How much effort should corporate boards go to rationalize high pay for CEOs? This is a question that most corporate boards face at some point, and how far should boards go to address this issue? How it is handled can have a lasting impact on the company and the directors involved.
Tesla's board goes public to reinstate CEO Elon Musk's unprecedented $56 billion compensation package, which was struck down by a Delaware court after a shareholder lawsuit claimed the compensation was excessive A campaign was launched. Some governance watchers and Tesla shareholders are asking, “Why would the board do this?” Why is it so important to pay Elon Musk this particular compensation plan that this country's legal system has deemed unfair? As this situation unfolds, there is much at stake for the Tesla board and its shareholders. is approaching.
Tesla's board of directors plans to hold a shareholder vote at its June 13 annual meeting to decide whether Musk should receive the compensation he originally agreed to, according to reports. Musk was supposed to be paid $56 billion in his original compensation package; he will now receive about $56 billion. 47 billion as the automaker's stock price fell. Tesla Chairman Robin Denholm released a video appeal defending the pay package, saying a judicial decision should not usurp the will of millions of Tesla shareholders and that restoring Musk's pay package would be “an important part of the future of the company.” “It's very important,” he said.
Tesla's board insists the $47 billion package is just compensation for Musk's work in increasing the company's value from $53.7 billion to $790 billion. Mr. Denholm credits Mr. Musk with turning the company's $2.2 billion loss into a $15 billion profit and sending Tesla stock soaring 1,100% during his tenure. While Musk has certainly achieved great results, the bigger question is whether this level of compensation for executives is sustainable and ethical.
The outcome of Tesla's vote to restore Musk's compensation will be closely monitored by corporate boards and governance experts. Some aspects discussed about this situation are:
• Will compensation packages like Mr. Musk's become commonplace? If shareholders vote to approve this type of compensation package, will other CEOs try to persuade their boards to enact similar plans? Another attempt may be made, as a CEO may compare his compensation with his colleagues. It's hard to imagine shareholders would approve paying a single executive the equivalent of three times the company's profits, but Tesla's compensation plan creates that situation. If approved, the pay would reignite debate over whether CEO pay is rising to unsustainable levels. If a company pays most of its profits to executives, are shareholders getting the most benefit, and is the company poised for long-term growth?
• What happens if the shareholder rejects the salary package? If shareholders reject Musk's pay package, will Tesla's board try to pass another unprecedented compensation plan to reward Musk? Boards have already been forced to comply with legal regulations regarding payouts to CEOs since a court ruled that key information about the compensation plan was not provided to shareholders before voting, thereby making the plan unfair. It shows that you are willing to ignore the decision. What other steps will the board take to ensure Musk is paid a salary similar to his original salary contract? What kind of compensation package do shareholders want?
• Did the board go too far in supporting Musk's pay package? The way Tesla's board is fighting for this compensation package may not help the image of the directors involved. Some may think that Mr. Musk has too much influence. The board may have to defend why it is insistent on paying Mr. Musk such a historic sum and how it really benefits shareholders. Additionally, the company is currently facing a steep decline in its stock price and slowing demand for cars, so the resources used to pay Mr. Musk could be redirected to helping the company recover from the current recession. Yes, and the responsibility lies with Mr. Musk. Directors who are members of the audit and compensation committees of the board of directors may be opposed to re-election. Some shareholders may feel that the board's support for Mr. Musk's pay structure does not represent best practices in governance, and may even pursue unethical behavior. Regardless of the outcome of the shareholder vote on Musk's compensation, further lawsuits are likely, which would cost the company more money than it can afford.
