The Decibel - Why Elon Musk’s $50 billion payday scandal matters

Episode Date: June 20, 2024

Last week, Tesla shareholders voted to approve a huge pay package for CEO Elon Musk that a judge previously struck down. If the payout is approved, Musk will receive company shares worth around US $50-billion. Last year, Loblaw’s CEO was paid more than $22-million. These pay packages are supposed to act as incentives for reaching company targets, but most executives can still receive these massive payouts even if they don’t meet their company’s objectives.David Milstead is a reporter and columnist with The Globe’s Report on Business. He joins the show to discuss why big paydays for executives still happen – and why they matter – even in instances of corporate failure.Questions? Comments? Ideas? E-mail us at [e-mail]

You know, this story actually starts in a way back in 2012. That's David Milstead, a reporter and columnist at The Globe, who covers news about executive pay. Tesla had put in a pay plan for Elon Musk, and it had run its course by 2018. And the Tesla board was asking, what now? You know, what are we going to do for the next compensation plan for Elon Musk? It was then that the board designed a pay package for Musk, CEO of Tesla and one of the richest people in the world. That package ended up being worth about 50 billion U.S. dollars.

Not long after the pay package was awarded in 2018, a shareholder of Tesla sued the board for giving it to him. And the case has been proceeding slowly in Delaware court, which is where Tesla's corporation status is. The judge in that case ruled the board was not truly independent when it decided to give this pay package to Musk. And a lot of the board members, particularly those on the committee that set compensation, had significant personal and financial ties to Musk. Last week, Tesla had its annual shareholder meeting, where this controversial compensation deal came up again. Tesla took the unusual step of having the shareholders essentially reauthorize this pay plan that they already voted

for in 2018. And so you may have seen stories that said, you know, Tesla shareholders vote to give Musk his pay, but it doesn't automatically happen that way. Tesla still has to fight the judge's ruling. But I think Tesla feels that having this vote and having the shareholders vote for it is a key arrow in the quiver, if you will, as they argue that shareholders truly did know what they were doing and intend to give this package to Elon Musk. It's easy to dismiss this controversy as just another headline about Elon Musk. But the interesting thing is what we can learn from this situation about executive compensation. The problem with the package is the size. If the actual amount that he was to get were smaller, it would actually be a very well-designed compensation plan. Today on the show, David will explain what Canadian companies and their workers can take away from this extreme example of

executive pay. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. David, it's great to have you here. Yeah, it's great to be here. Thanks for having me. So David, let's talk about this big payout that Elon Musk is fighting to get. There are some specific strings attached. So can you just explain the targets that Elon Musk had to hit in order to get this massive amount? The company said, you're going to get stock options in the company if you hit certain targets over the next 10 years. One of the set of targets was about the value of the Tesla company as a whole.

It's called market capitalization or market value. And at the time the package was awarded, Tesla, the company, was worth about $60 billion US. And they said, if you add roughly $50 billion in market value to the company for each step of the 12, then you'll hit the maximum amount of the awards. And just to put this in perspective, $50 billion U.S., there's only about a dozen companies in all of Canada that are worth $50 billion U.S. in sum. So these are huge amounts we're talking about. These are huge amounts. These are huge amounts. In conjunction with the value awards, there were also financial metrics that were part of the plan linked to the company's overall revenue and the company's profitability. And in both of those cases, the targets were aggressive.

The maximum award required revenue to grow 15-fold. The maximum award required profitability to go 15-fold. The maximum award required profitability to go 21-fold. In order to get these awards, he had to hit a market value target and then also pair it with one of the financial targets. So he wasn't going to get the pay just if investors drove up the stock price in a frenzy for no clear reason, which you might argue a lot of Tesla's market growth has been about. But he also had to hit certain financial metrics to get those awards. So the option award was divided into 12 chunks, and he managed to achieve all 12 of those in roughly five years, not 10. Okay, so he did hit those targets. And just so

