Do It Right the First Time: Tesla asks shareholders to resurrect Musk’s 2018 mega grant.

This week, Tesla asked shareholders to ratify (i.e., “resurrect”) CEO Elon Musk’s 2018 $55 billion “mega grant” after the award was struck down by a Delaware court this past January.  

While Tesla’s situation is the exception, its proxy filed in support of ratification demonstrates the rule:

Good compensation governance and disclosure is necessary to enable high pay for high performance.

This highlights three questions compensation committees should be asking, particularly when pay is high:   

First: is your compensation committee paper trail supportive of good disclosure?

As Jon mentioned in our post on the Delaware court’s January decision, good compensation committee materials, and especially meeting minutes, form the building blocks of a thoughtfully crafted CD&A story.  

This is a culture shift for some committees, but following Disney v. Ovitz, thinking through  disclosure  in advance of decisions allows the CD&A story to develop organically alongside the compensation program, in carefully drafted committee minutes, and over the course of the year, instead of all at once in the few months before the proxy is filed. 

In asking shareholders to ratify the award, Tesla labored to disclose the board’s process following the court decisions. In fact, most of the proxy reads like the board’s meeting minutes, complete with exhibits (e.g., the original court filing and a report by a special committee generated by the Board that reviewed Musk’s compensation). A good story and compelling rationale extrapolated from the meeting minutes would be better.

Second: are you proactively talking with shareholders to ensure alignment on key compensation components? 

Shareholders are not allergic to high pay if they understand and believe that the pay program generates commensurate shareholder value.  Proactive engagement gives shareholders a voice in the process and secures their buy-in on the program. 

Tesla reported widespread institutional and retail shareholder opposition to the Delaware court’s decision, meaning they likely have a degree of confidence that shareholders will ratify the award. 

Third: does your public disclosure justify the quantum of pay? 

Tesla punted on this point, instead focusing on the process of deciding for ratification, and the burden and incremental cost of putting in place a new pay package for Musk. Because of this there could be further litigation.

We believe this was a missed opportunity.  The appropriateness of the pay package is always at issue, and needs to be put into the best possible light.