The Shareholder's Suit over Tesla's 56-Billion-Dollar Pay Package for Elon Musk
Why Chancellor McCormick's decision is wrong
Last week a Delaware judge ruled that Elon Musk’s $56 billion pay package from Tesla was too much. I wasn’t going to write about it now, because I really ought to finish posts on Texas v. TechLords and on the Rally for Life, but I can’t get the Tesla case out of my mind. And I haven’t read enough analysis to satiate me; indeed, the only real analysis I’ve seen is that on Professor Ann Lipton’s blog, which is very very good, but limited.
There’s lots of interesting economics in Tornetta. It’s simple economics, too, price theory and transaction costs, but with fascinating applications that illustrate some depth one can find in the basic theory. So here is a first attempt. When the case is appealed, maybe I’ll write this up as an amicus.
What happened was that a small Tesla shareholder, Richard Tornetta, sued on the grounds that Elon Musk controlled Tesla and the Tesla board of directors voted Musk a very big pay package at the expense of the small shareholders. He complained of both the decision procedure and the size of the pay. The procedure was for Musk to be absent whenever the board discussed his pay and not to vote on it, and for all the shareholders except Musk to vote on whether to give him the pay package. Tornetta says this wasn’t enough, because the directors were friends of Musk and they didn’t tell the shareholders enough before they voted. The pay package gave Musk 12% of Tesla’s stock if the value of Tesla stock rose by $600 billion and smaller amounts of stock if it rose less.1 The stock did rise and Musk was paid $56 billion. Tornetta says Musk would have worked for free, because he owned 22% of the stock even at the start, so he didn’t need any pay, much less $56 billion.
Chancellor McCormick (the judge, titled thus because it is a “court of equity”) agreed with Tornetta and voided the pay agreement, leaving Musk with zero pay. I think she was wrong, and her mistakes are very lawerly, a good illustration of her ignorance of economics and of business (though she was a business lawyer, and a good one, for many years). She doesn’t understand incentives, bargaining, and valued-added, or the costs of extra procedures and information, costs— which lawyers, whose fees are a large part of those costs, tend to think are good rather than bad.
Moreover, I think this is reversible error. Chancellor McCormick was the trial judge. The trial court consisting of a single judge (and often a jury, but not in this case) decides what facts are true and false and applied the law to them. The appeals court, consisting of several judges, defers to the trial court’s judgement as to the facts, but checks whether the law was applied properly. Thus, this decision is reversible if the Chancellor got the law wrong, but not if she just got the facts wrong. I think she got the law wrong.
I think the Chancellor got the law wrong because whether (a) Tesla followed the right procedure to decide the pay, and (b) Tesla paid Musk too much are not just questions of fact. The fact questions are what Tesla did, which is not really in dispute. The law questions are whether what Tesla did was proper according to Delaware law. I don’t know Delaware law, but I know the general legal principles which lie behind it, and the economics on which those principles are based.2 I think having Musk propose a pay package to the other directors, having them decide it was basically fair and good, and having the lawyers attend to the details, after which the other shareholders voted on it is quite proper. It’s not worth the time and expense of hiring consultants to write reports on the pay package, using up lots of director and Musk time and temper haggling over the package, or writing a three-volume explanation each shareholder must read and sign to show he read before he’s allowed to vote. And although Musk might have worked for free, having more skin in the game always increases effort, and specifically would in this case where Musk’s attention is torn between Twitter, Tesla, SpaceX, and multiple wives and children, and it is also true that Tesla would have been willing to pay him $590 billion, not just $56 billion, if that is what it took to increase the stock value. Thus, the procedure was fair and a fair level of pay would arguably be $300 billion, not $56 billion.
But I could be wrong. I’m writing this, I admit, before reading the decision, and before reading anything the lawyers on each side wrote. That might change my mind. But the principles I’ll talk about here will still apply.
