Compensation packages have been subject to heightened scrutiny in recent years with the rise of say-on-pay votes and derivative and shareholder lawsuits. However, no pay package has come close in comparison by either size or legal opinion to Elon Musk's $55.8B compensation package.
Musk's pay package made front page news again this February, when the Delaware Court of Chancery sided with Tesla stockholders and invalidated his exorbitant 2018 compensation package. The unparalleled $55.8 billion pay package in question was proposed to the board by Musk himself. The court stated the main problem was that the board did not sufficiently negotiate that pay package down.
“The Delaware court's rationale had nothing to do with the size of [Musk's] pay. It was all about the underlying governance shortfalls,” said Jan Koors, senior managing director of Pearl Meyer. “There was no paper trail to suggest that there was any kind of arm's length negotiation.”
Koors suggests others could take a lesson in good corporate hygiene from the Musk case. When it comes to governance and executive compensation discussions, especially where the CEO has become so tied to the perceived value of the organization, the board is no longer negotiating from a position of equal strength. CEO compensation discussions are always a negotiation, Koors explains.
“I think part of what happens in these CEO personality issues is the CEOs end up having more power in those negotiations. That's because, even if the succession path is clear, it's perceived to be more perilous,” says Koors.
Outside advisors can support the boards' tough decision process.
“Asking directors to rely solely on the company's internal resources, the CHROs of visionary or founder-led organizations with high-profile CEOs are put in an impossible situation. It's the functional equivalent of saying that because you have a financial expert on your audit committee, you don't need an auditor,” says Koors.
Koors also suggests that companies have an executive session at the end of every single committee meeting, as a matter of course. This builds a kind of “muscle memory” and ensures that there is already a process in place to address big issues so they don't become even bigger problems.