A Delaware Chancery Court recently voided Elon Musk’s Tesla compensation package, overriding a favorable shareholder vote to find that an executive compensation package was fundamentally unfair.
While Tesla may appeal and the broader implications will take some time to reveal themselves, there are three general themes to note from the decisions:
The Moving Goalposts of Executive Compensation
- What constitutes an enlightened executive compensation program has long been something of a moving target, informed by governance lessons of the past.
- Musk’s Tesla compensation package appeared to pass these precedents, at least on its face. It bound Musk’s personal fortune to the fate of Tesla for a long period against what seemed at the time remarkably ambitious performance targets.
- However, the Delaware court found Musk’s package was simply unfair and that even a favorable shareholder vote could not save it against the backdrop of a fatally flawed governance process.
The Substance of the Process Matters
- While the process for arriving at the terms of Musk’s compensation plan seemingly adhered to governance norms, when the Delaware court looked closely at the governance process, they found what they considered to be significant deficiencies.
- The court concluded that the directors were not actually independent of Musk, the compensation consultant did not provide any meaningful benchmarking, and some of the performance targets were not as difficult as they may have seemed based on the company’s own projections.
Fairness and the Minority Shareholder
- The plaintiff in the Tesla case was a small individual investor, but objections to Musk’s compensation were not confined to a sole objector – ISS recommended against the pay package and at least two significant institutional shareholders voted no.
- The Delaware Chancery Court is a court of equity, and the equities will sometimes rule in favor of the aggrieved minority shareholders.
What Comes Next
The implications for directors on boards other than Tesla’s are not clear at this time -- insureds should expect additional scrutiny on the independence of compensation committee members. Such litigation brought by shareholders in their own interest or in the name of the company are typically covered under insurance.
For a discussion on your specific business needs and comprehensive insurance solutions for Directors & Officers as well as those of the Company, NFP's professionals are available to assist and navigate the diverse exposures your business may encounter.