Only a week after Elon Musk’s $55 billion Tesla payday was struck down by a Delaware decide, a New York court docket dismissed a challenge to Apple CEO Tim Prepare dinner’s compensation package deal, which clocked in at below $100 million. Some coincidence.
At face worth, the 2 instances appear to have so much in frequent. Each have been shareholder fits waged in opposition to a few of the highest-paid famous person tech CEOs on the earth. And each have been filed amid a backdrop of increased public scrutiny over executive compensation in recent times, which is close to all-time highs across S&P 500 companies.
However for all their similarities, from a authorized standpoint the 2 instances are apples and oranges—and Prepare dinner was all the time going to face a greater probability of holding onto his paycheck.
Elon Musk’s Tesla $55 billion compensation package made headlines final month after Delaware chancellor Kathaleen McCormick dominated in favor of a shareholder who argued that Tesla was paying its CEO an unfairly excessive quantity with the moonshot grant. Plaintiff Richard Tornetta argued that as a result of Musk wields a lot energy at Tesla and maintains shut relationships together with his board members, the supposedly impartial board of administrators vote approving his massive pay scheme was something however.
“Chancellor McCormick found that the process for setting Elon Musk’s pay was essentially controlled by Elon Musk,” stated Tulane College legislation professor Ann M. Lipton in an interview with Fortune. “The board didn’t engage in any kind of pushback or real bargaining.”
In response, Musk has threatened to relocate Tesla from Delaware (the place almost 70% of Fortune 500 firms are included) to Texas, the place a extra favorable political local weather may go away him much less uncovered to these kinds of challenges.
Whereas the Musk case was targeted on a broad, extra summary authorized query associated to the Tesla board of administrators’ diploma of independence, the Prepare dinner case resolved yesterday was a lot less complicated.
“The question before Delaware [in the Musk case] was simply, ‘Was the pay substantively unfair?’ whereas the question in the Tim Cook case was solely, ‘Was the proxy statement misleading?’” stated Lipton.
The Teamsters’ pension fund sued Apple last year, arguing that the corporate had misled buyers by misrepresenting Prepare dinner’s 2021 and 2022 pay in its proxy statements and paying him greater than it had initially proposed.
As a result of Prepare dinner and different Apple executives are primarily paid in fairness generally known as RSUs, the corporate enlists monetary fashions to estimate what Prepare dinner’s precise pay will probably be for shareholders’ approval annually.
(For CEOs, being compensated primarily with inventory isn’t unusual. Mark Zuckerberg famously earns simply $1 in annual salary, however he’s made billions by way of Meta inventory grants included in his compensation package deal. The Financial Coverage Institute present in a report final 12 months that stock-related pay accounts for over 80% of CEO compensation.)
The pension fund that sued Prepare dinner argued that Apple misrepresented its CEO’s precise compensation package deal by downplaying the worth of his fairness. Prepare dinner and different Apple executives netted over $90 million in compensation for 2021 and 2022, increased than the $77.5 million estimate the corporate initially requested shareholders to vote on for approval.
(Each of these figures are effectively beneath Prepare dinner’s present annual compensation; at his personal request, the Apple CEO took a 40% pay cut final 12 months. That change was authorized by shareholders and the Apple board’s compensation committee, which counts former Vice President Al Gore as one in all its members.)
The plaintiffs claimed that Apple used an uncommon monetary mannequin to artificially deflate Prepare dinner’s pay estimate, and in addition buried the compensation tables in a colorless, grey part of the proxy assertion, the place shareholders can be much less more likely to discover it earlier than casting their Say-on-Pay votes. The court docket didn’t purchase it.
“What happened with Tim Cook is very common in public companies,” stated Marc Hodak, accomplice at govt compensation consultancy Farient Advisors. “They award performance shares based on the face value of the stock. And each of those performance share units has a market value that’s higher than the face value stock at the time of grant.”
One key distinction between the 2 instances was the dimensions of the contested pay package deal. Musk’s $55 billion award from Tesla was a part of the largest compensation plan in corporate history. Whereas Prepare dinner’s $100 million annual pay is not at all a small sum, it’s on par together with his friends. The truth is, Apple makes use of a bunch of its rivals, together with Meta, Netflix, Visa and Cisco, to benchmark its executives’ compensation. (Notably, it added Tesla to that peer group final 12 months.)
“I don’t have any question that the size and scale of [Musk’s] pay package was a driver, both in terms of the litigation and the decision that we saw,” stated Hodak. “[$55 billion] is automatically going to attract an unusual amount of scrutiny.”
Taken collectively, these two instances do appear to trace at a broader pattern in direction of better scrutiny of bloated CEO pay—however Lipton suggested in opposition to studying the tea leaves prematurely.
“Elon Musk is beating this drum that everyone should leave Delaware, to suggest that somehow, this is a trend,” stated Lipton. “I think this is an Elon Musk problem. That Tim Cook thing, it was a different law. It was a different argument.”
Representatives from Apple didn’t instantly reply to a request for remark.
