Why Elon Musk's $50 billion payday scandal matters

This episode delves into the intricate world of executive compensation, highlighted by Elon Musk's controversial $50 billion pay package from Tesla.

1. Elon Musk’s pay package was contested in court due to perceived biases and the unusual structure of the compensation plan.
2. Despite the controversy, Musk achieved the stringent targets set in the plan, escalating Tesla’s market value significantly.
3. Shareholder reauthorization of the plan serves as a strategic move by Tesla amidst ongoing legal battles.
4. The episode challenges the common compensation practices, highlighting issues with how CEO pay is often disconnected from company performance.
5. It provides insights into alternative compensation models that might better align CEO incentives with long-term company health.

1: Introduction

Exploration of the background and significance of Elon Musk's pay package. David Milstead: "Tesla had put in a pay plan for Elon Musk, and it had run its course by 2018."

2: Legal Challenges

Discussion on the lawsuit and the Delaware court's stance on the independence of Tesla's board. David Milstead: "A shareholder of Tesla sued the board for giving it to him."

3: Shareholder Reauthorization

Details on the shareholder meeting and the strategy behind reauthorizing Musk's pay package. David Milstead: "Tesla took the unusual step of having the shareholders reauthorize this pay plan."

4: Compensation Controversies

Broader discussion on executive compensation and its implications in corporate governance. David Milstead: "If the actual amount that he was to get were smaller, it would actually be a very well designed compensation."

1. Evaluate CEO compensation plans critically, ensuring they are tied to genuine performance improvements rather than just market trends.
2. Shareholders should actively participate in compensation discussions and votes to ensure transparency and fairness.
3. Companies might consider alternative compensation structures that focus more on long-term company health rather than short-term gains.
4. Encourage corporate governance bodies to adopt stringent criteria for evaluating compensation plans, including the possibility of zero payouts in poor performance years.
5. Advocate for corporate policies that balance stakeholder interests, not just those of shareholders, to promote a more holistic company growth approach.

Last week, Tesla shareholders voted to approve a huge pay package for CEO Elon Musk that a judge previously struck down. If the payout is approved, Musk will receive company shares worth around US $50-billion. Last year, Loblaw’s CEO was paid more than $22-million. These pay packages are supposed to act as incentives for reaching company targets, but most executives can still receive these massive payouts even if they don’t meet their company’s objectives.

David Milstead is a reporter and columnist with The Globe’s Report on Business. He joins the show to discuss why big paydays for executives still happen – and why they matter – even in instances of corporate failure.

People

Elon Musk, David Milstead

Companies

Tesla

Books

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Guest Name(s):

David Milstead

Content Warnings:

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Speaker A
How about Cap'n crunch's crunchberries with breakfast?

Speaker B
Whoa. Dad, we're on Crunch island.

Speaker A
He's Jean left foot.

Speaker B
And he stole our crunch.

Speaker A
Quick, the zip line.

Speaker B
He's getting away.

Speaker A
Throw our last crunch berry. No.

No one steals my crunch berries.

Speaker B
I think you mean my crunchberries. Choose your own crunch venture with tapping crunch.

David Milstead
You know, this story actually starts, in a way, back in 2012.

Mainica Ramon Wilms
That's David Milstead, a reporter and columnist at the Globe who covers news about executive pay.

David Milstead
Tesla had put in a pay plan for Elon Musk, and it had run its course by 2018. And the Tesla board was asking, what now? You know, what are we going to do for the next compensation plan for Elon Musk?

Mainica Ramon Wilms
It was then that the board designed a pay package for Musk, CEO of Tesla and one of the richest people in the world. That package ended up being worth about $50 billion.

David Milstead
Not long after the pay package was awarded in 2018, a shareholder of Tesla sued the board for giving it to him, and the case has been proceeding slowly in Delaware court, which is where Tesla's corporation status is.

Mainica Ramon Wilms
The judge in that case ruled the board was not truly independent when it decided to give this pay package to Musk.

David Milstead
And a lot of the board members, particularly those on the committee that set compensation, had significant personal and financial ties to Musk.

Mainica Ramon Wilms
Last week, Tesla had its annual shareholder meeting, where this controversial compensation deal came up again.

