Elon's gonzo pay A judge has ruled that Musk's compensation package is excessive ROBERT REICH JAN 31 https://open.substack.com/pub/robertreich/p/elons-gonzo-pay?r=1izlr0&utm_campaign=post&utm_medium=web

 

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Elon's gonzo pay

A judge has ruled that Musk's compensation package is excessive

ROBERT REICH

JAN 31

 

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Friends,

A Delaware judge ruled yesterday that the generous pay package Telsa awarded Elon Musk in 2018 — which helped make him the world’s richest person — was unfair to other Tesla shareholders.

The automaker said at the time that the compensation deal could be worth nearly $56 billion to Musk, making it the largest pay package for anyone on Earth from a publicly traded company. (Musk’s compensation package came in the form of options to buy 304 million company shares.)

According to Chancellor Kathaleen McCormick of Delaware’s Court of Chancery, “[t]he process leading to the approval of Musk’s compensation plan was deeply flawed,” and she ordered Tesla to cancel the options.

Chancellor McCormick found that the board — legally obligated to serve the best interests of all shareholders — was not sufficiently independent of Musk to fulfill its duty (one director is Musk’s brother, Kimbal; several others are longstanding friends and associates).

Musk will probably appeal to the Delaware Supreme Court, but the Delaware Supreme Court has historically given chancellors like McCormick wide latitude to rule on such punishments.

Note that decisions by Delaware’s Court of Chancery and its state supreme court have enormous impact on big American corporations, most of which are legally incorporated in Delaware because of its streamlined legal system.

Importantly, yesterday’s ruling isn’t just about process. It also establishes that there is such a thing as excessive compensation.

McCormick found that the pay package awarded Musk was excessive — paying him much more than was needed to motivate him to do a good job.

Musk is now demanding even more shares of Tesla and an even higher compensation package — threatening the company and its other shareholders that unless they give it to him he’ll start moving highly anticipated A.I. projects to other parts of his business empire.

In a series of posts on X on January 15, Musk threatened that he would not grow Tesla to become a leader in artificial intelligence and robotics without a compensation package that gave him ownership of around 25 percent of the company’s stock, double the roughly 13 percent he currently owns.

He claims that his demand isn’t about money but about control. “At 15% or lower, the for/against ratio to override me makes a takeover by dubious interests too easy.”

Rubbish. He could easily maintain control if Tesla established a two-class voting system giving him multiple votes for each share. (Mark Zuckerberg holds 61 percent of the voting power at Meta despite Vanguard, BlackRock and Fidelity owning more Meta stock than he does.)

Following the logic of the Delaware court’s ruling, Musk’s latest attempt to hold Tesla hostage for a bigger compensation package would also be found to violate his fiduciary duty to Tesla and its other shareholders.

While the Delaware courts are setting some upward limits on executive pay, Democrats in Congress are seeking to do the same through a sliding-scale corporate tax.

Last week senators Bernie Sanders, Elizabeth Warren, Ed Markey, and Chris Van Hollen, proposed a corporate tax that rose with the ratio between CEO pay and median worker pay.

Their Tax Excessive CEO Pay Act of 2024 would raise the current corporate tax rate by one-half of 1 percent on corporations whose CEOs (or their highest-paid employee if not the CEO) made between 50 and 100 times the pay of their median worker.

The tax would rise incrementally up to corporations whose CEOs make 500 times what their median worker makes.

To give you some perspective on this, in the 1960s, that ratio was roughly 20-to-1. Now, it’s more than 300-to-1.

I applaud the legislation, but suggest it be amended to raise the sliding-scale corporate tax rate above a 500-to-1 ratio.

In 2021, when Musk sold a batch of Tesla stock options, his “total realized compensation” was $734,762,107.

That made the ratio of Musk’s compensation to the median compensation of all Tesla employees that year, 18,043-to-1.

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