Executive pay: the virus Elon Musk is exporting back to SA

The impact of Elon Musk’s staggering generous pay package will be felt far beyond corporate America. Graphic: Lisa Nelson

“Unique” is a dangerous word to bandy about, it risks being devalued to a level of pointlessness but, in the case of Elon Musk it might just be appropriate. “Being the only one of its kind; unlike anything else” comes very close to describing the South African-born entrepreneur. It also comes close to describing the staggeringly generous remuneration package at the centre of a long-running legal battle currently playing out in the US, home to Musk’s Tesla Corporation.

In brief, the battle is over the validity of a pay package awarded to Musk in 2018 in terms of which he would receive 6% of the company if he achieved certain profit and share price targets between 2018 and 2022. That would take his holding up from 22% (in 2018) to 28%, which Musk said was necessary to ensure he felt committed to Tesla. One analyst suggested that without a 25% stake Musk was a flight-risk for Tesla shareholders. Nevertheless the 25%-plus holding turned out to be not so important to Musk, as he sold a huge chunk of his shares in early 2022 to finance his purchase of Twitter and now owns just 13%.

Back in 2018, when Tesla was valued at $50-billion, the targets were regarded as exceptionally ambitious. Musk made light work of them. He reached the $650-billion company valuation (market capitalisation) target by 2020 and by late 2021 passed the $1-trillion mark. Unfortunately for Tesla shareholders that turned out to be the peak and in the last 18 months the market value of Tesla has dropped back to $560-billion.

In 2018 the 6% stake was valued at $3-billion; in 2022, when the company was worth over $1-trillion the stake was valued at $56-billion. It is currently worth around $45-billion.

In January a US court declared the proposed package invalid not because it was uniquely generous but because Tesla had not been “entirely fair” to its shareholders when asking them to approve the payment back in 2018. It had not disclosed that Musk had proposed the plan and had controlled the board’s consideration of it. Further, there had been no disclosure of the lack of independence of the board’s remuneration committee.

The court’s 200-page judgment includes riveting details about the operation of the board and its complete lack of independence from Musk.

The recent re-vote, which saw 72% (coincidentally the same number as in 2018) of now-well-informed shareholders backing the remuneration package, has no legal standing but is expected to influence the court when it hears Tesla’s appeal against the January invalidity ruling.

Virus

The impact of Musk’s remuneration award will be felt far beyond corporate America. Executive remuneration has viral-type characteristics with a devastating global reach that ensures that any US developments invariably pop up in South Africa, usually after passing through the UK. To date, continental Europe, China and Japan appear to enjoy some protection against the full impact of the virus.

Musk’s pay will be used as an additional prop to support the contention that CEOs are rare and precious and that their position at the top rung of the ladder is the work of a finely tuned market where supply meets demand at an excessive level of remuneration.

Musk’s proposed award will be used to provide cover for outrageous payments to mediocre executive talent across the globe with the glib gibe, “ah, but it’s not a fraction of what Musk got!”

The carriers of the remuneration virus are the remuneration consultants and remuneration committee members who constitute the global remuneration industry. The industry has served its paymasters exceedingly in recent decades. In the US (which has considerably more useful data on the subject than SA) CEO pay grew by 1,322% between 1978 and 2020, far outstripping growth in the share market or productivity advances. Over the same period, average worker pay grew by just 18%. The ratio of CEO-to-typical worker compensation has increased to 350-to-1 in 2020 from 21-to-1 in 1965 and 61-to-1 in 1989.

The trajectory has not been as steep in South Africa, but evidence dating back to 2002, when executives of companies listed on the JSE first had to disclose their remuneration, indicates that local executives are taking a significantly growing share of the economic pie. This is particularly worrying when you consider the almost imperceptible growth of that pie over the past several years.

Justifying these levels of reward on the grounds that CEO selection is the outcome of a scientific and unquestionable interplay of supply and demand in some imaginary market doesn’t stand up to much scrutiny.

In what other market do consumers (in this case companies) willingly accept the terms dictated by the supplier (executive talent) over the short- medium- and long-term without taking any action to reduce the impact? How is it possible that despite the proliferation of management courses across the globe there is still, apparently, a severe shortage of executive talent? It’s also puzzling that there is so little ‘supply chain management’ of this particular raw material.

Could it be that the ‘market’ for executive talent is manipulated by the insiders who control (or are part of) the supply? After all, it is CEOs who ultimately decide who is appointed to their boards, and it is those directors who decide on the package the executives receive. That decision is not the outcome of vigorous negotiations, as you’d expect in wage discussions with trade unions or in discussions with any major raw material supplier. No, it is made behind closed doors, no doubt in cosy, collegial circumstances in which all the parties are looking for the best outcome for the executive; one that can be justified by reference to some or other ‘benchmark’ so that the institutional fund managers will give it their blessing.

Of course, benchmarks in this contrived market are nothing more than a self-reinforcing mechanism that guarantees an ever-upward ratcheting level of remuneration.

Eye-watering

Remuneration decisions constitute a stellar example of self-dealing that is far too reliant on managerial power. And for reasons that have much to do with their own compromised position on executive pay, institutional shareholders appear completely toothless in holding to account the boards or executives of the companies they invest in when it comes to manifestly unjustifiable pay rewards.

South Africa can certainly boast some outstanding executive talent, but eye-watering levels of remuneration are being awarded to CEOs across the board. In the absence of accountability, executive remuneration at listed companies has truly become an all-you-can-eat buffet.

Now, 20-plus years since executive pay disclosure was mandated, it would be a good time to review how much value South African shareholders have received for the outstanding remuneration packages they have funded. The presumption that paying top dollar for your top executives guarantees top performance would be severely challenged by such a review.

The recent history of the JSE is littered with stories of exceptionally well-paid executives who wreaked untold damage on their companies but walked away multi-millionaires.

In the US there is talk of an increased tax rate for companies that make overly generous pay awards, but given the strength of the corporate lobby both there and in SA it’s hard to imagine such a proposal succeeding.

One potential fix would be for the trade union movement to use its considerable muscle as shareholders to challenge management’s self-dealing. Two or three labour-backed directors on listed boards, and members of the remuneration committee, might generate enough push-back to slow the spread of the executive pay virus.

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