David Milstead
Tesla took the unusual step of having the shareholders essentially reauthorize this pay plan that they already voted for in 2018. And so you may have seen stories that said, you know, Tesla shareholders vote to give Musk his pay, but it doesn't automatically happen that way. Tesla still has to fight the judge's ruling. But I think Tesla feels that having this vote and having the shareholders vote for it is a key arrow in the quiver, if you will, as they argue that shareholders truly did know what they were doing and intend to give this package to Elon Musk.

Mainica Ramon Wilms
It's easy to dismiss this controversy as just another headline about Elon Musk. But the interesting thing is what we can learn from this situation about executive compensation.

David Milstead
The problem with the package is the size. If the actual amount that he was to get were smaller, it would actually be a very well designed compensation. Play on it.

Mainica Ramon Wilms
Today on the show, David will explain what canadian companies and their workers can take away from this extreme example of executive pay.

I'm Mainneker Ramon Wilms, and this is the decibel from the Globe and Mail.

David, it's great to have you here.

David Milstead
Yeah, it's great to be here. Thanks for having me.

Mainica Ramon Wilms
So, David, let's talk about this big payout that Elon Musk is fighting to get. There are some specific strings attached. So can you just explain the targets that Elon Musk had to hit in order to get this massive amount?

David Milstead
The company said, you're going to get stock options in the company if you hit certain targets over the next ten years. One of the set of targets was about the value of the Tesla company as a whole. It's called market capitalization, or market value. And at the time the package was awarded Tesla, the company was worth about $60 billion us.

And they said if you add roughly $50 billion in market value to the company for each step of the twelve, then you'll hit the maximum amount of the awards. And just to put this in perspective, $50 billion us. There's only about a dozen companies in all of Canada that are worth 50 billion us in sum.

Mainica Ramon Wilms
So these are huge amounts.

David Milstead
These are huge amounts. These are huge amounts. In conjunction with the value awards, there were also financial metrics that were part of the plan linked to the company's overall revenue and the company's profitability. And in both of those cases, the targets were aggressive. The maximum award required revenue to grow 15 fold. The maximum award required profitability to go 21 fold. In order to get these awards, he had to hit a market value target and then also pair it with one of the financial targets. So he wasn't going to get the pay, just if investors drove up the stock price in a frenzy for no clear reason, which you might argue a lot of Tesla's market growth has been about.

But he also had to hit certain financial metrics to get those awards.

The option award was divided into twelve chunks, and he managed to achieve all twelve of those in roughly five years, not ten.

Mainica Ramon Wilms
Okay, so he did hit those targets. And just so I understand here, David, what exactly we're talking about here. So the targets, there's kind of the twelve main targets, and this is increasing the market value. And then kind of underneath that, there's like this other thing they have to pair it with. So this is like a revenue growth target. So he has to hit both of those things, a combination, in order to actually hit the goal.

David Milstead
Yes, exactly. Exactly. Tesla increased in market value all the way on up to the $650 billion at the top of the goals. Now, it has slid back a little bit since he hit that target. So Tesla is not worth $650 billion today, but it was. There were also the revenue and the earnings targets, which went up to 175 billion of revenue and $14 billion of profits. And along that sliding scale, Musk managed to hit twelve of those targets and get his full payout.

Mainica Ramon Wilms
Hmm. Okay. And so the matter of whether he's actually going to see this money is still before the courts. So we don't know for sure yet if he's actually going to get it. But let's just for a moment assume that he does. David, what form will that payment actually take?

David Milstead
Well, and that's interesting, too, because what he's getting is stock options, and a stock option is the right to buy a share of the company's stock at a set price. Let's say that there's a company trading on the Toronto stock Exchange for $50 a share, and you give the executives of that company an option to buy the stock at $50 a share. Well, today that's not meaningful because you can go out and buy it from a broker for the same amount of money. But what gives that stock option value is that that right extends into the future. And a lot of executive stock options last seven, eight, even ten years into the Future. You could see that if the stock price goes up on the market, that option has value.

So there's Variability options. There's value to them in the RIght to buy in the Future, but ultimately, we just don't know how much they'll be worth. In fact, a lot of the coverage of the Musk pay plan has used varying amounts. If you were reading the headlines, you might have seen $55 billion. YoU might have seen $45 billion. And that's because the value of those stock options is changing every day right now. As Tesla stock goes up and down, those options are worth roughly $50 billion us right now as we talk about what happened at the Tesla meeting last week.

