The Advisors' Blog

The late January decision by the Delaware Chancery Court that the 2018 compensation package awarded to Elon Musk was not fair to Tesla’s shareholders set in motion a complicated chain of events resulting in Tesla’s shareholders ratifying the 2018 award and Tesla reincorporating in Texas. The whole thing, award and all, may seem too Tesla-y to have many takeaways for other public companies that approach CEO compensation in a measured way with more typical annual packages. But, while the circumstances may be (somewhat) unique to Tesla, the court’s decision still has some important takeaways for other public companies (especially those with a controlling shareholder). In fact, I chatted with Paul Hodgson of ESGAUGE about some of them back in March in this podcast.

This Compensation Advisory Partners article takes a new look at the decision and lists some takeaways that may be more widely applicable to other public companies and compensation committees. Here are some pointers from the alert:

– Consider the retentive value of existing equity ownership

In its opinion, the Court points to Musk’s ownership of 21.9% of Tesla at grant as evidence that Musk was already significantly incentivized to drive Tesla’s performance. Testimonials also suggested that Musk had no immediate plans for leaving the Company, further putting the rationale for the grant in question.

– Carefully consider the board’s personal and professional relationships with the CEO and the impact of the company’s non-employee director compensation packages on the directors

Two directors out of the four Compensation Committee members had close personal and professional relationships with the Musk family, including the Chair of the Compensation Committee. The other two directors were found to have a significant portion of their wealth tied to their compensation as a Tesla director, which would sum to several million dollars. Such outsized director compensation was judged as atypical by the Court, and added to the question of whether the Committee members could truly be considered independent decision-makers.

– Ensure the compensation committee has control over the process and timing

When the initial schedule planned for the grant to be approved within two months, the Compensation Committee’s independent advisors asked for an extension but were denied. However, when Musk asked to pause the process from July to November 2017, the compensation process stopped entirely. The Board also found that Musk proposed new terms prior to six out of the ten Board or Compensation Committee meetings when the grant was discussed.

– Meredith Ervine