Court Invalidates Elon Musk’s Enormous Multi-Billion-Dollar Compensation Plan

A Delaware state court judge has invalidated the 2018 compensation package that contributed to Tesla CEO Elon Musk’s status as one of the wealthiest individuals globally. Delaware Chancery Court Chancellor Kathaleen McCormick ruled on Tuesday that Musk and the Tesla board failed to prove the fairness of the compensation plan, leading to its dismissal.

The compensation package included 303 million split-adjusted stock options, now valued at $51 billion based on Tuesday’s closing price. The lawsuit argued that the stock options were excessive, and Tesla’s board lacked independence from Musk to safeguard shareholder interests. It further contended that the financial targets set for Musk to qualify for each stock tranche were not sufficiently challenging, resembling internal growth projections rather than stretch performance goals.

The court decision represents a significant setback for Musk, who did not immediately comment on the ruling. However, he posted a tweet on Tuesday advising against incorporating companies in Delaware. Attorneys for the shareholders claimed victory, stating that the court’s decision would prevent dilution resulting from the “gargantuan pay package.”

Musk’s legal team and Tesla’s board argued that the compensation package had received shareholder approval, with 73% of votes supporting it, excluding those owned by Musk and his brother. They emphasized the substantial increase in Tesla’s market value since the package’s approval, from $54 billion to $607 billion.

The defense contended that Musk’s preexisting equity stake, valued at tens of billions of dollars, compensated him for his efforts. Musk, who does not receive a cash salary or bonus, argued that his equity stake was crucial to Tesla’s success, and without the compensation package, he would be left uncompensated.

Chancellor McCormick rejected the argument that Musk would be uncompensated, citing his substantial preexisting equity stake. Musk, with about 13% ownership of Tesla’s shares, also indicated a desire to increase his stake to approximately 25%, expressing concerns about maintaining influence over the company.

While the court’s decision can be appealed to the Delaware Supreme Court, the ruling has implications for Musk’s compensation and influence within Tesla. Musk, who is involved in various ventures, including SpaceX, Twitter (rebranded as X), the Boring Company, xAI, and Neuralink, aims to maintain significant control over Tesla’s direction.

The court case has sparked discussions about the potential need for Tesla to devise a new pay package for Musk to keep him focused on the company’s success amid his involvement in diverse projects. Robyn Denholm, Tesla’s board chair, testified that the initial pay package was intended to motivate Musk to achieve ambitious goals for Tesla and divert his attention from other interests.

As Musk awaits the court’s decision on the compensation package, some investors and analysts suggest that offering a new pay package could help keep him dedicated to Tesla’s success and prevent distractions from his other ventures.