The decision by Chancellor McCormick has been criticized on Twitter for flippancy, use of movie references, and general informality, but the parts I have read are very well written.3 It is clear and it is enjoyable to read.4 So let’s let the opinion describe the case. Note that I’ve boldfaced bits I think particularly important.
The plan offers Musk the opportunity to secure 12 total tranches of options, each representing 1% of Tesla’s total outstanding shares as of January 21, 2018. For a tranche to vest, Tesla’s market capitalization must increase by $50 billion and Tesla must achieve either an adjusted EBITDA target or a revenue target in four consecutive fiscal quarters. With a $55.8 billion maximum value and $2.6 billion grant date fair value, the plan is the largest potential compensation opportunity ever observed in public markets.”
and
This posttrial decision enters judgment for the plaintiff, finding that the compensation plan is subject to review under the entire fairness standard, the defendants bore the burden of proving that the compensation plan was fair, and they failed to meet their burden.
One of the important questions of fact was whether Musk “controlled” Tesla. He did not have 51% of the shares, but he had 22% when the pay package was negotiated, and 22% is enough for control when there are no other large shareholders or when the other large shareholders are mutual funds like Vanguard or Fidelity who don’t try to get involved in running the corporation.
In addition to his 21.9% equity stake, Musk was the paradigmatic “Superstar CEO,” who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan. At least as to this transaction, Musk controlled Tesla.
The primary consequence of this finding is that the defendants bore the burden of proving at trial that the compensation plan was entirely fair. Delaware law allows defendants to shift the burden of proof under the entire fairness standard where the transaction was approved by a fully informed vote of the majority of the minority stockholders. And here, Tesla conditioned the compensation plan on a majority-of-the-minority vote. But the defendants were unable to prove that the stockholder vote was fully informed because the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process.
The defendants were thus left with the unenviable task of proving the fairness of the largest potential compensation plan in the history of public markets
What the Chancellor is saying here is that since Musk controlled the corporation but they held a shareholder vote to approve the pay package, ordinarily it would be Tornetta who would have to show that the package was not “entirely fair”. But the directors misinformed the shareholders, the judge says, and so it is the directors who need to prove that the packet *is* entirely fair.
The concept of fairness calls for a holistic analysis that takes into consideration two basic issues: process and price. The process leading to the approval of Musk’s compensation plan was deeply flawed. Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf. He had a 15-year relationship with the compensation committee chair, Ira Ehrenpreis. The other compensation committee member placed on the working group, Antonio Gracias, had business relationships with Musk dating back over 20 years, as well as the sort of personal relationship that had him vacationing with Musk’s family on a regular basis. The working group included management members who were beholden to Musk, such as General Counsel Todd Maron who was Musk’s former divorce attorney and whose admiration for Musk moved him to tears during his deposition. In fact, Maron was a primary go-between Musk and the committee, and it is unclear on whose side Maron viewed himself. Yet many of the documents cited by the defendants as proof of a fair process were drafted by Maron.
and
Musk proposed a grant size and structure, and that proposal supplied the terms considered by the compensation committee and the board until Musk unilaterally lowered his ask six months later. Musk did not seem to care much about the other details. They got ironed out.
So the big issues for whether the pay was “entirely fair” are process and price. And the Chancellor says the process was unfair because the members of the compensation committee were friends of Musk, the committee worked with members of management such as the General Counsel (the chief lawyer for Tesla), and because the basics of the package were proposed by Musk and it was he who lowered his offer rather than the board making him a counteroffer.
Here I immediately become dubious. Yes, Musk controlled the corporation. I would guess his 22% of the votes was enough to vote in new directors if he didn’t like the old ones. But that doesn’t mean the directors were not “independent”. If the usual procedure was followed, the compensation committee was made up of outside directors, who were not Tesla employees. They were not paid by Musk. They may have been friends, but that is a good thing, not a bad thing. What kind of corporation wants personal enemies of the man who is president and chief shareholder on the board of directors? These people work together, so we would naturally expect them to be friendly and to trust each other. Such friendliness does not preclude a board from firing a corporation’s president if he is doing a bad job.
