The wage gap between CEOs and workers continues to rise, with estimates last year showing that the CEOs in the country’s 300 largest firms earned an average of $10.6 million a year, compared to the median worker’s earnings of $23,968. In other words, for every dollar a worker earns, the average CEO earns $670. There are firms where the ratio is 1,000-to-1. Elon Musk and Tesla would like that ratio to be higher. His shareholders say differently. In 2018, Tesla’s sycophantic board awarded him $56 billion in compensation, a level six times the combined pay of the 200 best paid CEOs that year. Some of his shareholders revolted, and took Tesla to court, arguing that the compensation was excessive, and inappropriately calculated. This week, a Delaware judge ruled that the compensation package was indeed excessive and inappropriately set. The ruling threatens his status as the world’s richest person, and has earned his wrath, with Musk tweeting, "Never incorporate your company in the state of Delaware”. He later polled his followers on X, “Should Tesla change its state of incorporation to Texas, home of its physical headquarters?”, because all big businesses make decisions on X. The case highlights the degree to which businesses have become the vassal states of their CEOs and owners, while doing very little to advance worker’s rights. This has happened at a time when Americans have come to think that wealth equates to genius, and that executive compensation, no matter how high, is justly deserved.
Executive compensation has not always been this high. For much of the New Deal era, the wage gap was fairly small, at almost European levels. In 1965, the wage gap was 15 to one, compared to 670 to one in 2023. What changed? According to the Economic Policy Institute, it is the increase in “the power of CEOs to extract concessions”, rather than any increases in productivity or skill, is responsible for the rise in CEO compensation.
“Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on the economy’s output or on employment”.
In fact, this was the very argument used by Tesla shareholder, Richard Tornetta, who filed the lawsuit five years ago: he said that Musk dictated negotiations, and said that the board was not independent. The court directed him to work with Musk’s team to implement its order. Tesla has the right of appeal, but I find it hard to believe how it can win. In fact, Musk’s explanation for why the pay was so high had very little to do with his impact on Tesla’s profitability: “It’s a way to get humanity to Mars. So Tesla can assist in potentially achieving that.“ The board itself argued that Musk is a very valuable executive, one of the world’s great innovators, with Antonio Gracias, a board member from 2007 to 2021? saying that the compensation package was “a great deal for shareholders”. However, there was no evidence that Musk would have left had he not been paid so much. Indeed, having had this package struck down, Musk has not threatened to leave. On what basis did the board agree to what the judge called a “historically unprecedented compensation plan”? On X, Musk may claim he is worth it, but in a court of law, that logic simply couldn’t fly: the CEOs of Google, Microsoft, Meta, and other juggernauts, are not paid anywhere near that amount. Indeed, Warren Buffett of Berkshire Hathaway, and Meta’s Mark Zuckerberg, are both paid $100,000 a year. Musk, as a leading shareholder, already had enough incentive to make Tesla work. In fact, Musk is not even a full-time CEO, what with his work at X, SpaceX, NeuraLink, and all his other initiatives. Musk is really more of a venture capitalist than a CEO, and so, it could be argued that Tesla is probably fine or better off without him, with the plaintiff’s legal team persuasively arguing that it had a duty to offer a lower compensation package, or get another CEO if he returned. And, there is no way to argue that Musk is so much better than all his peers. In Judge Kathleen St J McCormick’s words,
“Swept up by the rhetoric of ‘all upside,’ or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?”.
The answer seemed to be, no. The whole saga reminds me of an old finance book whose catchy title sums up the whole saga of the $56 billion compensation package: “Where are the Customer’s Yachts?”. So much of the modern corporation is about the extraction of wealth by CEOs, from shareholders and customers, rather than any actual creation of wealth.