I understand here, David, what exactly we're talking about here. So the targets, there's kind of the 12 main targets, and this is increasing the market value. And then kind of underneath that, there's like this other thing they have to pair it with. So this is like a revenue growth target. So we have to hit both of those things, a combination, in order to actually hit the goal. Yes, exactly. Exactly. Tesla increased in market value all the way on up to the $650 billion at the top of the goals. Now it has slid back a little bit since he hit that target. So Tesla is not worth $650 billion today, but it was. There were also

the revenue and the earnings targets, which went up to $175 billion of revenue and $14 billion of profits. And along that sliding scale, Musk managed to hit 12 of those targets and get his full payout. Okay. And so the matter of whether he's actually going to see this money is still before the courts. So we don't know for sure yet if he's actually going to get it. But let's just for a moment assume that he does, David. What form will that payment actually take? Well, and that's interesting, too, because what he's getting is stock options. And a stock option is the right to buy a share of the company's stock at a set price. Let's say that there's a company trading on the Toronto Stock Exchange for $50 a share. And you give the executives of that company

an option to buy the stock at $50 a share. Well, today that's not meaningful because you can go out and buy it from a broker for the same amount of money. But what gives that stock option value is that that right extends into the future. And a lot of executive stock options last seven, eight, even 10 years into the future. You can see that if the stock price goes up on the market, that option has value. So there's variability. Options, there's value to them in the right to buy in the future. But ultimately, we just don't know how much they'll be worth. In fact, a lot of the coverage of the Musk pay plan has used varying amounts. If you were reading the headlines, you might have seen $55 billion, you might have seen $45 billion. And that's because

the value of those stock options is changing every day right now as Tesla stock goes up and down. Those options are worth, you know, roughly $50 billion U.S. right now as we talk about what happened at the Tesla meeting last week. Okay. So Musk would get stock options. Is this on top of a salary that Tesla pays him as well? No. The whole concept is he doesn't take a salary. He doesn't take a bonus. He doesn't get any other stock awards that have no performance criteria. This is supposed to represent the sum total of his compensation for his service to the company.

Okay. So obviously the amount of money we're talking about with Tesla here is huge. But David, let's look at CEO pay more broadly then. I guess how common is it for CEOs to get these big payouts that are actually tied to specific outcomes? Most companies now understand that there needs to be a link between the company's performance and the pay that the CEO receives. And it was actually introducing stock options as an important part of the pay mix several decades ago that was an attempt to link what a CEO made to how the company performed.

The concepts have evolved greatly over time, and people have observed some problems with stock options, namely that if every company has their shares go up, like we saw perhaps in the tech boom of the late 90s or in certain periods since then, then the CEO can make millions of dollars even if the company did not outperform anyone else in their industry. They could even be the worst performer in their industry. But if their stock goes up along with everybody else's, the stock option delivers rewards to the CEO. So companies have worked on creating stock-based awards that are tied explicitly to financial goals or to explicitly outperforming their peers in an industry and having a stock price that doesn't just go up, but goes up more than the other companies in their industry. David, can we dig into this a little further here? I specifically want to ask you how CEO pay packages work in Canada.

What are some examples that really stick out to you? I wrote a piece about Bank of Montreal earlier this year. And actually, I noted that, unfortunately, I'd written a very similar piece multiple times in the past, where the bank set a number of targets for their performance pay. And at BMO, not only the annual cash bonus is dependent on these performance criteria, but so are the annual stock awards. And BMO missed multiple targets that they'd set, some of which were not particularly aggressive in my opinion, but there still was a payout. This is a really interesting concept, because I think for a lot of us who are not CEOs,

right, the idea of getting a bonus is usually linked to a performance review or something, right? But here, this is missing targets but still getting a payout. It's very rare for a company to structure a plan where there's zero payout at all. And I've queried companies about this. And the response I've gotten in the past is, well, if there's a chance of paying nothing from the plan, the executive will take too many risks with the company in order to hit the numbers. And I suppose I understand the thought process

behind that. But I still think, more importantly, a bonus plan should have an option to pay nothing if the year was bad enough. And in fact, the Globe and Mail's board games, corporate governance, evaluation, which I also am in charge of, we do have a criterion where we do expect a company that has a stock plan and give stock awards based on targets to have a zero payout. And if the company doesn't have a zero payout, they don't get the credit for that in our rankings. And yeah, we should say, so the board games, which you're referencing here, David, this is a series that the Globe does every year that basically looks at how boards are functioning and how that goes. Yeah, and compensation is a big part of that. We have a number of criteria where we evaluate companies' compensation practices. Are there any examples of CEOs who actually didn't get a bonus because of poor performance by their company? Does that happen?

