ISS Rejects Elon Musk’s $1 Trillion Tesla Pay Plan, Urges Shareholders to Vote ‘No

A Major Hurdle for Musk’s Record Payday

The strongly influential institution, which counsels the biggest investors on their voting votes in corporate activities is some of the largest institutions known as the Institutional Shareholder Services (ISS) which has dealt a huge blow to Elon Musk. The company has formally advised Tesla shareholders to vote against an initiative to approve the gigantic compensation package of Musk in 2018. This compensation package, that was estimated to cost up to fifty six billion dollars, is one of the biggest in company history and now is the focus of a high stakes corporate soap opera.

The future shareholder vote is not a frivolous issue. It was planned following the cancellation of the initial pay package in the state of Delaware by a judge in the year. The court concluded that the procedure of accepting the plan in 2018 was highly defective and that the board of directors was not actually independent and was not able to negotiate properly on behalf of shareholders. In order to get around this legal obstacle Tesla is re-seeking a second round of approval of the package by its shareholders.

The ISS recommendation is a significant hurdle to the Tesla board as well as the Musk himself. Huge institutional investors like pension funds and mutual funds control trillions of dollars and are often directed by the advice of proxy advisor groups like ISS. A no vote would have a huge impact on the vote on the pay plan because such influential voice would convince many people to vote against the plan and its passage was by no means assured.

This scenario sets a showdown before one of the shareholder meetings of Tesla. The company has found itself at a place where it has to persuade its investors not to listen to a reputable advisory firm and reiterate their holding position on their controversial but visionary CEO. The result will carry significant consequences on the future of Tesla leadership and corporate governance.

Understanding the Controversial Compensation Plan

The Elon Musk 2018 pay package was constructed in a way that was immensely ambitious. There were no salary or cash bonuses in it. Rather, it was designed solely on the basis of performance with Musk getting a chance to purchase an enormous amount of Tesla stock options, which were divided into twelve tranches. The tranches would not be accessible until he achieved a set of very tough targets.

These targets were pegged on the market capitalization of Tesla and its performance in relation to the operations of the company, in terms of revenue and profitability. At the time the plan was made, Tesla was worth less than 60 billion dollars and the targets which needed the company to augment its worth by 600 billion dollars appeared to be virtually unattainable. The goals were sneered out by many analysts of the time as being far-fetched and highly unlikely.

Elon Musk, despite all odds, managed to drive Tesla towards achieving all the difficult targets. The company in subsequent years enjoyed a record growth, its market value increased exponentially and it became profitable on a regular basis. It was an outstanding performance that prompted the vesting of all the twelve tranches of his stock options and made Musk and the shareholders who had executed the plan very rich.

Although this was successful, a shareholder appealed the package in court claiming that the process of approving the package was inappropriate. The case argued that Musk was basically the board chairperson and dictated his personal conditions of employment. The ruling of the Delaware court to strike the package agreed with this argument by indicating that the board had not been performing the best interests of all shareholders, which has created the necessity of the second vote.

Why ISS is Recommending a ‘No’ Vote

The main cause of the negative rating by ISS is the enormity of pay package. The company referred to the award as being oversized in the first place and that its valuation is still too high today. The compensation, despite being subject to change after the stock price of Tesla, is magnitudes higher than that of CEOs of similar sized firms, and it is important to question the reasonableness of this aspect of compensation.

The other main problem that ISS brings to the fore is the key person risk of Elon Musk. His focus is well known to be split between various large enterprises such as SpaceX, the social media site X, Neuralink and The Boring Company. ISS wonders why such a large payout would be real enough to compensate a CEO that is not entirely invested in Tesla as it may mean that his divided attention creates a risk to the future of the automaker.

The advisory firm also raised issues of corporate governance of the company. In the decision of the Delaware court, a weak board was revealed, and it was seen as serving a strong CEO. ISS must have such worries and feel that re-enacting the same package would be tantamount to condoning an erroneous governance process. The company observed that the board have failed to demonstrate that such a huge amount of payment is required to ensure Musk is motivated.

Lastly, ISS brought up the problem of dilution of stock. Offering a huge array of choices to a single executive decreases the shareholding of other shareholders. Although it is normal to dilute employee compensation, the size of the package offered to Musk is out of this world. ISS claims that materially dilutive effect of the award on the shares of other investors is a strong argument not to support it.

The High-Stakes Battle for Shareholder Support

The vote in question has turned out to be a decisive challenge to the shareholder loyalty to Elon Musk. Although the ISS recommendation is not binding it cannot be underrated in its impact. A no-vote would be a huge public scandal of Musk and the Tesla board. Conversely, the yes vote will send a strong statement of a pro-test and may aid Tesla in legal battles to get the pay package reinstated.

The board led by Tesla Chair, Robyn Denholm, has embarked on a publicity campaign to get the proposal passed. They state that the 2018 plan had been flawless and generated a value of more than $700 billion to shareholders. They maintain that Musk has fulfilled his end of the bargain and that it is but on the very score of fairness to compensate Musk what he was offered and what he has executed in his performance.