How Elon Musk helped elevate the ceiling on CEO pay

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

The bundle was composed completely of an unlimited inventory grant tied to the corporate’s efficiency. As Tesla has bought sufficient electrical automobiles to turn into probably the most useful automaker on the planet, Musk has up to now acquired shares value almost $60 billion — serving to to make him the world’s richest individual.

Compensation consultants say they see the affect of Musk’s deal all over the place.

“There’s a lot of companies out there that saw that award and its structure,” stated Brian Johnson, govt director with ISS Corporate Solutions, which advises companies on govt 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, reveals that lots of final 12 months’s highest-paid executives obtained packages that, like Musk’s, may pay out the form of sums that will have been unthinkable a number of years in the past. And even because the hole between what executives and employees 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 only a few executives on the high having fun with the spoils. Underscoring how widespread the pay will increase have been final 12 months, the median CEO made $32.1 million in 2021, up 27% from $25.3 million in 2020 and much larger than in pre-pandemic years.

Jeff Green, CEO of The Trade Desk, a digital promoting firm, reported compensation of $835 million final 12 months, making him the top-paid govt 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, continues to be the most important in these years.

Zig Serafin, CEO of Qualtrics, a software program firm, was second final 12 months, 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 12 months, with pay value $296 million.

Although these compensation totals are taken from the businesses’ monetary filings, they’re usually estimates pushed by the businesses’ makes an attempt to worth the inventory their CEOs would possibly obtain. As a end result, the executives could earn lower than these totals, particularly if the bear market persists and their corporations’ inventory costs stay depressed, however they might additionally take dwelling far larger quantities ought to the shares get well.

Many of the highest-ranking executives within the survey acquired pay packages that have been far bigger than these of the heads of far larger corporations with a lot bigger earnings. For instance, Tim Cook, CEO of Apple, acquired his first fairness award since 2011 final 12 months 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 favor of most packages. Only 3% of “say on pay” votes obtained lower than 50% help from shareholders within the 12 months by June 3, in accordance with an evaluation of 1,444 public corporations by Willis Towers Watson, a consulting agency that advises corporations on govt pay packages 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 traders assess the extent of govt pay. Last 12 months, CEOs earned 339 occasions greater than the median pay of staff at their corporations, up from 311 occasions in 2020, in accordance with Equilar. The median worker wage rose 10% final 12 months, to $92,349 from $83,808.

Last 12 months’s govt pay jumped partially as a result of company boards, which resolve CEO compensation, wished to reward high officers for navigating their corporations by 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 larger. When inventory costs are rising, boards are inclined to say executives are doing a great job and pay them extra.

And in a world mesmerized by Musk and his successes at Tesla, boards are much more more likely to view CEOs as indispensable and provides them big 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 assume tank that usually 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.”

The largest hole between CEO and employees within the survey was at Amazon, the place this previous spring a union gained a battle to prepare a warehouse for the primary time. Andrew Jassy, who took over from Jeff Bezos as Amazon’s CEO final 12 months, had pay that was 6,474 occasions that of the corporate’s median worker. His compensation final 12 months, $213 million, was the eighth highest, in accordance 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 symbolize 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. Skeptics stated the large riches it promised would possibly encourage him to take too many dangers to meet the plan’s objectives. But pay consultants 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 up to now 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 bundle was big, its phrases have been demanding.

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

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

This ensured there was a belt-and-suspenders method to efficiency measurement. Because Tesla’s enterprise and inventory have carried out exceedingly properly in recent times, Musk acquired almost all of the inventory within the deal, in accordance 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 acquired from the 2018 award is value considerably lower than it was simply months in the past.

Although they’ve the potential to pay out big quantities, in sure respects final 12 months’s largest pay offers weren’t as demanding as Musk’s.

For Green, of The Trade Desk, to qualify for the choices in his bundle, valued within the proxy assertion at $828 million, the corporate’s inventory value should climb properly 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 have been bold and famous that its inventory was up a number of thousand p.c 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 need to hit any efficiency targets to qualify for roughly two-thirds of his inventory pay final 12 months; he simply has to stay in his publish 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 acquired 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 12 months, wrote in its proxy assertion. Some corporations have awarded executives a considerable amount of inventory when going public as a strategy 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 12 months haven’t any share value or enterprise objectives hooked up, she has already acquired 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.”

No Limit

Even although there are various well-used methods to assemble wealthy pay packages, corporations are nonetheless discovering novel methods to take action.

Last 12 months, Ariel Emanuel, CEO of Endeavor Group and a strong Hollywood determine who was the idea for a personality within the collection “Entourage,” obtained a efficiency inventory award that locations no most on the quantity of inventory it may pay out, in accordance with the corporate’s proxy assertion. If Endeavor inventory retains hitting larger value targets, the award retains paying out inventory, for 10 years. (By distinction, Musk’s blowout bundle had a capped variety of shares.)

“I haven’t seen a plan like this before, with what appears to be no cap on payouts,” stated Steven Hall, a compensation advisor.

Endeavor, which went public final 12 months, valued the uncapped award at $196 million. Emanuel obtained one other inventory award final 12 months, value $72 million, that he can obtain in full if he stays in his publish by subsequent May. Equilar calculated Emanuel’s whole pay final 12 months to be $295 million, putting him fourth within the survey.

“Mr. Emanuel’s compensation in Endeavor’s IPO year reflects the value he has created over the last 25 years since founding the company and is tied to its continued performance and the creation of long-term value,” an organization spokesperson stated in an announcement.

If Endeavor’s inventory, which has not too long ago plunged, doesn’t get well, Emanuel gained’t accumulate a lot of his efficiency inventory grant. But Tesla’s inventory additionally fell within the months after Musk acquired his large deal. It then soared, clearing the way in which for Musk, and different CEOs after him, to get pleasure from sky’s-the-limit pay.