Kirsty Wigglesworth/Pool via REUTERS
- Musk’s previous $56 billion pay package was blocked by a Delaware judge.
- Tesla and other companies left Delaware. The state freaked out and relaxed its corporate code.
- Texas and Nevada followed suit. Now it’s even easier for companies to pay huge exec compensation.
There are some hard lessons to take from Tesla’s stunning new $1 trillion pay plan for Elon Musk.
I’m not here to judge whether this compensation proposal is good or bad, or too high or too low. Tesla shareholders will decide that in November.
As a journalist, my job is to report what happens and try to explain why, clearly and fairly.
My conclusion is that it would probably have been better not to have meddled with Musk’s previous pay package from 2018.
At the time, that original compensation plan was designed to pay Musk as much as $56 billion, but only if Tesla hit a series of performance targets that were considered wildly unobtainable back then. Shareholders signed off, along with Tesla’s board.
By 2024, Tesla had hit these almost impossible goals, and the spoils began flowing to Musk. But then, a judge in Delaware, where Tesla was incorporated, challenged the pay package.
She questioned the independence of Tesla’s board, saying Musk wielded too much control over the process of approving the $56 billion plan. The judge won. It was an impressive victory.
What happened after that? Tesla, Dropbox, and other companies left Delaware.
Tesla moved to Texas, which worked hard to carve out a more friendly jurisdiction for corporations. Nevada did a similar thing. Dropbox incorporated there. Even Meta considered leaving Delaware.
This undermined Delaware’s unique, multi-decade pitch that it is a friendly place to incorporate companies. Concerns began to grow that the state would lose revenue from the taxes many corporations pay there.
“An exodus of corporations could have dire consequences for Delaware,” a Fordham Law School journal warned earlier this year. “The state derives a substantial portion of its revenue from incorporation fees and franchise taxes.”
One corporate attorney focused on these issues told me that Delaware was tearing itself apart earlier this year as some residents worried they would see their tax bills rise to make up the shortfall.
To prevent this dire outcome, Delaware passed a law that radically changed the corporate code in the state. One major firm called it “the most impactful changes to Delaware corporate law in decades.”
The changes made it much easier for companies to get their executive compensation packages approved by directors and passed by shareholders. New protections made it harder for disgruntled investors to sue and demand internal documents and other evidence from companies.
This compounded what Texas and Nevada were already doing to make it easier for companies, such as Tesla, to pay whatever they and shareholders think is best in terms of executive compensation.
The end result of all this: It’s now even easier for public companies to pay executives massive compensation.
The best example is Musk’s huge new pay package. With Tesla is incorporated in Texas now, it’s unlikely this plan will be challenged.
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