Even when compared with other CEOs, who routinely get paid roughly 200 times more than their typical employees, Elon Musk鈥檚 pay package was eye-opening.
A judge in Delaware on Tuesday that Tesla established for Musk in 2018, ruling that the process was 鈥渇lawed鈥� and the price 鈥渦nfair.鈥� Chancellor Kathaleen St. Jude McCormick called the package 鈥渢he largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude.鈥�
So, if Musk isn鈥檛 worth the maximum $55.8 billion value of the package, how much is he worth? It鈥檚 a thorny question without an easy answer in the notoriously complex world of executive compensation.
McCormick鈥檚 ruling bumped Musk out of the top spot on The magazine on Wednesday lopped $25 billion off his net worth, reducing it to $185.3 billion, putting him behind and family.
Critics have argued for years that CEO pay packages are exorbitant. The median compensation for a CEO of an S&P 500 company was valued at $14.8 million, according to the latest AP CEO pay survey for 2022 conducted with the executive compensation research firm Equilar. It would take the typical worker at one of those companies more than 185 years to earn what their chief executive reaped in just 12 months.
In 2018, Tesla estimated the value of Musk鈥檚 compensation package at $2.28 billion, topping the previous highest package of $1.39 billion given to Blackstone鈥檚 Steven Schwarzman 10 years earlier, according to Equilar. The value of Musk鈥檚 package has grown as Tesla鈥檚 stock price increased. By comparison, in 2022 made $34,084.
Under Musk鈥檚 pay plan, he received a chunk of stock options each time Tesla鈥檚 market value rose by $50 billion. Ultimately, he would have the chance to buy nearly 304 million shares for $23.34 each. Tesla has met each of the performance hurdles since the package was awarded. Its stock is trading at compared with $21 at the start of 2018.
The judge determined that Tesla鈥檚 board lacked independence from Musk. His lawyers said the package needed to be rich to give Musk an incentive not to leave 鈥� a line of reasoning the judge shot down.
鈥淪wept up by the rhetoric of 鈥榓ll upside,鈥� or perhaps starry eyed by Musk鈥檚 superstar appeal, the board never asked the $55.8 billion question: 鈥榃as the plan even necessary for Tesla to retain Musk and achieve its goals?鈥欌�� McCormick wrote.
Musk鈥檚 fans would argue that he shouldn鈥檛 be paid like other CEOs because He and Tesla are practically inseparable, so keeping him as CEO is key to the company鈥檚 growth. He built the company from an idea to last year selling more electric vehicles than any other company. His star power gets free publicity, so the company spends little on advertising. And he has forced the rest of the auto industry to accelerate plans for electric vehicles to counter Tesla鈥檚 phenomenal growth.
To figure out how much to pay their CEO, corporate boards often start by looking at how much their rivals are paying theirs: They need to pay enough to attract and keep the talent.
General Motors, for example, considers executive salaries at 3M, Boeing, Ford, IBM and other huge companies, and uses complex formulas to determine CEO compensation. For GM CEO Mary Barra, part of that depends on how GM鈥檚 stock return compares to its peers and how much progress the company makes on electric vehicles.
In 2022, Barra earned total compensation that GM valued at $29 million. That included $2.1 million in salary. Ford CEO Jim Farley's compensation was valued at $22 million that year.
Even though Tesla makes automobiles, investors often lump its stock in with Big Tech stocks. They鈥檙e the companies disrupting industries and people鈥檚 ways of life.
Plus, Musk is closely identified with Tesla the way Meta Platforms鈥� Mark Zuckerberg or Apple鈥檚 Tim Cook are with their companies. Pay packages at Big Tech companies are among the largest in the U.S.
Cook鈥檚 compensation was valued at $63.2 million for 2023, mainly due to stock awards valued at nearly $47 million. A year earlier, he earned total compensation valued at roughly $99 million.
In the nuanced world of executive compensation, these numbers don鈥檛 indicate how much a CEO actually takes home, they鈥檙e just an estimate of the compensation package's value. The final value may exceed or fall far below those figures because it is tied to stock.
Corporate law experts say any new compensation package for Musk will likely be challenged in court unless Tesla's board either resigns en masse or follows a meticulous process to protect shareholders by passing a substantially smaller package.
鈥淭his is just a mess for them,鈥� said Charles Elson, a retired corporate law professor and founder of the corporate governance center at the University of Delaware. 鈥淭hey kowtowed to this apparent superstar with poor results.鈥�
Elson, who has followed the court for more than three decades, said this is the first time he can remember a judge invalidating an executive compensation plan at a public company.
Lawyers for Musk and the directors had countered that the plan was fairly negotiated by a compensation committee whose members were independent, and that it was blessed by a shareholder vote.
Shareholders who approved Musk鈥檚 deal, Elson said, were unaware that Musk essentially was negotiating with himself. 鈥淚f the shareholders were aware of that, they may well have not approved it.鈥�
Stan Choe And Tom Krisher, The Associated Press
