stand at odds, there are fair points being made by both sides that are worth considering.
Musk was asked to meet lofty goals
Tesla’s market cap was between $50 billion and $60 billion in 2018, with an end goal after 10 years of $650 billion. At the time, these goals were considered laughably lofty. To add to Musk’s gamble, he actually refused to take a salary of any kind and instead agreed to a purely performance-based compensation package made up of stock awards. Bearing such a risk, it’s reasonable that a considerable payout lie at the end of that undertaking.
Delaware’s conflict of interest laws
The legitimacy of Musks’s compensation package approval arose all the way back in 2018 when first approved. Musk owned 22% of the stock shares, making him the company’s largest shareholder, as well as being chairman of the board, CEO and Chief Product Architect. This is one of the core issues that Delaware’s Court of Chancery has with Musk’s compensation package.
Delaware’s state code Title 7 Chapter 64 § 6425 defines part of the issue well: “No director shall be entitled to vote on any matter before the Authority if such director knowingly has a financial interest in the outcome of such matter.”
Some concerns have arisen that Musk may have held sway over the pay packages original design, as well as the recent vote to ratify the 2018 CEO Performance Award, which took place at Tesla’s 2024 Annual Meeting of Stockholders and yielded support from over 70% of voting shareholders. Along with Musk’s significant voting power, some have called into question Tesla’s Board of Directors independence from Musk, considering his brother Kimbal Musk also serves on said board, for example.
While Delaware’s state code might be causing frustration for Musk, the fact that laws are in place to protect shareholder interests still stands out as a benefit of forming your business in the state. If you decide Delaware, or any other U.S. state for that matter, is the right home for your business, Northwest is here to help you form your business.
Elon’s results are unprecedented
At the time of this post, Tesla’s market cap sits at over $1 trillion. With a goal of $650 billion in total market cap, it would be unreasonable to downplay Musk’s results and the extent of his commitment. When the terms of Elon’s compensation agreement were released, many doubted the growth goals were even possible.
Being known for sleeping on the floor of his factory and working 80-100 hours per week, it’s difficult to not feel a level of empathy for Musk’s work and his defense of his $101 billion payday.
Musk’s pay would exceed 4 years of net income
Along with the unfathomable size of the payout, some have compared Musk’s potential payout to the company’s net income. California Public Employees’ Retirement System (CalPERS), one of the major shareholders of Tesla, directly addressed this issue in a June statement. With Tesla’s net income from 2020-2023 totaling $33.8 billion, the value of Musk’s compensation would easily eclipse that.
“While we agree that Mr. Musk is entitled to be well compensated for his work, we also believe that a pay package should be commensurate to a company’s performance with reasonable salary caps,” said CalPERS CEO Marcie Frost.
How State Decisions Effect Business
If Musk’s input really had the effect on company growth as Denholm and many shareholders would insist, his decision to leave the company due to denial of his compensation package by Delaware could have detrimental effects on the company as a whole as well as stock value for those invested.
In a letter to the United States Securities and Exchange Commission (SEC) defending Musk’s pay, Tesla board chair Robyn Denholm stressed the importance of “retaining Elon’s attention and motivating him to focus on achieving astonishing growth for our company.”
Since Musk heads 6 companies, including SpaceX and X (formerly Twitter), part of the push for approval of the compensation package comes from a desire to keep the mogul on as CEO and encourage greater focus on Tesla’s interests.
What Delaware’s decision says about state power
One argument in favor of Musk’s compensation lies in the political space. Musk is quoted on X/Twitter saying “Shareholders should control company votes, not judges”, which is a sentiment many share. It’s definitely worth noting the fact that a decision made by a great majority of shareholders is currently being shot down by state authorities. While some claim this type of regulation halts innovation, it could also protect the interests of shareholders and prevent the dilution of voting power for those with a smaller percentage of shares.