Mainica Ramon Wilms
Okay, so Musk would get stock options.

Is this on top of a salary that Tesla pays him as well?

David Milstead
No, the whole concept is he doesn't take a salary, he doesn't take a bonus, he doesn't get any other stock awards that have no performance criteria. This is supposed to represent the SUm Total of his compensation for his service to the company.

Mainica Ramon Wilms
Okay, so obviously, the amount of money we're talking about with Tesla here is huge. But David, let's look at CEO pay more broadly then, I guess. How common is it for CEO's to get these big payouts that are actually tied to specific outcomes?

David Milstead
Most companies now understand that there needs to be a link between the company's performance and the pay that the CEO receives. And it was actually introducing stock options as an important part of the pay mix several decades ago. That was an attempt to link what a CEO made to how the company performed. The concepts have evolved greatly over time, and people have observed some problems with stock options, namely that if every company has their shares go up, like we saw perhaps in the tech boom of the late nineties or in certain periods since then, then the CEO can make millions of dollars. Even if the company did not outperform anyone else in their industry, they could even be the worst performer in their industry. But if their stock goes up along with everybody else's, the stock option delivers rewards to the CEO. So companies have worked on creating stock based awards that are tied explicitly to financial goals or to explicitly outperforming their peers in an industry and having a stock price that doesn't just go up, but goes up more than the other companies in their industry.

Mainica Ramon Wilms
David, can we dig into this a little further here? Sure. I specifically want to ask you how CEO pay packages work in Canada.

What are some examples that really stick out to you?

David Milstead
I wrote a piece about bank of Montreal earlier this year, and actually I noted that unfortunately, I'd written a very similar piece multiple times in the past, where the bank set a number of targets for their performance pay. And at BMO, not only the annual cash bonus is dependent on these performance criteria, but so are the annual stock awards. And BMO missed multiple targets that they'd set, some of which were not particularly aggressive, in my opinion, but there still was a payout.

Mainica Ramon Wilms
This is a really interesting concept, because I think for a lot of us who are not CEO's, right, the idea of getting a bonus is usually linked to a performance review or something, right? But here, this is missing targets, but still getting a payout.

David Milstead
It's very rare for a company to structure a plan where there's zero payout at all. And I've queried companies about this, and the response I've gotten in the past is, well, if there's a chance of paying nothing from the plan, the executive will take too many risks with the company in order to hit the numbers. And I suppose I understand the thought process behind that. But I still think, more importantly, a bonus plan should have an option to pay nothing if the year was bad enough. And in fact, the Globe and Mail's board games corporate governance evaluation, which I also am in charge of, we do have a criterion where we do expect a company that has a stock plan and give stock awards based on targets to have a zero payout. And if the company doesn't have a zero payout, they don't get the credit for that in our rankings.

Mainica Ramon Wilms
And, yeah, we should say. So the board games which you're referencing here, David, this is a series that the globe does every year that basically looks at how boards are functioning and how that goes.

David Milstead
Yeah, absolutely. And compensation is a big part of that. We have a number of criteria where we evaluate companies compensation practices.

Mainica Ramon Wilms
Are there any examples of CEO's who actually didn't get a bonus because of poor performance by their company? Does that happen?

David Milstead
It does. It's rare. We did a story this year because Canadian Tire paid zero bonuses to its top executives. So Canadian Tire had a couple years where their results were so good that they were paying out at 200% of the possible target.

They would say something like, well, your target bonus is $1 million. But our results were so good, you're going to get $2 million. You're going to get 200% of your target. But she was on the other foot, so to speak, for 2023. And their profits dropped sharply. Their bonus plan was based on a profit measure and also a sales growth measure, and they fell well below the minimum targets in the plan. And the CEO got no bonus. And as my understanding from reading canadian tires disclosure is, nobody who was eligible for a bonus in the management ranks received one for 2023. The corporate bonus pool had zero funding in 2022. We only found nine CEO's out of 100 who received no bonus last year. With our fresh data, there were actually 13 who received no bonus. But when you take a closer look, there are a number of CEO's where they simply don't have a bonus plan for various reasons. So when you take out a number of CEO's in our study who just simply don't even have the bonus plan, I figure that about four or five out of 100 don't get a bonus each year. And so the vast majority of CEO's who are eligible for an annual cash bonus get at least something.

