Tesla shareholders approve record pay for Musk. Are pricey CEOs worth it?

At their annual meeting in Texas, shareholders of Tesla on Thursday took the latest step in a strange corporate tale of outsize pay for – and faith in – an unconventional CEO.

A majority approved, for the second time, a record-breaking pay package that could exceed $45 billion for Elon Musk. It was a personal triumph for the highly successful serial entrepreneur and a rebuff to the Delaware judge who rescinded the original package that shareholders approved in 2018. Tesla will use the symbolic vote as evidence to persuade the judge to approve the package.

The move also poses in the starkest terms a question that companies and economists have wrestled with for decades: How much is a CEO worth?

Pro and con views of high CEO pay

Last year, the median CEO pay – the middle amount among S&P 500 companies – was about $16 million. That’s higher than what most CEOs receive in other countries and nearly 200 times what the median American worker takes home in a year, according to a new analysis for The Associated Press.

Such sums might seem patently unfair. Many progressives point out that the gap further widens the already yawning divide between America’s richest and regular workers. In 1980, counting in a slightly different way, the average CEO earned only about 40 times the average employee’s pay and benefits.

On the other hand, the best CEOs create enormous value: new products and services for consumers, bigger profits for shareholders, and more jobs for workers. Many conservatives ask, aren’t multimillion-dollar pay packages worth it if they help America’s biggest companies – and, by extension, the U.S. economy – grow by multibillion-dollar leaps and bounds?

How Musk’s pay package at Tesla works

Mr. Musk’s record-breaking pay package at Tesla makes a point for both sides in this debate.

For starters, his compensation at Tesla is huge but not guaranteed. Like that of many CEOs these days, his compensation depends on meeting long-term goals. But while many CEOs get a large salary in addition to stock, Mr. Musk’s deal is all stock, which means he earns no money for 10 years unless he meets the corporate goals set for him for 2028. 

Those targets, set in 2018, were ambitious. He had to boost Tesla’s market value elevenfold and grow profits to $14 billion before interest, taxes, depreciation, and amortization. Those are goals he’s already achieved (though Tesla’s value and profits have then fallen, which has prompted some of the shareholder suits against the original pay package and could spawn more).

If Mr. Musk meets his targets, he will earn far more than any other CEO of a publicly traded company in history. Last year’s best-compensated chief executive – Hock Tan of Broadcom – pulled in only a little over $160 million, according to AP. Mr. Musk would earn the equivalent of around $5 billion per year depending on the value of Tesla stock. 

“It’s an order of magnitude more egregious than the most egregious ever dared to ask for,” says Andrew Behar, CEO of As You Sow, a leading nonprofit in shareholder advocacy.  

It’s not surprising that Mr. Musk’s pay would increase. Academic studies show that CEO pay increases proportionally to the size of the companies they lead. And when executives underperform, shareholders make their disappointment known.

Apple’s Tim Cook took a one-third pay cut last year after fewer than two-thirds of shareholders approved his pay package. Unilever CEO Hein Schumacher hasn’t seen a pay raise for two years after shareholders rejected his pay package in 2003. 

Do CEOs have too much influence over boards?

All this suggests that market forces are mainly responsible for setting pay at the top, many economists say. But others say CEOs can manipulate the process to boost their pay if they can wield influence over the company board. Here again, Mr. Musk’s situation at Tesla stands out.

A 2017 study found that the average CEO of a large company owns less than 1% of the stock. Mr. Musk, like many high-tech entrepreneurs, owns substantially more of the company. With the new pay package, his stake would jump to more than 22%, according to one estimate. And Mr. Musk has asked for more. 

“I am uncomfortable growing Tesla to be a leader in AI & robotics without having 25% voting control. Enough to be influential, but not so much that I can’t be overturned,” he wrote on X earlier this year. “Unless that is the case, I would prefer to build products outside of Tesla.”

Some analysts find such control – and especially his threat of leaving Tesla – as clear evidence of CEO manipulation. 

“Stockholders cannot cast meaningful votes on Musk’s pay package while his threat hangs, like the sword of Damocles, over Tesla’s future, and thus their own,” wrote Lucian Bebchuk, a Harvard economist, and Robert Jackson, a former commissioner of the U.S. Securities and Exchange Commission, in an article last week. 

The Delaware judge who struck down Mr. Musk’s pay package in January found that he improperly skewed the board’s approval process.

Also, Tesla shareholders voted in two measures Thursday to wrest some power from board members. They reduced their terms from three years to one and allowed a simple majority to approve future shareholder proposals. The board opposed both resolutions.

Whether companies overachieve with pricey CEOs remains an unresolved question. Mr. Behar of As You Sow says his research suggests that the 10 S&P companies with the highest-paid CEOs consistently underperform the other 490 companies in the stock index. But the 2017 study says the evidence is mixed. Most research finds a correlation between a firms’ value and a rise in the stock incentives of their CEOs, while some studies suggest that correlation weakens or even turns negative when CEOs own a big chunk of the company.    

To many of the Tesla shareholders, none of this mattered, as they voted to keep their unique CEO and his record-breaking pay in place. Many at the annual meeting prefaced their questions to Mr. Musk with gratitude and even adulation. 

“I love you guys!” Mr. Musk told them after the successful vote was announced.