Musk's $56 billion: Pay, Incentives, or Rewards?

Abstract

The pay package of Elon Musk, the CEO of Tesla, has featured prominently in the news in recent months. Articles related to the size of his pay and the legal battle over the pay package have appeared in numerous media outlets including the Wall Street Journal, Fortune, CBS News, Barron's, PBS News, Reuters, and NPR, to name just a few. The most frequently mentioned headline number for the CEO's compensation is $56 billion. Even a cursory study of the pay package, however, shows that this number is not the CEO's annual pay, which is the usual focus of comparison across CEOs by media and academics. We perform a detailed analysis of Tesla's compensation contract and make three contributions. (i) We find that the compensation design is consistent with sound contracting principles. (ii) We use the Tesla case study to focus attention on three critical elements of CEO compensation: the cost to the company ("annual pay"), the incentives embedded in the pay package to motivate the CEO's future performance, and the estimated maximum rewards to the CEO based on these performance incentives. (iii) We show that the sound-bite figure of $56 billon is not the cost, is not the incentives, and is only loosely related to the estimated maximum rewards to the CEO.

Keywords: G32, G34 Executive Compensation, CEO Pay, CEO Incentives, CEO Rewards, Tesla, Elon Musk, $56 billion