It does. It's rare. We did a story this year because Canadian Tire paid zero bonuses to its top executives. So Canadian Tire had a couple years where their results were so good that they were paying out at 200% of the possible target. They would say something like, well, your target bonus is $1 million, but our results were so good, you're going to get $2 million. You're going to get 200% of your target. But the shoe is on the other foot, so to speak, for 2023, and their profits dropped sharply. Their bonus plan was based on a profit measure and also a sales growth measure.

And they fell well below the minimum targets in the plan. And the CEO got no bonus. And as my understanding from reading Canadian Tire's disclosure is nobody who was eligible for a bonus in the management ranks received one for 2023. The corporate bonus pool had zero funding. In 2022, we only found nine CEOs out of 100 who received no bonus. Last year, with our fresh data, there were actually 13 who received no bonus. But when you take a closer look, there are a number of CEOs where they simply don't have a bonus plan for various reasons. So when you take out a number of CEOs in our study who just simply don't even have the bonus plan,

I figure that about four or five out of 100 don't get a bonus each year. And so the vast majority of CEOs who are eligible for an annual cash bonus get at least something. We'll be right back. Can I also ask you about Loblaw, David? Yeah, everyone likes to talk about Loblaw. Yeah, I mean, it's been in the news, right? We've been talking about CEO pay. We've talked about this company in particular. So its current CEO is a man named Per Bank.

Great name, by the way. I wanted to write a headline saying bank makes bank, but that's not a very Globe and Mail headline. Yeah, that is quite a perfect name for his job here. Well, he just got over $22 million last year. So I know you looked into this some, David. Can you break this number down for us? He's not going to make $22 million every year, I don't believe, because they hired Mr. Bank from another grocery company. And if you

don't promote your new CEO from within, but instead choose to go out and hire somebody from another company, you've got the problem of, well, what are they giving up to come? A lot of executives have stock awards that they hold and allow to grow in value. And so they're tied up in all kinds of medium-term and long-term compensation plans. And if you try to get them to go away, they say, well, you know, I've got, you know, X million dollars of stock sitting here that I'm in the process of earning by continuing to be here and continuing to hit targets. And if you want me to come work for you, look at how much I'm giving up. And that's exactly what happened with Per Bank. And as part of that $22 million, Loblaw decided that they needed to give him $18

million to compensate him for what he was giving up at his previous employer. And that took the form of $13 million in cash and Loblaw's stock worth $5 million. Well, it's interesting to actually break it down and see where that money is going and the justification for that money as well. David, this may seem like a naive question when we're talking about this world of such massive numbers, but are there companies or CEOs out there who don't actually do things this way, who don't get the big compensation packages like this? One example I think that's very good to highlight is a little lesser known company in Canada called Constellation Software that has been built over many years by a fellow by the name of Mark Leonard. Very interesting fellow, very publicity shy. He's got a really

long beard, so he looks like Rick Rubin, the music producer. And in 2015, stopped taking a salary, stopped taking a cash bonus, and he doesn't even receive stock options. And in a letter to shareholders back in 2015, he said, you know, my compensation for being president of this company is now tied solely to my ownership of Constellation Software shares. And he said, in essence, I'm your partner in this company, not your employee. I like the feel of the partner relationship a whole lot better. And, you know, when I examined that several years ago in the Globe and Mail, his stake in the company was worth about $580 million. That was about five years ago. And now with the increase in Constellation Software stock, his stake is now worth over $1.3 billion. So he's doubled his wealth and doubled his net worth without taking any additional compensation. And I'm one of those people that argue that if you have that much stock in the company, primarily you should be paid by share price appreciation of the stock you own. And the shareholders shouldn't be issuing more stock options to you when you own so much. And that's another one of the problems with Loblaw,

