Elon Musk’s record $56bn Tesla pay package is too much, judge rules

A Delaware judge has ruled that Elon Musk’s record-breaking $56 billion Tesla pay package could be scrapped, calling the compensation “an unfathomable sum” that was not fair to shareholders, according to a court filing.

The ruling in effect put a stop to what would have been the largest pay package in corporate America. The judge found it was negotiated by directors who seemed beholden to their headline-making chief executive and the promise of allowing him to share in the company’s enormous growth.

The shares fell by $6.75, or 3.5 per cent, to $184.85 in late trading on Wall Street on Tuesday night after the judgment was released.

Kathaleen McCormick, of Delaware’s court of chancery, wrote in her judgment: “Swept up by the rhetoric of ‘all upside,’ or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?”

McCormick’s opinion directed the Tesla shareholder who challenged the pay plan to work with Musk’s legal team on an order implementing the decision.

“Never incorporate your company in the state of Delaware,” Musk responded in a post on Twitter/X, the social media platform he bought for $44 billion in 2022. Musk moved the platform’s state of incorporation to Nevada from Delaware after his purchase.

Musk’s lawyer did not immediately reply to a request for comment.

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Greg Varallo, a lawyer for Richard Tornetta, the Tesla shareholder who brought the lawsuit in 2018, said: “Good day for the good guys.” The ruling can be appealed to the Delaware supreme court.

“The incredible size of the biggest compensation plan ever — an unfathomable sum — seems to have been calibrated to help Musk achieve what he believed would make ‘a good future for humanity’,” McCormick wrote in her 201-page opinion.

Musk testified during the compensation trial in November 2022 that the money would be used to finance interplanetary travel. “It’s a way to get humanity to Mars,” he said. “So Tesla can assist in potentially achieving that.”

Tesla’s agreement with Musk contributes a significant part of his fortune, which is one of the world’s largest.

Directors of the electric carmaker argued during a week-long trial that the company was paying to ensure one of the world’s most dynamic entrepreneurs continued to dedicate his attention to the business. Antonio Gracias, a Tesla director from 2007 to 2021, called the pay package “a great deal for shareholders” because he said it led to the company’s extraordinary success.

Tornetta’s lawyers argued that the Tesla board never told shareholders that the goals were easier to achieve than the company was acknowledging and that internal projections showed Musk was quickly going to qualify for large portions of the pay package.