As for the working group including Tesla employees, that makes perfect sense. The Board could have hired an outside law firm to help with the details, but that’s why you hire a chief counsel— to take care of legal details. They probably also used a company secretary, who could be fired by Musk, but it would be crazy to hire secretaries from a temp agency just to avoid the possibility they would be suborned by the boss of the company.
What about Musk making the initial offer and then being the one to make the biggest change in the offer? Well, someone has to make the first offer. If the directors are really the slaves of Musk, it wouldn’t matter who made the offer, since Musk would control it either way. If they weren’t, allowing Musk to make the first offer is not bad bargaining tactics. If you’ve been to a car dealership, you’ve probably had the salesman say, “How much would you pay to buy this car today?” He wants you to make the first offer. As a car-advice site says: “There’s a rule in negotiating that advises ‘The first person who speaks loses.’ ”5
And then Musk reduced what he was asking for. That sounds like bargaining to me, not control. I suppose the directors were going slow, and Musk got the idea that he’d better make a concession. Bargaining offer sequence can work in lots of ways. Would we expect more haggling? Maybe. Or, it could be that Musk’s offer was so good that the Board accepted rather than risk him withdrawing it. Usually, if Seller makes an offer, then reduces it, and Buyer quickly says YES, that’s a bad sign for the Seller. He offered too low a price. In this particular case, though, it was very hazy as to what to pay Musk, because Tesla was a new and very unusual company, one which might go bust or might end up dominating the car industry. When conditions are that hazy, it isn’t worth haggling over details. Nobody knows enough. It’s more efficient to just pick some numbers out of the air; any lengthy studies or six-digit calculations are going to be a joke anyway.6
The other part of the “process” part is whether the Board gave the right information to the shareholders. Chancellor McCormick said that the Board falsely said that the directors were independent. I have dealt with that above. She also said that the negotiating process wasn’t described well enough. I doubt that matters. Why should shareholders care about that part of the process? They have the deal in front of them. They know that Musk controls the company, and they can presume that he is friendly with the directors. They have abundant opportunity to look at outside advice from stock analysts and media pundits— Tesla is a much-studied company, Musk is a celebrity executive, and this was potentially the biggest pay package in history (or potentially the smallest— if Tesla’s stock price fell instead of rising). And even if the directors did describe the negotiation process in minute detail, and even if they hired outside consultants at fantastic fees, what better information could the shareholders deduce from that? If the directors really are The Slaves of Musk, it would all be for show. They could easily construct an appearance of vicious bargaining and sore feelings, and consultants are notoriously easy to hire to tell you only what you want them to say, especially if you pay them fantastic fees.
But if the process was entirely fair, what about the price? Who is worth $56 billion?
Well, we must repeat over and over that the pay wasn’t guaranteed to be $56 billion. In fact, Musk’s pay would be $0 billion if Tesla stock didn’t rise from its original price. And remember— the original price was what the experts on Wall Street thought Tesla was worth. If they’d expected it to be worth more, they’d have bought it already and pushed the price up to what it was in 2023. But they didn’t— they thought Tesla had potential, but very likely would go bankrupt. Back in 2018, a lot of people thought the pay package was either a publicity stunt or a way for the board of directors to take advantage of a megalomaniac who thought he could make the company’s stock go up 1000%. As Andrew Sorkin put it in the The New York Times Dealbook column back in 2018,7
“If Mr. Musk were somehow to increase the value of Tesla to $650 billion — a figure many experts would contend is laughably impossible and would make Tesla one of the five largest companies in the United States, based on current valuations — his stock award could be worth as much as $55 billion (assuming the company does not issue any more shares over the next decade, which is unrealistic). Even reaching several of the milestones would bring him billions.
