According to a report by Reuters, Elon Musk, Larry Ellison, and other current and former members of Tesla’s board of directors have agreed to return $735 million to settle claims that they were overpaid. This settlement concludes a legal battle that began in 2020 when a police and firefighter retirement fund filed a lawsuit questioning the stock options granted to Tesla’s board since 2017. As part of the settlement, the directors have also agreed to forgo compensation for the years 2021, 2022, and 2023 and make changes to the way compensation is calculated.
The current board of Tesla includes notable figures such as Elon Musk’s brother Kimbal, Fox News tycoon James Murdoch, Airbnb co-founder Joe Gebbia, and former Tesla CTO JB Straubel. It is important to note that this particular case is separate from another lawsuit filed by shareholders challenging a $56 billion compensation package awarded to CEO Elon Musk.
The Police and Fire Retirement System of the City of Detroit alleged that Tesla’s board had granted itself unfair and excessive compensation through 11 million stock options between 2017 and 2020, surpassing the norms for corporate boards. The $735 million settlement will be repaid to Tesla as a result of what is known as a “derivative lawsuit.” Reuters states that this settlement marks the largest ever awarded by Delaware’s Court of Chancery.
Tesla defended its use of stock options, claiming they were utilized to align the directors’ incentives with the goals of investors. The company has not yet issued any comments on the matter but expressed in court documents that the decision to settle was made to eliminate the risk of future litigation.
Importantly, Elon Musk is separately facing a lawsuit defending his $56 billion pay package. Shareholder Richard Tornette claimed it was the “largest compensation grant in human history” and argued that Musk did not solely focus on Tesla. As part of the package, Musk received the first of twelve $700 million payments in 2020.
While this settlement resolves the compensation dispute pertaining to Tesla’s board of directors, the ongoing legal battle concerning Elon Musk’s pay package remains unresolved. The outcome of this case could have significant implications for the company and Musk’s standing as CEO.
These controversies surrounding executive compensation at Tesla highlight the ongoing scrutiny faced by high-profile companies and their leaders in relation to excessive pay. Critics argue that such compensation packages can perpetuate income inequality and demonstrate a misalignment of incentives between executives and shareholders. On the other hand, proponents contend that high compensation is necessary to attract and retain talented leaders who drive innovation and shareholder value.
The resolution of these compensation-related disputes will undoubtedly shape the future governance practices and accountability standards in corporate America. With shareholders and the public increasingly demanding transparency and fairness in executive pay, companies like Tesla may be prompted to reevaluate their compensation policies and prioritize the alignment of incentives between executives and stakeholders.
In summary, the settlement of the lawsuit against Tesla’s board of directors is an important development in the ongoing saga surrounding executive compensation at the company. While this particular case has been resolved, the legal battles persist, raising important questions about the relationship between executive pay, corporate governance, and shareholder interests. As these debates continue, companies across industries may face pressure to adopt more equitable compensation practices that prioritize long-term value creation.
