How Elon Musk helped elevate the ceiling on CEO pay

When Tesla awarded Elon Musk a multibillion-dollar pay package deal in 2018, the landmark deal helped to vastly improve the potential compensation of the CEOs at lots of America’s largest public corporations.

The package deal was composed solely of an unlimited inventory grant tied to the corporate’s efficiency. As Tesla has offered sufficient electrical autos to turn into essentially the most precious automaker on the planet, Musk has to date obtained shares value almost $60 billion — serving to to make him the world’s richest individual.

Compensation specialists say they see the affect of Musk’s deal in all places.

“There’s a lot of companies out there that saw that award and its structure,” stated Brian Johnson, government director with ISS Corporate Solutions, which advises companies on government pay and different practices. “They think it’s a good way to incentivize performance.”

A brand new survey carried out for The New York Times by Equilar, a compensation consulting agency, exhibits that lots of final yr’s highest-paid executives acquired packages that, like Musk’s, might pay out the form of sums that may have been unthinkable just a few years in the past. And even because the hole between what executives and staff earn continued to widen throughout the pandemic, corporations opened the floodgates for what they paid their leaders in 2021.

All of the ten highest-paid executives had compensation over $100 million, a primary. Their common compensation was $330 million, the best ever. But it’s not just some executives on the high having fun with the spoils. Underscoring how widespread the pay will increase had been final yr, the median CEO made $32.1 million in 2021, up 27% from $25.3 million in 2020 and much greater than in pre-pandemic years.

Jeff Green, CEO of The Trade Desk, a digital promoting firm, reported compensation of $835 million final yr, making him the top-paid government within the Equilar survey, which encompasses 200 corporations, all of which have income over $1 billion. Green’s pay in 2021 was the third-highest quantity that Equilar present in its previous 5 annual surveys, that are primarily based on corporations’ pay disclosures; Musk’s deal in 2018, which Tesla valued at $2.3 billion, remains to be the largest in these years.

The Trade Desk CEO Jeff Green (The commerce desk/ display screen seize)

Zig Serafin, CEO of Qualtrics, a software program firm, was second final yr, with compensation of $541 million. It was the fourth-highest sum of the previous 5 years. Peter Kern, CEO of Expedia, the journey firm, was third final yr, with pay value $296 million.

Although these compensation totals are taken from the businesses’ monetary filings, they’re typically estimates pushed by the businesses’ makes an attempt to worth the inventory their CEOs may obtain. As a consequence, the executives might earn lower than these totals, particularly if the bear market persists and their corporations’ inventory costs stay depressed, however they may additionally take dwelling far greater quantities ought to the shares recuperate.

Many of the highest-ranking executives within the survey obtained pay packages that had been far bigger than these of the heads of far greater corporations with a lot bigger earnings. For instance, Tim Cook, CEO of Apple, obtained his first fairness award in 2011 final yr and had whole compensation of $99 million, placing him simply thirteenth within the survey.

Despite the expansion in pay, shareholders, apparently believing that it’s being tied to efficiency, have voted in favour of most packages. Only 3% of “say on pay” votes acquired lower than 50% help from shareholders within the yr by means of June 3, in line with an evaluation of 1,444 public corporations by Willis Towers Watson, a consulting agency that advises corporations on government pay applications and company governance issues.

For a number of years, public corporations have needed to evaluate their CEOs’ compensation with that of a typical worker, the results of a regulation handed by Congress that aimed to assist buyers assess the extent of government pay. Last yr, CEOs earned 339 instances greater than the median pay of workers at their corporations, up from 311 instances in 2020, in line with Equilar. The median worker wage rose 10% final yr, to $92,349 from $83,808.

Last yr’s government pay jumped partly as a result of company boards, which resolve CEO compensation, wished to reward high officers for navigating their corporations by means of the pandemic.

In addition, the inventory market rallied in 2021, and the worth of inventory grants, which generally represent the biggest share of CEO compensation, was additionally greater. When inventory costs are rising, boards are likely to say executives are doing job and pay them extra.

And in a world mesmerized by Musk and his successes at Tesla, boards are much more prone to view CEOs as indispensable and provides them large pay offers.

“There’s a mindset that the whole thing will fall apart if we don’t have this off-the-charts talented person in that office,” stated Sarah Anderson, a program director on the Institute for Policy Studies, a liberal suppose tank that always analyzes CEO pay. “So many people on these corporate boards are benefiting from the system. They’re either executives themselves or they have some other stake in keeping the compensation system the way it is.”

