IB2C40 Assignment
On January 30th 2024, the Financial Times reported that:
“Elon Musk’s $55bn pay package from Tesla has been voided by a Delaware judge, who
ruled that the unprecedented remuneration was improperly approved by the electric-car
maker’s board of directors and had short-changed the company’s shareholders.”
(https://on.ft.com/3vY1Lqh)
*Short-changed the company’s shareholders=shareholders did not receive fair value or were
disadvantaged by the approval of this substantial pay package.
Critically examine this ruling, in view of the relevant literature on CEO pay. As part of
your answer, please discuss whether there is a problem of excessive pay for CEOs of
large corporations in countries like the US and the UK.
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, IB2C40 Assignment
Chief executive officer (CEO) pay or compensation refers to the total amount the CEO of a company
earns in exchange for doing their job (Donhue, 2023). Composed of many elements: salary, annual
bonus, pay-outs, restricted options, and stock grants (Frydman & Jenter, 2010), the magnitude of CEO
pay remains a contentious topic across a spectrum of scholarly disciplines. The ruling on Elon Musk's
$55 billion pay package from the Delaware judge (Hammond & Indap, 2024) is just one case among
many, unveiling the importance of evaluating CEO compensation and the governance within
committee boards permitting it. Focusing on the United Kingdom (UK) and the United States (US),
while the different regulatory climates between the two allow CEOs in the US to extract higher pay
(Deering, 2024), the theoretical discourse underpinning CEO compensation is consistent between the
two states. This paper aims to contribute to the existing discourse and, through critical engagement
with the case, will outline why 'excessive' CEO pay is problematic. Initially dissecting the Tesla case
and examining the reason for the pay package's ruling, the first objection towards excessive CEO pay
will reveal present dysfunctional corporate governance systems (Bivens & Kandra, 2023) within large
corporations permitting excessive compensation, disclosing the exploitative nature of CEOs within
the process. Following this, the essay will then evaluate CEO compensation as a mechanism to
alleviate the principal-agent problem (Frydman & Jenter, 2010), disproving pay as an incentive
(Locke, 1980) to align interests between parties. Expanding on the incentive discussion, a thorough
assessment of the dynamics between CEO compensation and talent retainment will uncover the
significant shortcomings of claims correlating excessive pay with intellectual and skilful contributions
from CEOs. Concluding with the perspective of employees, the essay will then expose the adverse
effect of excessive CEO pay cascading down (Wade et al., 2006) large corporations, exacerbating
inequality (Bivens & Kandra, 2023)
A critical starting point in attempts to challenge the use of excessive CEO pay as a reward for
executives would be to dissect the Tesla pay package case in more detail, deducing the rationale
behind the Delaware judges' ruling. Noted as the largest pay package in corporate America,
statistically 250 times larger than median peer compensation (Birnbach et al., 2024), the main
objections to Musk's pay package can be highly attributed to opacities between shareholders and
governance within the board (Bhuiyan, 2024). This marks the first objection against excessive CEO
pay: compensation is often more reflective of affiliative relations between CEOs and compensation
committee members (Deering, 2024), allowing the bypassing of regulatory protocol. Declared as a
product of 'sham negotiation' (Bhuiyan, 2024), the Tesla pay package case encapsulates this issue,
McCormick specifically disclosing Musk's connections with compensation committee chairman Ira
Ehrenpreis and fellow committee member Antonio Gracias (Restuccia, 2024). This case is a clear
example of defiance to the arm's length principle, a paramount principle advocating for agreements on
transactions between parties to be conducted independently (Natt et al., 2010) without self-interest,
intending to promote fair and equitable outcomes (Kindness, 2023). Neglecting this principle can
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