to get back to that topic, which is Galen Weston, who is everyone's favorite whipping boy. The previous CEO. Yes. Well, the previous CEO and the leader of the family that has a controlling stake in the company, which is worth billions and billions of dollars. And Loblaw and the Weston holding company give Galen Weston stock options. And I'm not quite sure why Galen Weston needs stock options to be motivated. The question is, how much motivation do CEOs need when they already have billions of dollars of shares in their company? Just in our last few minutes here, David, I'm wondering, could there be a downside to having

executive compensation tied to targets? Like, for example, if it's tied to profit, isn't there a risk a CEO could just cut staff, save the money on their salaries, which could then let them hit that profitability target? It is certainly the stockholder versus stakeholder problem. There was a time many years ago, most of us don't remember it, when companies who laid off people were embarrassed by it. To them, it was a sign that they had not operated successfully if they had to cut employees and layoff people. That's ancient history. And we're about 25 to 30 years into a culture where layoffs are celebrated on Wall Street and Bay Street as a sign that the company is being lean and mean or efficient. And quite often, the stock price will go up because

when you cut out costs, you're quite likely to be improving profits. And so plans that have a goal that is based on some type of earnings, some type of profits in the short term or in the long term, you know, they do create a perverse incentive for the CEO to cut workers. And to take a step back, I think a lot of how we think about business now, we're turning to the idea of, is it really better in the long run for the business to be solely focused on shareholders and not focused on the stakeholders and cut your workforce willy-nilly and leave the rest of the people behind still working there to wonder about your company culture if every year there's layoffs and every year as it happens, the CEO hits the profit target and makes a big bonus.

Just very lastly here, David, I guess I wonder what the rest of us should make of all this, right? Those of us who have to undergo performance reviews in order to even make a case for getting a potential bonus, how should we be thinking about this? Well, I wouldn't blame you for being angry. It's quite possible that a lot of bonus plans for lower level employees, the rank and file who actually are lucky enough to have some type of annual incentive. I'm not sure that companies are quite as patient with missing the target. I suspect that there are some number of bonus plans where it's, you know, all or nothing. To look at companies where multiple targets are missed and some by, you know,

a meaningful amount, and yet there's still a payout that for a CEO, you know, is in the hundreds of thousands of dollars or maybe even, you know, millions. So in a way, like CEO bonuses, like I guess this can be a form of accountability really here. It certainly can. But I think we're, unfortunately, we're not quite there because there are disconnects. I like to say that one of the reasons we have such large CEO pay, why it's risen so much, particularly in comparison to the average worker, is there's a lot of people on Wall Street and Bay Street who make even more money. These guys, and they're usually guys, running hedge funds who are getting literally hundreds of millions of dollars a year. And in comparison,

these CEOs kind of look like the hired help, you know, merely making only a few million dollars a year. So a lot of the people who are investing in these companies, who are evaluating these CEOs, this isn't really a whole lot of money at all. And that's the complete opposite of you and me and ordinary people and ordinary investors looking at this and how these companies do is really important for our retirement accounts.

Companies each year conduct, most companies, I should say, conduct what's called a say-on-pay vote, where the shareholders can vote for whether they approve of the compensation practices of the company. In Canada, the average level of approval is generally 90% or more. So if you're a normal person looking at all this money that the CEOs are making and wondering how we've gotten to this point, you have to realize that when the companies interact with their shareholders, they're getting the message that it's all okay. You know, it's very unusual for a company to get less than 80% approval. And by the way,

we should add that this Tesla pay package, the vote that was held last week, they only got 70% approval for this pay package. 70% in school may be a passing grade, but arguably it's a failing grade in the world to stay on pay. So if you ask yourself, well, how does this keep happening and how these people keep getting so much money? It's because the shareholders of the companies are sending the message that it's okay. And if you are a shareholder of various stocks and you're not looking at that proxy statement that's sent to you each spring with an opportunity to vote and you're not voting no on a pay package that you think is inappropriate or too high, you know, that's part of the problem.

David, it was great to have you here. Thank you for doing this. Thank you so much. It's great to be here. That's it for today. I'm Maina Karaman-Wellms. Our intern is Kelsey Arnett. Our producers are Madeline White,

Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer, and Matt Frainer is our managing editor. Thanks so much for listening, and I'll talk to you soon.