Mr. Musk’s critics — and there are many — are likely to contend that the new compensation plan is just the company’s latest publicity stunt. He has been called a modern-day P.T. Barnum who has created the illusion of success while consistently missing production estimates. The company continues to lose money; at one point last year, it was losing almost a half-million dollars an hour, according to Bloomberg News. Jim Chanos, a short-seller who has bet against Tesla’s shares — and has thus far been on the losing side of that trade — has contended that Tesla is worthless”
Of course, the Market was wrong and Musk was right: Tesla has proven to be worth But will who needs $56 billion to run a company? If, talented reader, I offered you $3 billion to run Tesla, wouldn’t you work just as hard as if I offered you $56 billion? Regardless of how many dollars you yourself might need to get off your couch, would Musk really need any salary at all? After all, he owned 22% of Tesla’s stock, and that gave him plenty of reason to work his hardest to maximize Tesla’s stock price. Chancellor McCormick put it this way. After describing the pay package and how it effectively gave Musk 6% of the stock if and only if he gave the shareholders $600 billion in value, the judge says,8
At a high level, the “6% for $600 billion” argument has a lot of appeal. But that appeal quickly fades when one remembers that Musk owned 21.9% of Tesla when the board approved his compensation plan. This ownership stake gave him every incentive to push Tesla to levels of transformative growth—Musk stood to gain over $10 billion for every $50 billion in market capitalization increase. Musk had no intention of leaving Tesla, and he made that clear at the outset of the process and throughout this litigation. Moreover, the compensation plan was not conditioned on Musk devoting any set amount of time to Tesla because the board never proposed such a term. Swept up by the rhetoric of “all upside,” or perhaps starry eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?
First of all, the premise that Musk doesn’t need motivating is false. Phil Trubey said in a comment on Ann Lipton’s blogpost:
Both the opinion and this blog concur that Musk wouldn’t leave Tesla absent a pay package. Anyone who closely follows Musk knows that his number one priority is actually SpaceX. He tried very hard to not become CEO of Tesla, and when he took the position (he was the last man standing as the company was a day away from not making payroll), he stated that he would take the company to the point of releasing a mass market vehicle. We are well beyond that point.
In addition, the Board had already granted him two option plans before the 2018 plan, and you’d be hard pressed to argue the then VC dominated Board was being controlled by Musk during those award periods, so the obviously non conflicted Board thought then that he needed incentives to stay on, which, reviewing the history of SpaceX and Tesla, anyone would conclude.
Further flawed reasoning abounds. Musk is not a robot. He has intense emotional feelings. The Board did not slap him down when he flouted the SEC Twitter controls, but doing so could have, in their view, demotivated Musk from putting his all into Tesla. Musk has five other companies competing for his attention, make Tesla too corporate and boring and he will devote his energies elsewhere. IF you want Musk in all his glory doing what he does (everyone concedes he did right by shareholders by executing extremely well) then I (and the Board) would argue that you have to let Musk be Musk.
Well, whether Musk would have stayed at Tesla as CEO and worked just as hard even if he had no salary is a question of fact, and Chancellor McCormick ruled that he would, so that’s hard to get changed on appeal. But whether zero is the “entirely fair” pay in these circumstances, even if Musk would have stayed on as CEO and worked just as hard, is a question of law, and the Delaware Supreme Court might rule that the Chancellor got it wrong.
So they should do. Let’s think about how to look at “entirely fair” pay.
Defendants’ primary response is to reduce the issue to a straw man, stating that “Plaintiff’s allegations boil down to the position that Musk should be happy to work for free.” They make a similar point elsewhere, stating that if Musk “fell short of achieving some or all of the [Grant’s] milestones, the stockholders retained the benefit of any increase in Tesla’s stock price, while Musk risked receiving nothing.” For free? Receive nothing? Defendants’ arguments ignore the obvious: Musk stood to gain considerably from achieving the Grant’s market capitalization milestones (over $10 billion for each $50 billion increase in market capitalization)
The Chancellor confuses labor and capital here. Musk supplies both labor and capital to Tesla, separately. If he stepped down as CEO, he would still have his capital, and he would get his share, 22%, of the company’s profits. Like any other shareholder, he would not be obligated to put in any work whatsoever. If he is being required to work, as a shareholder, shouldn’t the other shareholders be require to put in some hours too? Wouldn’t that be fair? It would be like the Bloomington Co-op, a grocery store in my town, where owners put in a certain numbers of hours at the cash register. But Tesla is not that kind of company. And no cooperative makes some members work for free for the benefit of the “silent partners”, nor would that be fair.
