CHAUDHRI: Tesla CEO Elon Musk’s compensation plan hangs in the balance

Article content

Tesla CEO Elon Musk is in a fight with the Tesla board over his compensation.

Article content

In 2018, Musk made an all-or-nothing deal with his board. In exchange for achieving 12 gargantuan financial metrics, he would earn the right to buy up to 304 million Tesla shares at the fixed price of $23.34.

The financial metrics were considered by many to be impossible, as Musk would have to boost the Tesla’s then valuation of $50 billion to more than $650 billion. As part of the deal Musk took no salary or cash bonuses.

Over 70% of shareholders approved the deal.

In the years that followed, Musk crushed his metrics. By 2021 Tesla shares were trading at $400, boosting the company’s valuation to over $1 trillion. Based on the 2018 agreement, Musk was entitled to a payout of up to $55.8 billion. The payout, if made, would be the largest compensation plan payout in America’s history for any public company.

Article content

Article content

But the payout never happened.

A Tesla shareholder challenged the plan in a Delaware court and was successful in having the 2018 agreement set aside. Delaware Judge Kathaleen McCormick set the compensation plan aside finding that directors of the board did not act with independence when approving the compensation plan and that the payout was unfair to shareholders.

Next week at Tesla’s AGM, shareholders will vote again on the compensation plan. It’s unclear if Musk will get the compensation he is due per his 2018 agreement.

Ironically, Musk’s battle with his board for billions of dollars has several relatable themes to any employee that owns stock or equity with their employer.

Article content

In my practice, I regularly represent executives who own equity in companies, often offered as a result of strong performance and leadership. I have found that any employee who owns equity in an organization faces a fight on valuation, usually at the time of an exit. When terminated, employers of privately held corporations usually take steps to buy back equity from the terminated employee. Typically, privately held company shares are deemed to be low value or “worthless” by the employer, but that is rarely, if ever, the case.

Often shareholder agreements require employers to buy back shares at fair market value. When no shareholder agreement exists, the courts often call for fair market values to be used when ascribing value to an employee’s equity in a company.

Article content

Often, however, terminated employees must threaten litigation and independent valuations to get a fair payout for equity.

Much of the same can be said for restricted share units (RSUs) and performance share units (PSUs). RSUs and PSUs are often awarded to executive employees to recognize strong personal and corporate performance. They typically vest over a two to five year period depending on the plan. The value of these units is often tied to the stock price of a company and fluctuates in value depending on when they vest.

RECOMMENDED VIDEO

We apologize, but this video has failed to load.

Play Video

On termination, many employees are told their unvested RSUs and PSUs are cancelled. Again, this is usually not the case as most employees are entitled to the continued vesting of at least some of their RSUs and PSUs post termination. These grants can be very valuable, particularly if the stock price has improved since the grant date.

Article content

Most decisions regarding equity and compensation plan payouts rest with a company’s board. In the same vein, boards will resist fair payouts of equity and RSUs on termination to save company cash.

While I’m sure there are few who believe Elon Musk is due any sympathy, his story points to how board conduct can seriously impact executive employees and their compensation.

If any other CEO was denied their compensation plan after wildly exceeding expectations and earning no salary for years, it would be hard not to find that result unjust and objectively demoralizing.

There is little doubt that Musk will continue to fight for his full pay, approved by his board, and passed by shareholders. The question is, will the Tesla board support it or resist.

Have a workplace question? Maybe I can help! Email me at [email protected] and your question may be featured in a future column.

The content of this article is general information only and is not legal advice.

Article content