Elon Musk took the stand on Wednesday in a shareholder lawsuit that seeks to nullify the 2018 pay package he received as Tesla’s CEO—then and now, the world’s most lucrative such contract. The class-action suit argues that Tesla’s board of directors were unduly influenced by Musk, and failed to disclose crucial information about this deal to the shareholders, who then approved it. If Musk were to lose the case, it would undo around $50 billion in compensation, meaning he’d have to return more than a quarter of his current estimated net worth.
Lead plaintiff Richard Tornetta first filed his suit three months after the board granted Musk’s historic compensation package. Back then, Tesla estimated the deal was worth about $55 billion. Like with most executives, the pay was in company shares, not cash: It would be divided into 12 batches of stock that would be disbursed as Musk hit predetermined milestones. The board’s logic was that Tesla was on the verge of becoming huge, and they wanted Musk hooked to lead it long term.
Their milestones mostly revolved around making Tesla worth ever more money. For instance, Musk earned certain batches of stock when Tesla’s market cap increased another $50 billion beyond $100 billion. This meant the higher Tesla’s stock prices soared, the more Musk would be awarded and also the more his reward stood to be worth. Tesla expected this package to take a decade to pay out, but Musk helped rocket Tesla to Earth’s most valuable carmaker by 2020, a mere two years later. He’s now expected to earn his 12th and final batch of stock in early 2023.
Sky-high pay, even by today’s standards
Tornetta’s lawyers argue that Musk didn’t need such lucrative compensation—he was heavily invested in Tesla’s success already, as a shareholder. Plus publicly, he had confirmed his commitment to the company.
They also argue that the deal, as orchestrated, revolved around Musk’s satisfying a set of milestones that essentially amounted to gimmes. On Tuesday, Tesla board chair Robyn Denholm testified that those were actually some “audacious” milestones. As she was saying this, Tornetta’s lawyers apparently displayed internal records showing that the company’s own projections were that Tesla was on track to achieve many of those goals, regardless of Musk’s performance.
His multibillion-dollar compensation was decried as excessive even by standards today, where S&P 500 CEOs now outearn the average worker 324 to 1. The board, Denholm argued, offered such outlandishly high pay as a carrot to incentivize Musk not just to stay, but to focus on Tesla, instead of other side interests that are increasingly sucking up his time—back then, SpaceX. (Musk’s own testimony on Wednesday complicated this: He sees himself not as part-time CEO, he said, but as “almost 100% Tesla.”)
“Way too much work on my plate”
But then two weeks ago, Musk bought Twitter. Denholm noted that she was aware Musk had acquired a new play thing, but she added: “He will do whatever he needs to achieve the results.” At the same time, she admitted she wasn’t sure how much time Musk is now dedicating to Twitter. Earlier this week, though, Musk’s own words were, “I have too much work on my plate, that is for sure.”
One of the lawsuit’s arguments for nullifying Musk’s pay package is that the contract contains no effective provision for accountability—there’s no measure to rein in Musk’s pay if, say, he fails to stay squarely focused on Tesla.
Whatever strength this may possess as a legal argument, it’s obvious that Musk’s attention has, in fact, been diverted in ways affecting Tesla. A few days after taking over Twitter, Musk drafted more than 50 top Tesla employees, largely software engineers from the Autopilot team, to help figure out Twitter. He owns around 20% of Tesla stock, and he’s sold $19 billion worth since April, likely to finance his share of the Twitter purchase. Tesla’s share prices have been sinking for most of that time. He tweeted on Monday that “I’ve been at Twitter SF HQ all night. Will be working & sleeping here until org is fixed.” Reports on Wednesday noted that “minutes before beginning his testimony,” Musk was again tweeting about Twitter.
Ultimately, the lawsuit rests on proving that the board breached its fiduciary duties by being too close to Musk and wasting billions of dollars. His tight relationships with Tesla’s board members may end up being the smoking gun: At the time, members included Musk’s brother, Kimbal, and pals Steve Jurvetson and Anthony Gracias.
Never say Musk isn’t a fast learner, though. Among his first moves after declaring himself Chief Twit was to dissolve Twitter’s board.
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