Lucian Bebchuk and Robert Jackson argue that Tesla’s proposal to ratify Elon Musk’s $50 billion pay package would fail to secure Musk’s devotion of time and effort to Tesla rather than other endeavors, just as its past pay arrangement did.
Tuesday’s news that Tesla’s chief executive, Elon Musk, asked a supplier to redirect scarce chips needed for artificial-intelligence development from Tesla to other Musk-owned companies followed reports that Donald Trump is considering Musk for a role in a new administration. All of this comes just days before Tesla stockholders must cast an unprecedented vote on Musk’s pay package, which a Delaware court invalidated in January. The news shines light on a key flaw of Musk’s pay arrangements at Tesla: the board has not in the past, and would not in the future, limit the time and effort Musk spends on endeavors other than Tesla. Rather than ask stockholders to hope that Musk will focus on the company, Tesla’s board should ensure that its CEO gives Tesla and its investors the high priority they deserve.
Next week’s vote is the Tesla board’s attempt to reinstate an option award that was worth about $50 billion when a Delaware court struck it down at the end of January. The board has argued that stockholders should vote to do so because the award succeeded in motivating Musk’s “continued service and dedication to Tesla,” and restoring the award would do so in the future. In fact, however, the award failed to effectively achieve that objective in the past, and it should not be expected to do so going forward. If the grant is restored, Musk will get massive monetary payoffs—but Tesla stockholders would get little assurance that they will get most of his future time and attention.
Tesla’s board first approved Musk’s grant in 2018 and asked stockholders to endorse it, arguing then that “many of Tesla’s past successes were driven significantly by Mr. Musk’s leadership” and that the award was intended to motivate him to “focus more of his attention on” “key product and strategic matters that most impact Tesla’s long-term growth.” But earlier this year, after a lengthy trial, a Delaware judge concluded that the process that produced the grant was driven by Musk’s influence rather than the interests of Tesla’s investors.
Among other problems with that process, the court found, was that the grant failed to require Musk to prioritize Tesla and its investors over his other endeavors. In fact, the court concluded that the Tesla board failed even to try to convince Musk to make any such commitment. “Trial testimony,” the court said, “revealed that no one raised this issue with Musk.”
Corporate boards commonly obtain contractual limits on the time their CEO may spend on other endeavors. “[T]he most obvious way” to ensure that the award motivated Musk to focus on Tesla, the court explained, “would have been a requirement that Musk devote substantially all his professional time and attention to Tesla-related matters;” but “no one proposed anything like that to Musk.” A less demanding, but still meaningful, contractual provision would have required Musk to spend at least a specified fraction of this time at Tesla or limited the fraction of time he could spend elsewhere. Strikingly, the terms of the 2018 award, which the board now seeks to restore, imposed no limits whatsoever on the amount of time and effort that Tesla’s CEO may spend on his other projects.
And we now know that, in fact, the grant failed to induce Musk to focus his time and effort on Tesla. Free to spend his time as he wished while his Tesla options accumulated enormous value, Musk acquired Twitter and was soon “pouring . . . all” his time “into Twitter.” During that same period, Musk was continuing to lead SpaceX and living substantially in a home near the SpaceX spaceport. And the amount of time that Musk spends on social media is well-known—and has increased since he acquired Twitter two years ago.
To be sure, some might argue that, in light of Musk’s considerable talents, it might be better to have just a fraction of his time rather than all of somebody else’s. But as Tesla investors consider whether to approve a multi-billion package for him, they should know that an award ostensibly aimed at getting Musk’s time and attention was not well-designed for this purpose.
Instead of asking shareholders to approve the grant that has failed to get Musk to attach a high priority to Tesla matters, the Tesla board should have heeded the court’s advice and bargained with their CEO over how he spends his time. Indeed, even if the board preferred for whatever reason to restore the old award, it should have obtained from Musk, in exchange for bringing the package to a vote, a commitment to devote at least a specified appropriate fraction of his time and effort to Tesla.
As matters stand, the key question for Tesla stockholders is not whether devotion of Musk’s full efforts to Tesla is worth the $50 billion that reinstating this package would cost them. Instead, stockholders should recognize that restoring the award would not secure for them the full devotion of Musk’s time and attention. Tuesday’s news highlights the risk really facing Tesla stockholders next week: that they will bear both the $50 billion cost of Musk’s ill-designed pay package and not get priority among Musk’s many endeavors.
Authors’ Disclosures: Lucian Bebchuk is a professor of law, economics, and finance, and director of the corporate governance program, at Harvard Law School; and Robert Jackson is a professor of law at NYU School of Law who served as a Commissioner of the U.S. Securities and Exchange Commission from 2018 to 2020. They have served as independent experts on behalf of the plaintiff in the Delaware litigation regarding Mr. Musk’s pay package. The post is part of a series of academic posts on Tesla’s governance.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
