The Elon Musk theory of pay

Delaware’s chancery court stands between Elon Musk and investors willingly offering him a fortune. In 2018, when Tesla was worth around $50bn, the carmaker’s shareholders approved a plan to link Mr Musk’s pay to the value of the company. By January 2024, when the court ruled that the pay package was illegal, the carmaker and Mr Musk’s stock options were worth more than $600bn and $50bn respectively. Tesla’s board of directors had not been transparent about how Mr Musk’s pay was set, the judge said. That summer Tesla’s shareholders voted to reincorporate the company in Texas and reapprove the compensation package. The court killed it again in winter.

On August 3rd Tesla’s board handed Mr Musk an insurance policy. If his old package is not revived, he can cash in new options worth $24bn. That’s much less than his original award but still the largest pay cheque in history, and more than Tesla’s net profit during the past two years. “It’s not a money thing,” Mr Musk has said. Nor is it about giving the finger to judges in Delaware (though the exodus of companies from the state has quickened since Tesla left). Instead, it is about control.

Under the new deal, Mr Musk’s stake in the company will rise from 13% to 15%. The 2018 package entitled him to 20%. Mr Musk has said he wants 25% if he is to advance Tesla’s artificial-intelligence (AI) and robotics capabilities—enough control, he thinks, to prevent him being ousted by an activist investor. Put differently, Mr Musk fears someone doing to Tesla what he did to Twitter, the social network now called X, which he bought in 2022.

It is one thing for shareholders to tolerate the continued control of someone who built a firm, as they do when investing in Warren Buffett’s Berkshire Hathaway or Mark Zuckerberg’s Meta (both companies have dual-class share structures). It is quite another for them to hand over power willingly. Where does Mr Musk’s Svengali-like sway over investors come from?

Economists disagree about whether huge compensation packages in corporate America reflect a competitive market for scarce executive talent or extraction of rents by bosses courtesy of weak boards. Mr Musk is certainly a rare talent. But his latest pay package supports the second, more cynical, view of executive pay.

Whereas many bosses can negotiate a raise by threatening to walk across the street to a competitor, Mr Musk needs only to change tabs on his computer screen. His investment in Tesla makes up less than half of his astronomical paper wealth. Mr Musk holds large stakes in SpaceX, a rocket company, xAI, an AI startup, which he has merged with X, and various other enterprises. The boundaries between these businesses are blurring. In June SpaceX invested $2bn in xAI. Tesla’s investors will vote on a similar deal later this year. Mr Musk’s time is not the only resource firms compete for in this internal market: Nvidia chips ordered by Tesla were recently diverted to xAI.

If shareholders assume Mr Musk will allocate attention to the firm where he has the most to gain, it may be rational for them to submit to his demands for more control. The stakes are particularly high at Tesla because the electric-vehicle (EV) manufacturer is performing poorly. It is losing ground to cheaper Chinese competitors and suffering from the reputational carnage wrought by Mr Musk’s foray into politics. Its valuation is supported not by fundamentals, but Mr Musk’s futurism, including his promises of fleets of self-driving taxis and legions of humanoid robots. By tanking Tesla, Mr Musk has made it even more dependent on his pixie dust. The worse the carmaker performs, the more its mercurial boss ought to be paid.

No other chief executive benefits from such topsy-turvy incentives. But Mr Musk will not be the last boss to claim that AI is too important a technology to risk losing command over it in a battle for corporate control, and that the usual rules of corporate governance must be suspended. After all, every king tries to limit his parliament’s powers when going to war. ■