It is *not* a straw man to say that the plaintiffs say that Musk should be happy to work “for free”. As a shareholder, if he puts in zero hours, he gets 22% of the dividends, and if he puts in 80 hours a week he still gets 22% of the dividends. It is literally the truth that the plaintiffs are saying Musk should be happy to work for free.
What the Chancellor is confusing with working for free is working for no benefit. Musk indeed gets a benefit if he works for Tesla, because his stock will be worth more. And this is true for any of the other shareholders too. Mr. Tornetta owns something like 9 shares of Tesla. If he were to volunteer as a janitor at Tesla, for zero pay, his volunteer hours would increase the value of his 9 shares. This is a bit unfair of me to say, because Musk gets a lot more personal benefit from working. But the fact that Musk would be willing to put in zero-pay hours so he can make his stock more valuable does mean it is fair to pay him zero. By this reasoning, it would be fair for a baseball team to pay their star pitcher minimum wage because he’d enjoy the chance to pitch in World Series games and to sell his picture for baseball cards. Under a doctrine called “entire fairness”, this is intolerable.
But the “entire fairness” doctrine really just means the deal has to be fair to the shareholders, not to Musk. So let’s think about that. To be fair to the shareholders does not require the deal to be unfair to Musk. A deal can be fair to both sides. So how do we decide what range of pay is fair to both sides?
There is a very natural way to decide what is fair to both ways: ask what the pay would have been if Musk did not control the company and the Board of Directors were not friends with him. In that case, what would his pay have been? Would it have been zero? If not, how high would it have been? If it would have been $56 billion (or more) contingent on increasing stock value by $600 billion, $0 if he didn’t increase the stock value, then the deal was entirely fair, if we take this counterfactual of no-control as the legal rule.
The basic paradigm of price theory is supply and demand. We look at how much sellers are willing to supply at a given price, and how much buyers are willing to demand. The equilibrium is where they are equal, if we have a “thick” market with thousands of buyers and sellers. We don’t have that here. Instead, let’s consider the opposite extreme of supply and demand, bilateral monopoly, and let’s think of the good at stake being a single unit decision: Musk as CEO, or Musk as couch potato. Let’s also put aside the complexity of the 12-tranche contingent contract, and just think of the pay package as a single lump sum.
Bilateral monopoly refers to the situation where there is just one buyer and just one seller, so each has a monopoly vis a vis the other. This is the classic bargaining situation. The first step in figuring out what will happen with arms-length bargaining is to ask what the lowest pay is that the seller— Musk here— will accept. The second step is to figure out what the highes amount is that the buyer—Tesla— would be willing to pay.
These two steps both require that we know Musk’s effect on the stock price. Let’s suppose that the initial value of the stock is $100 billion, and Musk owns $20 billion of it. Let’s also suppose that if he doesn’t work for Tesla, the stock price stays the same, but if he does, the value of all Tesla stock rises to $700 billion, so Musk’s stock rises to $140 billion. And let’s suppose that Musk is indifferent between sitting on the couch or being CEO— that, stock aside, he *would* be willing to work free.
