You can be on Entrepreneur’s cover!

Is It Fair To Deny The Fruits Of Hard Work? Thoughts On The Voiding Of Elon Musk's US$56 Billion Pay Package The Elon Musk compensation story serves as a reminder to re-evaluate CEO compensation norms, and their profound impact on corporate success.

By Aaron Illathu

Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.

Shutterstock.com
Tesla CEO Elon Musk

Picture this: you get hired for a job, but then, they tell you the only way you get paid is if you make the company more successful than any other company in the history of public markets- a steep request that even the most exceptional of leaders would turn down, and with good reason. Yet, this is the story of Tesla CEO Elon Musk, as his unique pay package has taken centerstage in the news as of late.

Perhaps Musk was following in the footsteps of his predecessor, Jack Dorsey, the man he bought X (formerly known as Twitter) from; Dorsey had agreed to take a salary of US$1.40, the same price as that of a Starbucks coffee at the time. Regardless, Musk's compensation plan was about something other than a steady salary or cash bonuses. It was all about performance-based goals, with targets like doubling Tesla's value, and skyrocketing market capitalization by $50 billion at a time. Initially valued at $2.6 billion, his pay package quickly soared as he got an additional 1% worth of stock in the company for every $50 billion the company grew by. There were 12 targets to hit, and against all odds, Elon hit all 12, basically creating the largest growth in the history of public markets.

Musk accomplished the near impossible, making the company more successful, and outperforming the behemoths that rule the tech markets- Apple, Google, and Microsoft. Six years later, when Tesla had soared beyond anyone's wildest dreams, he was due for a pay day of nearly $56 billion dollars. Deservedly so, right? He had made the company, and in turn, his shareholders quite wealthy. To put this in perspective, Tesla's stock market value was $53 billion when Musk's package was approved, and it surged by more than 2000% to exceed $1.2 trillion in 2021 before retreating more recently to $605 billion. An investor who bought and held shares when Musk's package was approved would currently be up about 1000%, meaning your $1000 would be worth around $11,000.

However, a Delaware judge in the US recently invalidated Musk's pay package in response to a shareholder's lawsuit claiming that it was unfair. The judge's critique delved into the negotiation process, ultimately declaring the shareholder vote invalid, even though the plan was negotiated by a compensation committee whose members were independent, and was approved by a 73% approved shareholder vote. This surprising twist has sent ripples through the corporate landscape, sparking debates about the fine line between incentivizing CEOs and safeguarding shareholder interests.

Related: From Twitter To X: An Inverse Masterclass In Branding

Supporters of Musk's compensation plan argue that it created a win-win situation. Musk would only reap hefty rewards if he delivered outstanding performance, aligning his success directly with Tesla's shareholders. However, the judge's ruling has ignited a broader conversation about CEO compensation structures, with concerns that it might discourage risk-taking and innovation– key drivers of success in the corporate world.

On the other side of the coin, the shareholder's lawyers argued the Tesla board never told shareholders the goals were easier to achieve than the company let on, and that internal projections showed Musk was quickly going to qualify for large portions of the pay package. The plaintiff's legal team also argued the board had a duty to offer a smaller pay package, or look for another CEO, and that they should have required Musk to work full-time at Tesla, instead of allowing him to focus on his other projects like SpaceX and X. But here, the argument can be made that while the shareholders do have a right to be properly informed prior to the vote, they also have a responsibility to do their own due diligence, and ask the appropriate questions if there were concerns then.

Comparing Musk's unconventional deal with traditional CEO pay structures, like Mary Barra's at General Motors, which is basically negotiated based on an average of other CEOs in their sector, and set to increase regardless of company performance, sheds light on the differing approaches to rewarding top executives that many have criticized as unfair. Beyond the specifics of Tesla, the controversy surrounding Musk's pay package offers a glimpse into the complex world of corporate governance. Is it really fair that, after something has been agreed upon, and the terms agreed to have been delivered, someone can come in, and say that they don't like the deal anymore, and void the entire thing?

The fallout from this ruling is likely to resonate across boardrooms, shaping how companies structure incentives for their top executives, and how shareholders perceive the risk and reward in pursuing innovation. If a CEO said, "Pay me only if I make the company a ridiculous amount of money," would it not put your mind at ease that they are highly invested in the success of the company? But with a ruling like the one which Musk has fallen subject to, it seems like it will push CEOs to make sure they are compensated immediately and irrespective of how the company does, which can lead to decision-making that does not have the shareholder in mind. After all, why would a CEO take all the risk of growing a company without making sure they are financially compensated from the get-go?

As the saga unfolds, the Elon Musk compensation story serves as a reminder to re-evaluate CEO compensation norms, and their profound impact on corporate success. Far from reaching its conclusion, the tale of Tesla's CEO compensation will continue to echo in future discussions on corporate governance, risk-taking, and the intricate dynamics of leadership compensation.

Related: A One-Page Leadership Textbook (Courtesy An Email from Elon Musk)

Aaron Illathu

Account Manager, Atteline

Aaron Illathu is an Account Manager at Atteline, a communications agency in Dubai, UAE. With a diverse background in big tech (ex-Google), real estate, finance, academia, and hospitality, he brings a wealth of experience to his work, and his passion for technology and artificial intelligence is infectious. Aaron uniquely positions himself to help businesses navigate the complex world of public relations. He is a passionate technophile, with a particular love for the potential of artificial intelligence to improve our daily lives. 
Side Hustle

This Dad Started a Side Hustle to Save for His Daughter's College Fund — Then It Earned $1 Million and Caught Apple's Attention

In 2015, Greg Kerr, now owner of Alchemy Merch, was working as musician when he noticed a lucrative opportunity.

Business News

This One Word Is a Giveaway That You Used ChatGPT to Write an Email, According to an Expert

"Delve" has increased its presence in written work since ChatGPT entered the scene.

Business News

Side Hustles Are Soaring as Entrepreneurs Start Businesses Working Part- or Full-Time Elsewhere, According to a New Report

The younger the entrepreneur, the more likely they were to start a business as a side hustle.

Fundraising

Use This Game-Changing Tool to Make or Break Your Pitches To Investors

Get ready to win over investors and captivate your audience with video, the best tool for conveying your message and value

Fundraising

Successful Fundraising Begins With a Stellar Pitch Deck

It's one thing to summarize your company and vision, but to truly capture the attention of investors, you have to create a pitch deck that really knocks your message out of the park.

Starting a Business

Less Talk, More Action: It's Time To Inject Some Reality Into The PR Blitz Around Entrepreneurship

Entrepreneurs are not a promotional tool, they are businesspeople who are trying to build commercially viable and stable enterprises.