A recent ruling by a US judge in the Delaware Court of Chancery has deemed Elon Musk's $56 billion pay package at Tesla as unfair, requiring the company's board to devise a new compensation proposal. Judge Kathaleen McCormick delivered the decision, stating that Tesla failed to prove the fairness of the 2018 compensation plan.
The original package, approved by shareholders in 2018, involved 20.3 million stock option awards divided into 12 tranches of 1.69 million shares each. These options were set to vest incrementally based on Tesla's achievement of specific milestones related to market capitalization, revenue, and adjusted earnings, excluding certain one-time charges like stock compensation.
In her ruling, Judge McCormick criticized the process leading to the approval of Musk's compensation plan as "deeply flawed." She highlighted the lack of independence in the decision-making process since Elon Musk controlled the board, and the directors who endorsed the plan were not genuinely independent. Furthermore, shareholders were allegedly not informed of this controlled relationship during the approval of the $55.8 billion compensation plan, leading to its invalidation.
Elon Musk, known for his active presence on social media, responded to the ruling on the X platform, advising against incorporating a company in the state of Delaware. In a subsequent post, he initiated a poll asking whether Tesla should consider changing its state of incorporation to Texas, the location of its physical headquarters.
The judge's decision poses a significant challenge for Tesla's compensation strategy and underscores the importance of transparent and independent processes in approving executive pay packages. The company's board will now be tasked with developing a new proposal that meets the criteria of fairness and shareholder approval.
(With Agency Inputs)
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