The Advisors' Blog

Meredith blogged recently about Tesla’s proposed settlement of claims that its board had authorized excessive director pay. The clawback & forfeiture terms of that agreement are shocking – a $735 million clawback plus no additional compensation for 2021-2023 – and potentially controversial, according to The Chancery Daily.

But there’s another piece of the settlement that is also getting a lot of attention, which is the governance approach to setting director pay. The terms illustrate what could be considered a “best practice” for protecting director compensation decisions that are outside the norm, which can be tricky. The proposed settlement says:

As soon as practicable after the Effective Date, the Compensation Committee of the Tesla Board (“Compensation Committee”) shall amend its charter to provide that the Compensation Committee shall be responsible for:

(a) conducting annually a review and assessment of all compensation, including cash and equity-based compensation, paid by Tesla to Non-Employee Directors;

(b) engaging an independent compensation consultant (“Independent Consultant”) annually to advise the Compensation Committee in connection with such annual review and assessment, including with respect to (i) the amount and type of Non-Employee Director compensation, and (ii) any comparative data deemed appropriate by such consultant; and

(c) recommending to the Tesla Board, on the basis of such annual review and assessment, the amount and type of compensation payable to Non-Employee Directors.

The Tesla board must annually review total direct compensation, including the compensation committee’s recommendation. And then:

On an annual basis, Tesla shall submit the proposed annual compensation to be paid to Non-Employee Directors to an approval vote of the majority of Unaffiliated Tesla Stockholders present in person or represented by proxy and entitled to vote on such decision. For purposes of the Stipulation, “Unaffiliated Tesla Stockholders” means all Tesla stockholders of record other than (i) Defendants and (ii) Other Tesla Directors (but only while such Other Tesla Directors serve on the Tesla Board). For the avoidance of doubt, Defendants and Other Tesla Directors (but only while such Other Tesla Directors serve on the Tesla Board) shall (with respect to any and all shares over which they hold beneficial ownership, as that term is defined in 17 CFR § 240.13d-3(a)) abstain from voting in their capacity as stockholders on the votes required by this Section and shall not be counted as shares present or entitled to vote for purposes of determining the majority.

Prior to any stockholder vote on compensation to be paid to Non-Employee Directors, Tesla shall disclose to stockholders in a proxy at least the following information, in a manner consistent with Tesla’s operative bylaws:

(a) a description of the philosophy relating to Non-Employee Director compensation;

(b) the process by which decisions were made concerning Non-Employee Director compensation, including with respect to the role and analysis of the Independent Consultant and any peer group or other comparative data deemed appropriate by such Independent Consultant (or that no such data was deemed appropriate); and

(c) the proposed compensation of Non-Employee Directors, including the cash and equity value of such compensation, on a director-by-director basis.

In addition, the settlement directs Tesla to annually review its internal controls for director compensation to ensure that it’s properly administered – and report the results of the annual review to the audit committee.

“Director Say-on-Pay” isn’t necessarily a new thing – it garnered a wave of attention following the Investors Bancorp decision back in 2018. And maybe this directive for an annual vote will be more likely to stick than what we’ve seen in other contexts. But I don’t know whether this is a practice that will ever become widespread – especially at companies that are moving towards simplifying director pay and staying close to peer group levels. We have “Director Compensation” Practice Areas for anyone currently dealing with decisions on pay practices or disclosures.

– Liz Dunshee