Mainica Ramon Wilms
We'll be right back.

Speaker A
How about Cap'n Crunch's crunchberries with breakfast?

Speaker B
Whoa, dad, we're on Crunch island.

Speaker A
He's Sean left foot.

Speaker B
And he stole our crunch.

Speaker A
Quick, the zip line.

Speaker B
He's getting away.

Speaker A
Throw our last crunch berry. No.

No one steals my crunchberries.

Speaker B
I think you mean my crunchberries. Choose your own crunch venture with Cap'n crunch.

Mainica Ramon Wilms
Can I also ask you about Loblaw, David?

David Milstead
Yeah, everyone likes to talk about Loblabla.

Mainica Ramon Wilms
Yeah, I mean, it's been in the news, right we've been talking about CEO pay. We've talked about this company in particular.

So its current CEO is a man named Purr bank.

David Milstead
Great name, by the way. I wanted to write a headline saying bank makes bank, but that's not a very globe. And a male headline.

Mainica Ramon Wilms
Yeah, that is quite a perfect name for his job here. Well, he just got over $22 million last year, so I know you looked into this sum. David, can you break this number down for us?

David Milstead
He's not going to make $22 million every year, I don't believe, because they hired mister bank from another grocery company. And if you don't promote your new CEO from within, but instead choose to go out and hire somebody from another company, you've got the problem of, well, what are they giving up to come?

A lot of executives have stock awards that they hold and allow to grow in value. And so they're tied up in all kinds of medium term and long term compensation plans. And if you try to get them to go away, they say, well, you know, I've got x million dollars of stock sitting here that I am in the process of earning by continuing to be here and continuing to hit targets. And if you want me to come work for you, look at how much I'm giving up. And that's exactly what happens happened with per bank. And as part of that $22 million, Loblaw decided that they needed to give him $18 million to compensate him for what he was giving up at his previous employer. And that took the form of $13 million in cash. And lob lost stock worth $5 million.

Mainica Ramon Wilms
Well, it's interesting to actually break it down and see where that money is going and the justification for that money as well.

David, this may seem like a naive question when we're talking about this world of such massive numbers, but are there companies or CEO's out there who don't actually do things this way, who don't get the big compensation packages like this?

David Milstead
One example, I think that's very good to highlight is a little lesser known company in Canada called Constellation Software that has been built over many years by a fellow by the name of Mark Leonard. Very interesting fellow, very publicity shy. He's got a really long beard, so he looks like Rick Rubin, the music producer, and in 2015 stopped taking a salary, stopped taking a cash bonus, and he doesn't even receive stock options. And in a letter to shareholders back in 2015, he said, my compensation for being president of this company is now tied solely to my ownership of Constellation software shares. And he said, in essence, I'm your partner in this company, not your employee. I like the feel of the partner relationship a whole lot better. When I examined that several years ago in the Globe of Mail, his stake in the company was worth about $580 million. That was about five years ago. And now with the increase in constellation software stock, his stake is now worth over $1.3 billion. So he's doubled his wealth and doubled his net worth without taking any additional compensation. And I'm one of those people that argue that if you have that much stock in the company, primarily you should be paid by share price appreciation of the stock you own, and the shareholders shouldn't be issuing more stock options to you when you own so much. And that's another one of the problems with Loblaw. To get back to that topic, which is Galen Weston, who is everyone's favorite whipping boy.

Mainica Ramon Wilms
The previous CEO.

David Milstead
Yes. Well, the previous CEO and the leader of the family that has a controlling stake in the company, which is worth billions and billions of dollars.

And Loblaw and the western holding company give Galen Weston stock options. And I'm not quite sure why Galen Westin needs stock options to be motivated. The question is, how much motivation do CEO's need when they already have billions of dollars of shares in their company?

Mainica Ramon Wilms
Just in our last few minutes here, David, I'm wondering, could there be a downside to having executive compensation tied to targets? Like, for example, if it's tied to profit, isn't there a risk a CEO could just cut staff, save the money on their salaries, which could then let them hit that profitability target?