First, what is the lowest pay Musk would accept, given these as the facts? It is not $0, actually. That is too generous. Remember: his stock is worth $120 billion more if he is the CEO. So he would be willing to work for a salary of -$120 billion: he would be willing to pay $120 billion for the privilege of working for Tesla.9
Note the implication for Chancellor McCormick’s analysis. She is saying that if the directors were entirely fair they would have held Musk down to the lowest pay that would obtain his services. Since he owned so many shares, he’d have enough incentive to work that they could make him pay for the privilege. He would be down on his knees saying, “Please, please, Mr. Director, allow me to pay Tesla $100 billion to be the CEO. You won’t regret it!” Musk would do that, because he would come out $20 billion ahead in the long run because of how much his 22% of the company would increase in value with him as CEO. Zero pay would be excessive, justifying a shareholder suit against the directors because they could have extracted billions of dollars from Musk in return for allowing him to be CEO.10
But let us proceed to the second step, the demand side. How much would the Board have been willing to pay Musk, if they couldn’t bargain him down to less? Under the assumed facts, they would, as good fiduciaries, be willing to pay him $600 billion, because that’s how much value he would add to the company. If they paid him $601 billion, the shareholders would have gained $600 billion from the Musk value-added, but lost $600 billion from having to pay him for it, so they’d be down $1 billion. If they paid him $599 billion, the shareholders would be up $1 billion, a definite improvement despite the gigantic salary. So the salary of $600 billion would make the Directors just barely willing to accept the deal.
We now have what is called a “bargaining range” of (-$120 billion, +$600 billion). Outside of that range, one party or the other would break off negotiations and there’d be no deal. Inside the range, any of the pay levels would be better for each side than no deal at all.
And so we come to the third step: deciding what price within the bargaining range would be the agreed-upon price. This is the hardest step for theory, because we don’t have a good theory for it. The part of game theory called “bargaining theory” is extensive and complicated, too complicated for us to get into. It looks at such things as what each side knows about the other side’s break point, each party’s aversion to risk, each party’s degree of impatience, the order of offers, the possibility of something suddenly killing negotiations, and so forth. Even if we could take care of all of these, though, there remain ineffable considerations of psychology, willpower, randomness, unintentional blunders, and emotion. Hire a game theorist, labor negotiator, used-car salesman, or street-smart businessman and you’ll get some expertise, which will look carefully at lots of factors that can’t be fit into a mere 200 pages of legal opinion. But we’ll be much simpler, and do what economists and ordinary people do when they’re given a bargaining problem without enough details to get into the fine points: split the difference.
There is a bargaining surplus of $720 billion here if Musk and Tesla come to an agreement. So let’s just split it, and say that a fair price would give $360 billion of surplus to each. That means a salary of $240 billion. The company would end up with $600 billion in added company value minus the $240 billion salary, a net payoff of $360 billion. Musk would end up with stock worth $120 billion plus a salary of $240 billion, which would also total $360 billion.
This way of looking at what is fair suggests that $56 billion is much, much, too small to be a fair pay package. The Directors seem to have traded on their friendship with Musk and ruthlessly taken advantage of him.
What I’ve provided, of course, is a method more than a number, when I say that $240 billion is a fair salary. The method takes certain numbers as inputs, in particular, Musk’s value to the company. If Musk had died in 2018, maybe the company would still have gone up $600 billion in value. I don’t know— that’s where we’d need a lot more facts and wisdom, though we at least have the benefit of hindsight. But change the numbers to what you think are accurate and re-run the method, if you like. And if it is to be used in practice, we’d have to figure in the contingent nature of the twelve 1% rewards and the contribution of Musk to each of them, not just to the total. If you pay me large consulting fees I might do that. And I would then go over this essay again and fix the mistakes which I’m sure are in it. But it’s 11:40 pm now, time for me to go to bed.
The package is more complicate than that, of course. The 12% comes from 1% -of-initial-value increments, so later the judge says it’s 6%, because 1% of the initial value of the stock is a lot less than 1% of the value once the stock went way up. All that matters is that Musk was promise a small percentage of the company’s stock, but even a small percentage was worth lots of billions of dollars.
