What’s in Elon Musk’s Multi-Billion Dollar Pay Package and Why Did a Judge Reject it?

A Delaware judge has again voided what would be the largest executive compensation package in history—a Tesla (TSLA) pay plan for CEO Elon Musk now valued at $101 billion, 33 times larger than the previous record (also held by Musk for a 2012 Tesla deal). The December 2024 ruling stands despite Tesla shareholders recently approving the package, which has almost doubled from its original $56 billion value because of the company’s soaring stock price.

For context, the package’s current value exceeds the market capitalization of four-fifths of S&P 500 companies. The ruling has implications not only for Musk’s wealth but for how corporate America approaches executive compensation.

Key Takeaways

• A Delaware court reaffirmed its prior decision to void Elon Musk’s pay package as Tesla CEO, citing concerns over conflicts of interest for those who negotiated it for the board.
• This ruling comes after Tesla shareholders approved the 2018 pay package again after the judge threw it out earlier in 2024.
• Tesla and Musk plan to appeal the decision, aiming to reinstate the compensation agreement.

Details of Elon Musk’s Tesla Pay Package

In 2018, Tesla’s board and then the shareholders approved a compensation plan for Musk worth up to around $56 billion at the time. This performance-based package granted Musk stock options contingent upon achieving specific milestones related to Tesla’s market capitalization and operational targets.

Each milestone unlocked additional stock options, aiming to align Musk’s incentives with the company’s growth. Notably, Musk would not receive a salary or any cash bonuses as CEO, emphasizing a commitment to Tesla’s long-term success.

At the time Musk was awarded the $56 billion package in 2018, his net worth was about third of that at $20 billion, according to Forbes. In addition, the total market capitalization of Tesla was about several billion less than the potential worth of the pay package.

Why the Judge Voided the Pay Package

In January 2024, Judge Kathaleen McCormick of the Delaware Court of Chancery rescinded Musk’s compensation package. The court found that Musk had “engineered the landmark pay package in sham negotiations with directors who were not independent,” leading to a deal that was unfair to shareholders, including those who were plaintiffs in the lawsuit.

“The board never asked the $55.8 billion question,” the judge wrote. “Was the plan even necessary for Tesla to retain Musk and achieve its goals?” She called the deal “unfathomable,” citing the following reasons:

• Conflicts of interest: The court found that Musk improperly controlled the board process during the negotiation of the 2018 pay package, compromising the board’s independence.
• Material misstatements: Tesla’s proxy statement contained multiple material misstatements regarding the pay package vote, which the judge deemed misleading.
• Excessiveness: The package, valued at $56 billion and now worth $101 billion, was deemed unreasonably excessive, even as compensation for meeting ambitious targets.

In its latest ruling, the court noted that allowing companies to “reset” decisions through later votes would undermine judicial accountability and encourage interminable litigation. The flaws in the initial approval process couldn’t be remedied retroactively, she argued.

Musk’s Likely Next Step

Tesla’s lawyers say they plan to appeal to the Delaware Supreme Court in a process that could last at least a year. If the appeal fails, any new compensation agreement would likely require explicit shareholder approval and could involve even larger sums, given Tesla’s increased valuation.

Impact on Musk’s Net Worth

Even without this compensation, Musk is estimated to be worth over $350 billion as of December 2024. If the plan were reinstated, Musk’s net worth would increase by almost 30%, bolstering his lead over fellow billionaires as the world’s wealthiest individual.

The Bottom Line

The court’s decision to void Musk’s Tesla pay package highlights growing scrutiny of executive compensation and corporate governance. As the case moves through the appeals process, its outcome could set important precedents for how companies structure executive pay packages and how much influence CEOs can have in negotiating their own compensation.