EXPLAINER | The case against Elon Musk's $56bn pay package

A Delaware judge on Tuesday invalidated Elon Musk's $56bn (R1.05-trillion) pay package for his work as Tesla CEO, siding with a Tesla shareholder who called the package unfair.

Musk is one of the world's wealthiest people, according to Forbes Magazine, and his 2018 compensation package for leading the electric-vehicle maker is much larger than any executive pay package to date.

Here is what the case is about:

WHO SUED AND WHY?

An investor named Richard Tornetta sued Musk and several Tesla directors in 2018, claiming Musk's pay package was unfair. While Tornetta held just nine Tesla shares, the deal had also been criticised by major pension fund California State Teachers’ Retirement System and proxy advisory firms, who viewed the deal as too large.

Musk's 2018 pay package gave him stock grants worth about 1% of Tesla's equity each time the company achieved one of 12 tranches of escalating operational and financial goals. Tornetta argued shareholders were not told how easily the goals would be achieved when they voted on the package.

Tesla achieved the financial goals, helping make Musk one of the world's wealthiest people.

Tornetta claimed the pay was not necessary to incentivise Musk to achieve success for Tesla, as he already owned about 22% of the carmaker's stock.

WHAT WAS MUSK'S DEFENCE?

Tesla's board argued in court filings the pay package was needed to align Musk's incentives with shareholders and keep him focused on the company as it ramped up production of the Model 3. It argued Musk did not receive compensation other than the stock options and if Tesla had not achieved the targets in the pay package, Musk would not have received any money.

Shareholders were told the goals tied to Musk's pay were “challenging” yet “attainable.”

WHAT HAPPENS NEXT?

Musk is likely to appeal, experts said. Before that can happen, the judge will have to finalise the ruling and decide on compensation for lawyers who represented Tornetta on a contingency basis.

Even without the pay package, Musk benefited from his 22% ownership share of Tesla's stock at the time the package was adopted in 2018. Since then, Tesla's stock has risen about 10-fold, raising the value of his stake by more than $100bn (R1.88-trillion).

CAN TESLA PAY MUSK RETROACTIVELY?

Musk said in January discussions on a new pay package with the board were on hold pending the outcome of the case over the 2018 package.

The plaintiff's legal team said in court documents the board could adopt a new plan to pay Musk for his work for the past five years, saying this plan would have to be reasonable.

Experts said any such payment were likely to pale in comparison with the stock grant and could lead to more legal headaches.

Jesse Fried, an executive pay expert and professor at Harvard Law School, said while Delaware courts sometimes allow boards to make modest “gift” payments to executives for past performance, shareholders could easily sue over such a payment to Musk, claiming it was a waste of corporate resources.

“Musk has already generated value for the shareholders. If they were to write a check to him now for $10bn (R187.9bn) for past performance, what exactly do the shareholders get from that?” he said.

Reuters