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Musk’s multi-billion dollar pay package inspired others. Now the strategy is in doubt

Musk’s multi-billion dollar pay package inspired others. Now the strategy is in doubt
Elon Musk, the chief executive of Tesla, SpaceX and X (formerly Twitter). (Photo: Antonio Masiello / Getty Images)

Elon Musk’s $56-billion Tesla pay package, thrown out on Tuesday by a Delaware court, wasn’t the only such “moonshot” deal handed out in recent years.

Numerous other compensation deals were similarly structured in the wake of Musk’s 2018 award, with boards hoping to match Tesla’s enormous share-price gains and CEOs attracted by the high-risk, high-reward strategy. Some became billionaires as a result.

Now, the future of the strategy is uncertain after Chancery Court Chief Judge Kathaleen St. J. McCormick revoked Musk’s deal, calling his pay “unfathomable”.

When CEOs and boards ask for such awards, “they are going to say ‘How do we do this in a way that doesn’t get voted down?’” said Dan Walter, founder of compensation-consultant Performensation. 

“As someone who does this for a living, I don’t know if I can answer that question right now,” he said.

Financial milestones

Instead of the traditional salary, bonus and equity grants, Musk’s deal consisted of options that vested after Tesla reached certain financial milestones over as long as a decade. Musk, 52, would receive no salary or cash bonuses, but if Tesla met all the goals the options would be worth about $56-billion. By the end of 2022 all of the tranches vested, helping cement Musk’s position as the world’s richest person.

After Musk’s deal was publicised, other CEOs started asking their boards to pay them the same way. 

In 2018, taser-maker Axon Enterprise Inc. awarded founder and CEO Rick Smith options that, like Musk’s, were divided into tranches with vesting depending on various market-value and earnings goals. 

To receive them all, Axon’s market value had to roughly quadruple and revenue and earnings grow more than five-fold. 

Read More: Musk’s Moonshot Award Aped by Taser Maker as Advisers Balk

By the second quarter of last year, all 12 of the tranches had been awarded. Smith’s 6.4 million stock options are now worth more than $1.4-billion, according to the Bloomberg Billionaires Index. 

Veteran technology executive Nikesh Arora was given a similar package, worth $125-million, when he was hired in 2018 by Palo Alto Networks Inc. 

The company subsequently met all of the goals needed to award the full package to Arora. Even after selling nearly $300-million worth of stock last year, Arora’s stake is worth about $950-million, helping give him a total fortune of $1.7-billion, according to the index. The board decided to structure a new moonshot-style package last year. 

While the huge CEO payoffs are controversial, there’s also an argument they’re good policy, Walter said.

“Why pay people for mediocre work when they should be doing amazing work?” he said. “You are giving them a piece of the pie when that pie can be very, very big for shareholders.” 

No pay

Part of the argument for the structure is that when the CEOs don’t deliver, they don’t get paid. 

In 2020, Eric Wu, the founder of real estate platform Opendoor Technologies Inc., was given nearly 15 million performance-based stock units divided into tranches that would vest at certain share price targets.

Upon hitting the maximum target of $67.22 the performance units would have been worth more than $1-billion. Ultimately only one of six performance targets was met and the shares are now trading at $3.47. Wu announced he was leaving the company in December. 

Read More: Elon Musk’s Astronomical Pay Spreads Across Corporate America 

In deciding to rescind Musk’s award, McCormick pointed to his influence over Tesla and the board’s failure to meaningfully negotiate with him as factors. 

That means that not every CEO who received a moonshot-style award is going to have it cancelled. But some are probably going to be challenged by shareholders, according to Walter, who said he expects to see new lawsuits in wake of the decision. 

He also expects boards to be more cautious about structuring these awards in the future — at least until someone can determine how much is too much. Right now, he likens the situation to Supreme Court Justice Potter Stewart’s answer on trying to determine obscenity. 

“I can’t define what too much pay is, but I know it when I see it.”

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