Last yr’s government pay jumped partly as a result of company boards, which resolve CEO compensation, wished to reward high officers for navigating their corporations by means of the pandemic. (Express file photograph)

The largest hole between CEO and staff within the survey was at Amazon, the place this previous spring a union received a battle to arrange a warehouse for the primary time. Andrew Jassy, who took over from Jeff Bezos as Amazon’s CEO final yr, had pay that was 6,474 instances that of the corporate’s median worker. His compensation final yr, $213 million, was the eighth highest, in line with Equilar. Nearly all of it got here from a inventory grant.

“The way the SEC rules work, we are required to report that grant as total compensation for 2021 when in reality it will be available to be paid out over the next 10 years, starting in 2023,” Chris Oster, an Amazon spokesperson, stated in an announcement, referring to the Securities and Exchange Commission, which regulates corporations’ disclosures. “As famous within the proxy, this award is meant to signify most of Andy’s compensation for the approaching years.

Only one lady, Sue Nabi, CEO of Coty, a cosmetics agency, was among the many 20 top-paid executives within the survey, coming in fifth, with $284 million in compensation.

Setting an Example

Musk’s megapackage was criticized when it was introduced in 2018. Sceptics stated the large riches it promised may encourage him to take too many dangers to fulfil the plan’s objectives. But pay specialists say it impressed boards at different corporations to concoct related offers.

The groundbreaking function of Musk’s compensation plan was not a lot the efficiency targets — these have been round for years — however the colossal quantity of inventory that lined pay for a number of years into the longer term. (Tesla’s board has not awarded Musk any subsequent inventory grants.) The inventory he has to date gotten for the award is value simply over $60 billion, a treasure chest that helped him finance his bid for Twitter. Musk and Tesla didn’t reply to a request for remark.

Although the worth of Musk’s package deal was large, its phrases had been demanding.

Just being employed by Tesla wasn’t sufficient for Musk to get any of the award. He obtained no inventory only for displaying up, a observe that’s widespread in CEO packages.

For him to get the inventory, Tesla’s worth on the inventory market — a perform of its inventory value — needed to preserve rising and the corporate needed to hit bold targets for gross sales and working earnings.

This ensured there was a belt-and-suspenders strategy to efficiency measurement. Because Tesla’s enterprise and inventory have executed exceedingly nicely lately, Musk obtained almost all of the inventory within the deal, in line with a current Tesla regulatory submitting, one thing that appeared extremely unlikely on the time it was introduced.

The current plunge in Tesla’s share value means the inventory that Musk has obtained from the 2018 award is value considerably lower than it was simply months in the past.

Although they’ve the potential to pay out large quantities, in sure respects final yr’s largest pay offers weren’t as demanding as Musk’s.

For Green, of The Trade Desk, to qualify for the choices in his package deal, valued within the proxy assertion at $828 million, the corporate’s inventory value should climb nicely above present ranges, however there are not any enterprise objectives for The Trade Desk to attain.

Melinda Zurich, a spokesperson for The Trade Desk, stated the inventory value targets within the firm’s award had been bold and famous that its inventory was up a number of thousand per cent since its preliminary public providing in 2016.

“Jeff has played an integral role in driving that growth and is key to the company’s future growth agenda,” she added.

Serafin, of Qualtrics, doesn’t should hit any efficiency targets to qualify for roughly two-thirds of his inventory pay final yr; he simply has to stay in his put up to get these shares, which the corporate valued at $360 million in its proxy assertion. And his performance-based shares, valued at $180 million, have enterprise working targets however no inventory value objectives. Serafin has already obtained shares from each awards.

“As a technology company that encounters significant competition for qualified personnel, long-term incentive compensation plays a critical role in our ability to attract, hire, motivate and reward qualified and experienced executive officers,” Qualtrics, which had its preliminary public providing final yr, wrote in its proxy assertion. Some corporations have awarded executives a considerable amount of inventory when going public as a option to give them “skin in the game.”

Among the best paid, Nabi, of Coty, seems to have one of many best packages to earn. Not solely does the $280 million in inventory awarded to her final yr haven’t any share value or enterprise objectives connected, she has already obtained one-third of the inventory outright — and stands to get the remainder of the award as quickly as August 2023.

A Coty spokesperson famous that the corporate’s inventory had risen since Nabi grew to become CEO in 2020 and added: “Ms. Nabi is one of the beauty industry’s leading founder talents: a hugely respected business leader with an outstanding track record in the sector. In order to attract a true entrepreneur like her, Coty needed to have an enticing equity scheme.”