Usually lawyers and judges do not know that the law stands on economic foundations, but it is. That is one of the points of the law-and-economics movement. Business law is generally what an economist would choose the law to be if he were trying to maximize societal wealth. For an example see my “The Economics of Agency Law and Contract Formation,” American Law and Economics Review, 6 (2): 369-409 (Fall 2004). The abstract says: “This article uses the economic approach to address issues that arise in agency law when agents make contracts on behalf of principals. The main issue is whether the principal should be bound when the agent makes a contract with some third party on his behalf which the principal would immediately wish to disavow. The resulting tradeoffs resemble those in tort law, so the least-cost-avoider principle is useful for deciding when contracts are valid and may be the underlying logic behind a number of different legal doctrines applied to agency cases. In particular, an efficiency explanation can be found for the undisclosed principal rule, which says that the principal is generally bound even when the third party is unaware that the agent is acting as an agent for him.” See also the book by David Friedman, Law’s Empire, for an overview of law generally, or Richard Posner’s classic book, whose title I forget because we professors always just use “In Posner it says . . .” when we’re referring to Posner’s book.
Indeed, the style makes me think of Judge Richard Posner, of the 7th Circuit, whose writing not only made his opinions much cited beyond the 7th Circuit (he was the most-cited judge not on the Supreme Court, by a long shot), but caused a noticeable change in the way other judges wrote. I don’t see any contractions in Chancellor McCormick’s opinion, though, in my cursory skim. On Posner, see “Contraction reaction,” The (New) Legal Writer blog (Apr. 14, 2008); “A Tale of Two Judges: Posner vs. Flaum,” Legalwritingpro.com, Ross Guberman (Feb. 6, 2016) ; Richard A. Posner, "Judges' Writing Styles (And Do They Matter?)," 62 University of Chicago Law Review 1420 (1995).
At least, it is enjoyable for an economist to read.
“How to Negotiate to Buy a Used Car: Whether you negotiate to buy a used car from a private party or a dealer, these simple concepts can save you money,” Nerdwallet.com, Philip Reed (updated June 28, 2019).
One of Tornetta’s lawyers later said, “At trial, I cross-examined the compensation consultant who testified that the committee “knew” that the benchmarking data would show that Musk’s requested compensation package was so far off the charts that they decided not to use it.” “Litigators of the Week: Rolling Back Elon Musk’s $56B Tesla Compensation Package,” Law.com, Ross Todd (Feb. 2, 2024). When a business situation is unusual, benchmarking is useless, as is customary practice generally. You need original thinking.
“Tesla’s Elon Musk May Have Boldest Pay Plan in Corporate History,” Andrew Sorkin, The New York Times, DEALBOOK (Jan 23, 2018).
Moreover,
"To get an idea of the size of the pay package, Elon Musk’s compensation came to 89 percent of Tesla’s gross (pre-tax) profits over the years 2019-2023."
“Elon Musk’s $56 Billion Pay Package Nixed as Unfair to Shareholders,” Dean Baker, cepr.net (February 1, 2024). But that’s unfair. The value of a growing company is almost entirely from its expected future profits, not from its present profits. And, in fact, Musk’s pay required not profits at all to pay— he was paid entirely in stock; that is, in future profits.
There’s actually a problem with the salary of $120 billion: the cash flow problem. Back in 2018, could Musk have afforded to pay Tesla $120 billion for the privilege of being CEO? He might have trouble borrowing the money. But we’ll put that aside.
The shareholder suit would be successful if the Board offered Musk zero pay, under Chancellor McCormick’s legal rule of “the entirely fair pay is the least Musk would accept”. I am not sure how the legal decision would be implemented. It wouldn’t be enough just to void the contract, as Judge McCormick did, because that would still leave shareholders $120 billion short. I speculate that the directors would be personally liable, since this is a matter of fiduciary duty, and that their directors’ insurance has a maximum payout that is less than $120 billion, so they would have to pay the rest— $100 billion, perhaps— out of their own pockets (or perhaps I should say, “by selling their own shirts”).