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• Delaware Chancery Court Judge Kathaleen St. Jude McCormick has blocked Elon Musk’s US$55.8 billion pay package, which Tesla’s board of directors approved in 2018 through a process she found to be “deeply flawed.” No CEO of a publicly traded U.S. company has ever been paid this much for one year’s work, according to Equilar, which tracks corporate leadership data.
• Pay for the 10 highest-paid executives, including Google’s Sundar Pichai and Apple’s Tim Cook, reportedly maxed out at around $250 million in 2022.
• The Conversation asked Justin P. Klein, the director of the Weinberg Center for Corporate Governance at the University of Delaware, to explain McCormick’s reasoning.

Why did the judge block Musk’s pay package?

• This legal defeat may have knocked Musk out of his perch atop the Forbes list of the world’s richest people, making him the second-wealthiest, the media outlet calculated.
• Ultimately, she determined that Musk’s compensation plan was considered and approved by a board of directors that was not sufficiently independent or objective.
• This pay package deserved close scrutiny because of its enormity, McCormick observed.

What was wrong with Tesla’s board?

• The board approved this compensation plan without following commonly accepted norms, according to the ruling.
• Further, McCormick found that the directors allowed Musk to control the process for approving the compensation plan, dictating the terms, amount and timing.
• This is both inconsistent with widely accepted compensation setting practices and striking due to the scale of the pay package.

What factors are boards supposed to consider in setting CEO pay?

• In deciding what CEOs should earn, boards or compensation committees should consider the company’s performance under the leadership of the CEO and the executive’s own personal performance.
• They should also review what comparable companies take into consideration when making decisions about their own CEO’s compensation.
• It also required the appointment of two new independent Tesla board members and a requirement that he preclear certain public statements.
• The board could have considered this incident a negative factor when making its decisions about Musk’s compensation.

What process are boards supposed to follow in setting CEO pay?

• In setting CEO compensation, all members of boards or compensation committees should be truly independent and objective, with no interest in the outcome.
• They should consider engaging compensation experts and benchmark or seek information on executive compensation at comparable companies.

What happens now?

• On the other hand, Musk could ask Tesla’s board, its compensation committee – or both of them – to revisit and revise his compensation plan, taking into account the objections spelled out in the ruling.
• That would include both the amount – $55.8 billion – and the process by which it was set.
• Even if Musk were to prevail and change Tesla’s jurisdiction of incorporation, it would not be likely to affect this decision.

Is Delaware particularly tough on corporate leaders?

• Delaware is the corporate home of more than 60% of Fortune 500 companies even though it’s the country’s second-smallest state.
• Musk’s court case was heard in its Court of Chancery, a system that primarily decides corporate legal matters.
• In 2005, Chancellor William B. Chandler III of the Delaware Chancery Court let it go, while acknowledging the apparent impropriety of paying an executive so much.

Justin P. Klein directs the advisory board of the Weinberg Center for Corporate Governance. Chancellor Kathaleen McCormick is an ex officio member of that center's advisory board.