Glass Lewis advises Tesla shareholders to reject Musk’s USD 56 bn pay package

Proxy advisory firm Glass Lewis has advised Tesla shareholders to vote against a USD 56 billion compensation package proposed for CEO Elon Musk, potentially making it the largest pay deal for a CEO in corporate America. This recommendation is based on concerns about the scale of the package, its impact on shareholder value, and Musk’s increasing involvement in numerous projects.

Glass Lewis cited the "excessive size" of the proposed pay deal as a primary reason for their opposition. The advisory firm highlighted the dilutive effect of the pay package upon exercise and the concentration of ownership it would result in. Additionally, Musk's involvement in numerous high-profile projects, particularly his recent acquisition of Twitter (now rebranded as X), has raised concerns about his capacity to dedicate sufficient time to Tesla.

The advisory firm questioned the practicality of such a large compensation package, especially given Musk’s slate of “extraordinarily time-consuming projects.” These projects are seen as potentially diverting his focus from Tesla, thereby affecting the company’s long-term growth and stability.

The structure of the pay package

Proposed by Tesla’s board of directors, the pay package is structured without a salary or cash bonus. Instead, it sets rewards based on the company’s market value increasing to as much as USD 650 billion over the next decade, starting from 2018. As of now, Tesla's market value stands at approximately USD 571.6 billion, according to data from LSEG.

In January, Delaware's Court of Chancery Judge Kathaleen McCormick nullified the original pay package, prompting Musk to seek moving Tesla’s state of incorporation from Delaware to Texas. Glass Lewis also criticised this proposed relocation, pointing out the "uncertain benefits and additional risks" it poses to shareholders.

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Tesla’s defence and shareholder reaffirmation

Tesla has urged its shareholders to reaffirm their approval of Musk’s compensation package. Robyn Denholm, Tesla’s board chair, defended the package in a recent interview with the Financial Times, stating that Musk deserves the pay because the company has achieved ambitious targets for revenue and stock price.

“Musk deserves this package because Tesla has surpassed its ambitious revenue and stock price targets,” Denholm stated.

Since Musk became CEO in 2008, Tesla has seen significant improvements in its financial performance. From a USD 2.2 billion loss in 2018, the company turned a profit of USD 15 billion. The production capacity has also increased, with seven times more vehicles being produced now compared to 2018, according to an online campaign website, Vote Tesla.

Proxy advisor’s recommendations on board members

In addition to opposing Musk’s pay package, Glass Lewis has also recommended shareholders vote against the reelection of Kimbal Musk, Elon Musk's brother, to the board. However, they have supported the reelection of James Murdoch, the former CEO of 21st Century Fox, to the board.

Glass Lewis’ stance is influenced by concerns over governance and the potential conflict of interest due to the close familial ties within the board. They argue that such relationships could undermine the board’s independence and its ability to act in the best interests of all shareholders.

The broader implications

The debate over Musk’s pay package highlights broader issues around executive compensation, corporate governance, and shareholder rights. It raises questions about how to balance rewarding leadership for outstanding performance with ensuring that compensation packages do not disproportionately impact shareholder value or corporate governance standards.

The recommendation from Glass Lewis comes at a time when Tesla is navigating significant challenges and opportunities in the electric vehicle market. As the industry leader, Tesla's decisions on executive compensation and governance are likely to influence broader industry practices.

Glass Lewis' recommendation for Tesla shareholders to reject Musk’s USD 56 billion pay package underscores significant concerns about the deal's scale, its impact on shareholder value, and Musk’s ability to manage his numerous high-profile projects effectively. As the vote approaches, Tesla’s shareholders will need to consider these factors carefully, weighing the company's impressive performance under Musk’s leadership against the potential risks highlighted by the advisory firm.

(Inputs from Reuters)