Tesla Shareholders to Vote on Controversial Pay Package for Elon Musk

Next week, Tesla shareholders will cast their votes on whether CEO Elon Musk deserves a massive compensation package previously struck down by a judge, and whether the company should relocate its state of incorporation from Delaware to Texas.

Five months ago, a Delaware judge nullified the $50 billion pay package granted to Musk by Tesla’s board in 2018. Now, Tesla’s board is asking shareholders to reinstate those stock options, currently worth $46.9 billion, and to move the company’s incorporation to Texas, where its headquarters is located.

Elliott Investment Management, which has a significant stake in Tesla, has criticized the leadership’s execution and the company’s rigid adherence to outdated strategies. They claim this has resulted in a more than 50% drop in Tesla’s stock price from its peak in late 2021, alongside disappointing sales and squeezed profits amid a global price war for electric vehicles (EVs).

The vote, set for Thursday during Tesla’s annual shareholders meeting, will address two proposals. One seeks approval for Musk’s compensation package, while the other proposes relocating Tesla’s incorporation to Texas. Despite the original 2018 package receiving 73% shareholder approval, Delaware Chancery Court Chancellor Kathaleen McCormick ruled in January that the process behind the package was flawed and biased in favour of Musk.

McCormick criticized the board’s process, stating it failed to prove the fairness of the compensation plan. “Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” she wrote.

In response, Tesla appealed the ruling and sought shareholder permission to move the company’s state of incorporation. The move to Texas, where Tesla’s headquarters is located, is seen as a strategic shift to potentially avoid further judicial scrutiny from Delaware courts, which are known for their business-friendly reputation.

Tesla’s board has been actively campaigning for shareholder support, filing numerous communications with the SEC and even offering a tour of Tesla’s Texas factory conducted personally by Musk as an incentive for voting.

Tesla Chair Robyn Denholm emphasized the importance of Musk’s involvement, saying, “This is obviously not about the money… Elon is not a typical executive, and Tesla is not a typical company. We want his ideas, energy, and time at Tesla.”

However, Musk’s controversies, including his acquisition of Twitter (now X) and the associated scandals, have complicated shareholder sentiments. Since buying Twitter for $44 billion, Musk’s actions, such as reinstating banned accounts and allegedly endorsing antisemitic content, have driven away advertisers and incurred financial losses.

Meanwhile, Tesla faces its own challenges, including price cuts due to weaker-than-expected demand and increased competition in the EV market. Tesla shares have dropped 30% this year alone, following a high point in November 2021.

Dan Ives, a tech analyst with Wedbush Securities, believes the pay package will likely be approved but expects a closer vote than in 2018. “Musk is still the hearts and lungs of the Tesla growth story,” he said.

High-profile shareholders like Ron Baron of Baron Capital support Musk, arguing that the aggressive performance metrics tied to his compensation have greatly benefited shareholders. However, advisory firms like Institutional Shareholder Services and Glass Lewis, as well as Norway’s sovereign wealth fund, have opposed the package, citing its size and structure.

Musk has criticized the Norwegian fund’s decision on X, claiming overwhelming public support for both resolutions. However, McCormick’s ruling suggested Musk’s existing equity stake already provided significant compensation.

Regardless of the shareholder vote outcome, Delaware courts may still play a crucial role in the final decision about Musk’s compensation package and the company’s potential move to Texas. Tesla’s attorneys have assured the court that the relocation is not an attempt to evade Delaware’s jurisdiction.

The upcoming vote will be a pivotal moment for Tesla, determining not only Musk’s compensation but also his future involvement with the company that made him one of the wealthiest and most controversial figures in the world.