Court Battles for Musk, Cook Highlight New Expectations for Executive Pay

It was a tale of two verdicts recently for a pair of corporate heavyweights and their compensation.

On January 30, a Delaware court put the kibosh on a $56 billion pay package for Elon Musk, the mercurial automotive innovator. Judge Kathaleen McCormick ruled that the purportedly independent directors on Tesla Inc.’s board in charge of setting the chief executive’s compensation were anything but. Evidence cited in the decision included the chair, Robyn Denholm, calling the nearly $300 million she received in stock awards from the electric-vehicle manufacturer “life-changing.” Ever the self-promoter, it probably didn’t help Musk’s case when he described the process of establishing his compensation as “me negotiating against myself,” either.

Apple’s Tim Cook received a more favorable decision a week later when a federal judge tossed a lawsuit claiming the tech company miscalculated performance-based awards for its CEO and other executives. The lawsuit from a pension fund tied to the International Brotherhood of Teamsters charged Apple with overshooting its intended awards for the executives by mispricing the fair value of restricted stock units that were paid out to the C-suite. U.S. District Judge Jennifer Rochon disagreed in her decision, maintaining Apple laid out its compensation tables in its 2023 proxy statement in accordance with securities laws.

The mixed bag of legal decisions comes at a time when corporations are gearing up for more rigorous scrutiny of executive compensation. Last year, shareholders overall showed a more palpable sense of skepticism during proxy season about corporate management. Notably, 131 companies saw shareholders vote down their say-on-pay proposals, representing a five-year low for support. Netflix stock owners in 2023 shot down the entertainment streaming service’s executive compensation packages by a whopping margin of three to one, for instance. Although the vote was non-binding, Netflix got the message, promising “substantial” reforms to its compensation system in 2024.

But even if investors were in a more understanding mood, public companies would still be dealing with requirements for more transparency around executive pay. The Securities and Exchange Commission in 2022 adopted enhanced reporting requirements for companies regarding their executive compensation systems, including how they award stock options. In fact, most issuers began complying with the new disclosure rules last year.

However, in an analysis of 2023 compensation disclosures, lawyers from Cleary Gottlieb Steen & Hamilton LLP poured cold water on the idea that the new compensation disclosures would be a bonanza for the financial-statement users. They found most reporting represented “exercises in disclosing the bare minimum necessary to comply.” For example, more than 90% of companies published graphs or charts to illustrate the relationship between what they actually paid executives and performance metrics such as total shareholder returns and net income.

Looking ahead, it bears mentioning that Apple’s disclosures solidified its case in support of Cook’s pay. Unfortunately for Musk, complying with the new compensation disclosure rules probably won’t help companies like Tesla earn a pass for stacking their boards with CEO sycophants. He’ll have to take that up with the judge.