Tesla’s Elon-Gated Pay For Musk. Lessons From Shareholder Democracy

Tesla’s shareholders have recently approved a $56 billion pay deal for Elon Musk, following a prolonged debate and opposition. The approval of this staggering compensation package, the largest ever for a global executive, let alone for an executive at a US-listed company, has reignited the debate on the boundaries of shareholder capitalism and corporate governance. 

While there would be many critics to such high payout, I want to argue why this is capitalism, at its best. And this is regulatorily upright.

Musk’s pay package is more than just a financial reward; it is a testament to his pivotal role in Tesla’s survival and growth. Since taking over, he has not only steered the company through precarious times, especially post-2008 financial crisis. The initial approval of his pay package in 2018 reflected shareholders' acknowledgment of his contribution, with specific performance milestones tied to the payout. By 2023, Tesla’s market value had soared from $54 billion to over $650 billion, meeting the goals set in Musk’s original deal. This impressive growth validated the shareholders' confidence in his leadership.

However, the controversy surrounding the approval process cannot be ignored. A Delaware judge previously nullified Musk’s pay package, citing the lack of independence of Tesla’s board from Musk’s influence. Despite this, a new vote has now re-approved the compensation, but it has not settled the matter entirely. Potential legal battles seem possible, as new lawsuits may challenge the vote.

The $56 billion question today is: would Tesla have achieved this level of success without him?

This brings to light a fundamental flaw in the concept of shareholder capitalist democracy. Critics argue that if you possess enough wealth and power, like Musk, governance structures and systems can be bypassed. This sentiment echoes the outrage over executive pay and governance failures seen during the 2008 Global Financial Crisis. The approval of Musk’s pay deal epitomises the audaciousness of shareholder-led corporate governance, raising concerns about the true efficacy of such democratic processes in curbing excesses.

Imagine if a company's stock price were determined only by shareholder votes instead of market fundamentals. This scenario would lead to unprecedented volatility, as stock prices could swing wildly based on the whims and biases of the voting shareholders rather than the actual performance and prospects of the business. Market stability would be compromised, making it difficult for investors to gauge the true value of a company. Moreover, this could encourage short-term thinking and manipulative practices, undermining the integrity of the stock market and potentially harming the broader economy.

The true test of shareholder democracy is not in the power it grants, but in the wisdom with which that power is wielded.To his supporters, Musk is worth every cent of his compensation, as evidenced by the 72% vote in favour of the pay package. His achievements with Tesla, SpaceX, and other ventures like X (formerly Twitter), Starlink, Neuralink, and X.ai showcase his unparalleled ability to drive innovation and business success. But then, is this investor’s FOMO on Musk ?

Tesla initially created Musk’s compensation package in 2017, outlining conditions for him to receive 12 tranches of stock options if the company met specific revenue and market targets. To be fair, Musk has achieved these targets, with Tesla’s market value increasing from $54 billion to the $650 billion goal established in the original agreement.  Under the terms of the compensation package, this package is not cash payout, but restricted stocks that he cannot sell for the next five years.

Yet, this admiration must be balanced against the implications of such disproportionate rewards. Corporate governance is about balancing short- to mid-term financial success with the long-term sustainability of the entity and its business model while maintaining profitability. Rewarding only short-term achievements can incentivise CEOs to game the system, focusing on immediate gains at the expense of the company's future stability. This approach benefits large investors who can exit with profits, leaving late-stage and retail investors, who lack detailed information, to bear the consequences of a weakened long-term outlook. Such practices undermine the integrity of the market and erode trust in corporate governance, ultimately harming the broader economy.

For all the emphasis that global investors place on corporate governance, Tesla investors have undermined a critical aspect by failing to address the need to derisk the entity from reliance on a single individual. While Tesla shareholders have demonstrated the power of the capitalist model, they have missed a crucial aspect: succession planning. Focusing so heavily on Musk's contributions, they have not adequately addressed the future leadership of the company. This oversight leaves Tesla vulnerable to uncertainties if Musk were to step down or be unable to lead. Is this Musk’s payday a Mayday for corporate governance regulations ?

Musk has illustrated a playbook for capitalists, showing that corporate regulators have limited influence over executive compensation. By securing this pay package with all necessary compliance approvals, he has demonstrated that the mechanisms intended to regulate executive pay can be navigated, leaving the question of what constitutes "right" pay largely unanswered by regulatory bodies.

This situation is a stress test for corporate regulators on determining appropriate executive compensation and attempting to regulate it. The complexity of the issue, coupled with varying shareholder interests and legal frameworks, creates a challenging environment for regulators. Navigating this maze of concerns will be crucial in setting future precedents for executive pay and corporate governance.

This example tests the resilience of capitalist frameworks in the face of extraordinary compensation schemes driven by shareholder democracy. How regulators respond to this scenario will have significant implications for the future of corporate governance and the protection of minority shareholders. The balance between rewarding success and maintaining fair, transparent governance is delicate, and the outcome of this “shareholder capitalist democracy” experiment will shape the landscape of executive compensation and corporate accountability for years to come.