David Milstead
It is certainly the stockholder versus stakeholder problem. There was a time many years ago most of us don't remember it, when companies who laid off people were embarrassed by it. To them, it was a sign that they had not operated successfully if they had to cut employees and lay off people?

History. And we're about 25 to 30 years into a culture where layoffs are celebrated on Wall street and Bay street as a sign that the company is being lean and mean or efficient. And quite often the stock price will go up, because when you cut out costs, you're quite likely to be improving profits. And so plans that have a goal that is based on some type of earnings, some type of profits, in the short term or in the long term, you know, they do create a perverse incentive for the CEO to cut workers and to take a step back. I think a lot of how we think about business now, we're turning to the idea of, is it really better in the long run for the business to be solely focused on shareholders and not focused on the stakeholders. And cut your workforce willy nilly and leave the rest of the people behind still working there to wonder about your company culture if every year there's layoffs and every year as it happens, the CEO hits the profit target and makes a big bonus.

Mainica Ramon Wilms
Yeah, just very lastly here, David, I guess I wonder what the rest of us should make of all this. Those of us who have to undergo performance reviews in order to even make a case for getting a potential bonus.

How should we be thinking about this?

David Milstead
Well, I wouldn't blame you for being angry. It's quite possible that a lot of bonus plans for lower level employees, the rank and file, who actually are lucky enough to have some type of annual incentive.

I'm not sure that companies are quite as patient with missing the target. I suspect that there are some number of bonus plans where it's all or nothing to look at. Companies where multiple targets are missed and some by a meaningful amount. And yet there's still a payout that for a CEO is in the hundreds of thousands of dollars or maybe even millions.

Mainica Ramon Wilms
So in a way, CEO bonuses, I guess this can be a form of accountability really here.

David Milstead
It certainly can, but I think unfortunately we're not quite there because there are disconnects. I like to say that one of the reasons we have such large CEO pay, why it's risen so much, particularly in comparison to the average worker, is there's a lot of people on Wall street and Bay street who make even more money, these guys, and they're usually guys running hedge funds who are getting literally hundreds of millions of dollars a year. And in comparison, these CEO's kind of look like the hired help merely making only a few million dollars a year. So a lot of the people who are investing in these companies, who are evaluating these CEO's, this isn't really a whole lot of money at all. And that's the complete opposite of you and me and ordinary people and ordinary investors. Looking at this and how these companies do is really important for our retirement accounts. Companies each year conduct.

Most companies, I should say, conduct what's called a say on pay vote, where the shareholders can vote for whether they approve of the compensation practices of the company.

In Canada, the average level of approval is generally 90% or more. So if you're a normal person looking at all this money that the CEO's are making and wondering how we've gotten to this point, you have to realize that when the companies interact with their shareholders, they're getting the message that it's all okay. It's very unusual for a company to get less than 80% approval. And by the way, we should add that this Tesla pay package that the vote that was held last week, they only got 70% approval.

Mainica Ramon Wilms
Oh, that's interesting.

David Milstead
Pay package. 70% in school may be a passing grade, but arguably, it's a failing grade in the world of, say, on pay. So if you ask yourself, well, how does this keep happening, and how do these people keep getting so much money? It's because the shareholders of the companies are sending the message that it's okay. And if you are a shareholder of various stocks and you're not looking at that proxy statement that's sent to you each spring with an opportunity to vote, and you're not voting no on a pay package that you think is inappropriate or too high, you know, that's part of the problem.

Mainica Ramon Wilms
David, it was great to have you here. Thank you for doing this.

David Milstead
Thank you so much. It's great to be here.

Mainica Ramon Wilms
That's it for today. I'm Mainica Ramon Wells. Our intern is Kelsey Arnot. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy McLaughlin. David Crosby edits the show. Adrian Chung is our senior producer, and matt fraynor is our managing editor.

Thanks so much for listening, and I'll talk to you soon.

Speaker A
How about captain crunch's crunchberries with breakfast?

Speaker B
Whoa, dad, we're on.

Speaker A
Captain crunch island is charlotte foot.

Speaker B
And he stole our crunch.

David Milstead
Quick.

Speaker A
The zip line.

Speaker B
He's getting away.

Speaker A
Throw our last crunch berry. No, no one steals my crunch berries.

Speaker B
I think you mean my crunch berries. Choose your own crunch venture with tapping crunch.