Surpassing Quant Think Tank Center|Is Elon Musk overpaid? Why a Delaware judge struck down Tesla CEO's $55 billion payday

Is Elon Musk overpaid?Surpassing Quant Think Tank Center

A Delaware judge this week voided the $55.8 billion Tesla pay package that helped make Musk the world’s richest person, calling it an “unfathomable sum” that was unfair to shareholders.

Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery ruled Tuesday that Tesla’s board of directors failed to show that the pay package for the electric car company's CEO was fair to shareholders.

The defendants had the burden of "proving the fairness of the largest potential compensation plan in the history of public markets," McCormick said in the 200-page ruling. "The task proved too tall an order.

So what happens next?

Why did the Delaware judge void Elon Musk's pay package?

The lawsuit was filed by a shareholder who claimed that Musk had close ties with the Tesla board and too much say in negotiations. 

Musk and Tesla argued that making sure Musk continued to lead the company was critical to its future and that the deal made concessions to shareholders. 

"In addition to his 21.9% equity stake, Musk was the paradigmatic 'Superstar CEO,' who held some of the most influential corporate positions (CEO, Chair, and founder), enjoyed thick ties with the directors tasked with negotiating on behalf of Tesla, and dominated the process that led to board approval of his compensation plan," the judge said. "At least as to this transaction, Musk controlled Tesla."

What will the Tesla board do?

Tesla board members now face a “tornado situation,” according to Wedbush Securities analyst Daniel Ives.

They must negotiate a new pay package that has the approval of shareholders and of Musk, who recently demanded an increase in his ownership stake in the company, appeal the judge’s decision or change where Tesla is incorporated.

How did Elon Musk react to the Delaware ruling?

On X, the social media platform that he owns, he asked his followers to vote if Tesla should incorporate in Texas, a more business-friendly state where it has its corporate offices and a factory.

“I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters,” he wrote.

Case Western Reserve University law professor Anat Alon-Beck said Musk only has himself to blame for ignoring the fundamentals of the fairness doctrine and failing to show that the pay package was inherently fair to shareholders. 

“These are basic principles he could have – and should have – been coached on Delaware corporate law,” Alon-Beck said. “Musk just didn’t follow the corporate rules and procedures. If he did, he would have avoided this mess.”

How much Tesla stock does Elon Musk own?

Even without the stock from the pay package, Musk owns about 411 million Tesla shares, worth approximately $78 billion.

‘Absurd’ Elon Musk pay package criticized

The court decision comes as the compensation of rank-and-file employees lags big bumps in executive pay. 

The judge said Musk’s pay package was “the largest potential compensation opportunity ever observed in public markets by multiple orders of magnitude” – 250 times larger than the median compensation plans of his peers and more than 33 times larger than the plan’s closest comparison, which was Musk’s prior pay package.

“Musk’s absurd 2018 pay package eviscerated the previous CEO compensation record by orders of magnitude at a time when CEO compensation already insulted any sense of what a senior manager is truly worth,” Bart Naylor, financial policy advocate for Public Citizen, said in a statement.