Elon Musk and the R1-trillion payout package — a matter of one individual’s worth

It’s worth repeating. R1-trillion. In a single payout.

Most people who read this for the first time will be appalled. How can this happen in a world where the average US income is $76,000 and the annual South African income is roughly 10 times less? “Obscene” is the word that is most often used when it comes to excessive executive pay, and one must forgive anyone who believes it to be an understatement.

But alas, the world doesn’t always work the way we think it should, and there are plenty of arguments to support Musk’s hyperbolic claim.

The world of chief executive remuneration is, if nothing else, a place of wild creativity. Payments are usually divided into three pots. First, there is a salary which appears in the CEO’s bank account each month. Then there are the perks, which can range widely – insurances, accommodation, first-class travel, holidays, loans, drivers, home alarm systems and whatever else the chief demands as conditions for taking the job.

And then there are the other incentives – juicy carrots offered to reward future performance. 

They usually go like this: 

The company has some value, perhaps as determined by its share price on a public exchange. The board and (especially) the shareholders tell the CEO: “If you increase the value of the company by a set amount in some set amount of time, we will be happy to reward you.” Why? Because the shareholders will also be worth a lot more, so a little reward for the CEO is fair, right? (Actually, it often happens the other way around, with the CEO setting the terms, at least if the CEO has enough leverage, and Musk certainly does.) 

What form does the reward take? Sometimes it is cash, sometimes shares. The former is subtractive to ongoing operating cash requirements, so it is less popular, while the latter is easier. Yes, of course it dilutes everyone’s stake a bit, but not enough to hurt. To put it simply, shareholders make a deal with the CEO: if you make us richer, we will make you richer. The rest, at least in theory, is detail. 

None of this is particularly new. Option incentives (options to buy shares in the future at a set price) arrived on the executive remuneration scene almost 75 years ago, when the US tax code was changed to treat them favourably with the Revenue Act of 1950. 

One can safely assume that no one at the time imagined we would arrive at a place where one individual can claim $56-billion in options in 2024. Especially when you compare this figure with the relatively paltry takings of Musk’s peers – Sundar Pichai at Alphabet received $225-million in 2022, Tim Cook at Apple got $95-million the same year, while Andy Jassy at Amazon took home $221-million in 2021.

Read more in Daily Maverick: Tesla’s $56bn pay package for Elon Musk opposed by Calpers CEO

Musk signed this particular remuneration package at Tesla in January 2018. It said (I’m skirting over the details here) that, over 10 years and in 12 separate tranches, Musk would be entitled to 1% of Tesla’s outstanding shares, conditional on the achievement of various financial targets. If he never missed a target, he would receive 12% of Tesla’s stock in addition to his existing holdings.

Tesla has made every target to date. The company’s valuation has risen from about $75-billion in 2018 to $560-billion today (it has fallen somewhat from its highs last year). When all the numbers and financial terms are put into the spreadsheet, Musk is indeed owed $56-billion or so. (Note: because of the volatility of Tesla stock, his pay package is slightly less now, but who’s counting?)

So, why is there a vote happening this week? Isn’t there a deal in place?

There was indeed a board-approved deal, but a Delaware court struck down the agreement on 24 February this year. More accurately, the court ordered it to be sent to the shareholders for a vote, not so much because they thought the size of the payout was, er, obscene (they did), but because they determined that the board was full of Musk’s friends and was not impartial. The board is indeed stuffed with his buddies who have gotten rich on his coat-tails and boards are supposed to be completely independent. (This is, admittedly, often not the case in some corporations, and certainly not in this instance.) 

Read more in Daily Maverick: Elon Musk could become policy adviser if Trump wins election, WSJ reports

Anyway, this whole affair has kicked off an almighty public spat. Musk is grumpy, suggesting that he will not only spend less time at Tesla and instead go have fun at his many other companies (SpaceX, Twitter/X, Neuralink, The Boring Company, etc), but worse, he is reconsidering his intention to start his new AI company xAI under the Tesla corporate umbrella. 

Read more in Daily Maverick: On the wealth-happiness horizon, how much money is enough?

Now Musk is saying that, without his pay package, he will launch xAI elsewhere. Given that AI is the big new pot-of-gold for anyone with huge funds to invest, the threat of him turning his back on Tesla is akin to him trying to blackmail his shareholders into approving the package. It may or may not be legal, but it is certainly blinding in its many potential conflicts of interest, most of which result from his being CEO of many companies simultaneously. 

It’s a bit of a mess all round. Even if the package is approved, there will surely be lawsuits. And if it is not approved, there will surely be lawsuits. 

Which brings us back to the question: is any one individual worth this amount of money?

The obvious answer is no. The less obvious answer is yes. DM

Steven Boykey Sidley is a professor of practice at JBS, University of Johannesburg. His new book, It’s Mine: How the Crypto Industry is Redefining Ownership, is published by Maverick451 in South Africa and the Legend Times Group in the UK/EU, available now.