Energy
Tuesday, June 28th, 2022 6:00 am EDT
Elon Musk’s compensation package in 2018 was a multi-billion-dollar deal, and the influence his pay hike had on US chief executives has been enormous. CEO pay has never been so widely distant from its company’s workers, as boards are now — more than ever — granting CEO pay packages that are lavish, partly inspired by Tesla’s example.
The goal-driven, extravagant compensation package for Elon Musk has helped redefine executive pay.
We live in a 24/7 world where CEOs post on social media and a nation enraptured with the mythology of meritocracy is captivated by Tesla CEO Elon Musk. Boards at other companies are watching how Musk can move Tesla market valuation, and they have become convinced that their CEOs are indispensable influencers. To keep them happy, boards dispense previously unseen, grand pay deals to appease CEOs.
Musk’s Magnificent CEO Pay Package
Musk’s 2018 deal was based on traditional performance targets but also a gigantic amount of stock that was tied to the company’s performance. As Tesla has sold enough electric vehicles to become the leading global auto manufacturer, Musk’s earnings in stock shares have accrued to nearly $60 billion now — helping to make him the world’s richest person.
The goals for Musk’s pay package were different from other CEOs. He needed to exceed mere attendance. Tesla’s stock market valuation needed to continue to rise, and the company would need to meet sales and operating profit objectives. It shouldn’t come as a surprise as we look back that Musk was sleeping beside the Model 3 assembly line as a 2018 quarter came to an end. His pay plan was in jeopardy, as well as his company.
Initially, Musk’s rare compensation package drew tremendous criticism. It was feared that the incentives would spur Musk to take unnecessary risks. Yet such skepticism didn’t sway other boards from designing comparable CEO pay plans at their own companies.
“There’s a lot of companies out there that saw that award and its structure,” Brian Johnson, executive director with ISS Corporate Solutions, which advises businesses on executive pay and other practices, told the New York Times. “They think it’s a good way to incentivize performance.”
According to the Motley Fool, as of June 2022, Musk owned almost 163 million shares of Tesla stock, or about 17% of the company, which is currently worth approximately $142 billion. He also has a compensation package from Tesla that pays him exclusively in company stock, so the Fool suggests that Musk’s ownership ratio could increase over time. The rationale for this premise is that Musk sold or distributed almost $22 billion of Tesla stock late in 2021, yet his stake in the all-electric car company increased because of stock options.
Of course, the recent plunge in Tesla’s share price means the stock that Musk has received from the 2018 award is worth significantly less than it was just months ago. He’s also been accused of being a threat to his companies and supporters who have made him the wealthiest person in human history due to his rigidity, defensiveness, lack of worker empathy, and mercurial behavior.
What influence has Tesla CEO Elon Musk had on other CEOs, and to what detriment has astronomical CEO compensation packages had on workers and consumers?
The Unchecked, Vast Wealth of Corporate CEOs
All 10 of last year’s highest-paid executives had compensation over $100 million, a first. Their average compensation was $330 million, the highest ever.
It is not a coincidence that the others who top the world’s richest people lists are or were recently also CEOs. Jeff Bezos (Amazon), Bill Gates (Microsoft), and Larry Page (Google) follow immediately behind Musk on Forbes’ Real Time Billionaires List.
The largest gap between chief executive and workers in the survey was at Amazon, where this spring a union won a battle to organize a warehouse for the first time. Andrew Jassy, who took over from Jeff Bezos as Amazon’s chief executive last year, had pay that was 6,474 times that of the company’s median employee. His compensation last year, $213 million, was the 8th highest, according to an Equilar study. Nearly all of it came from a stock grant.
Public companies are required by Congress to compare their chief executive’s compensation with that of a typical employee. Last year, chief executives earned 339 times more than the median pay of employees at their companies, up from 311 times in 2020. The rule, which the SEC’s two Republican commissioners opposed, does not in any way limit how much a chief executive is paid.
The revelations from the Institute for Policy Studies are staggering. CEO pay last year soared 31% to an average $10.6 million at corporate America’s 300 low-wage firms. This stunning increase drove the average gap between CEO and median worker pay at these companies to 670 to 1 — up from 604 to 1 in 2020.
US corporations spent record sums on stock buybacks in 2021. This legal form of stock manipulation artificially inflates the value of a company’s shares and the value of executives’ stock-based pay. Of the 106 firms where median worker pay did not keep pace with inflation in 2021, some 67 of these firms — two-thirds of them — spent a total of $43.7 billion buying back their own shares.
Does this sound familiar to anyone out there who holds some Tesla stock? (Note: I hold a few shares of Tesla stock. This article is in no way meant as financial advice.)
Buybacks were largely illegal before 1982, and several bills have been introduced in the last couple of years to reinstate that ban: the Tax Excessive CEO Pay Act of 2021, CEO Accountability and Responsibility Act, and the Stock Buyback Accountability Act of 2021. None have made it through Congress, though.
The Say-on-Pay vote asks investors to vote on the compensation of the top executives of the company — the CEO, the Chief Financial Officer (CFO), and at least 3 other most highly compensated executives. How do shareholders react to this ration imbalance? Most don’t care, it seems. Despite the growth in pay, shareholders — apparently believing that it is being tied to performance — have voted in favor of most packages. Only 3% of “say on pay” votes got less than 50% support from shareholders in the year through June 3, according to an analysis of 1,444 public companies by consulting firm Willis Towers Watson.
When you receive a shareholder’s ballot for the annual meeting, do you read it? Do you take time to vote, which is your right? The Tesla board last year recommended to stockholders to approve the compensation plans it had created for all its executives, Musk included. Did you vote “No?” I did. I admire Musk’s brilliance. I simply don’t feel he should earn such an outlandish profit.
It’s important that we each take a stand on corporatocracy to support the rights of workers and consumers.
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