Chief executive compensation has long been out of whack with the average worker. According to the Economic Policy Institute, US chief executive pay has increased 1,209% since 1978 compared with a 15.3% rise in typical worker’s pay.

Put another way, in 2022 CEOs were paid 344 times as much as the average worker, up from 21 times in 1965.

Elon Musk has taken the inequality debate to an entirely new level, after shareholders recently (13 June) approved his $56 billion pay package.

Even in the rarefied air of CEO compensation, Musk’s award is 35 times higher than Broadcom’s (AVGO:NASDAQ) boss Hock Tan, who topped an Associated Press survey of pay in 2022 with a package worth $162 million.

A Delaware judge initially threw out Musk’s pay award on governance issues, arguing there were insufficient independent directors and shareholders were not properly informed. Shareholders have now had their say.

Musk was given 10 years of performance targets to achieve with a maximum of 303 million shares up for grabs, equivalent to around 12% of Tesla’s (TSLA:NASDAQ) stock in 2018, when its market capitalisation was $65 billion.

There are 12 separate tranches each worth 1% of the company, and Musk needed to hit 28 targets to get the maximum payout. Twelve are tied to market capitalisation measured in $50 million increments up to $650 billion, eight are tied to earnings and eight to revenue.

In effect Musk was betting Tesla’s stock would rise by 983% and be profitable over the following 10 years.

Tesla’s market capitalisation reached $650 billion in 2020 and all eight earnings milestones have been hit together with all but one revenue goal. Each option has a strike price of $23 per share (adjusted for share splits) compared with the current price of around $185 per share.

One weakness in the way the award is calculated is it doesn’t have a claw-back mechanism if the share price subsequently falls or profitability collapses. For example, at the current price of $185 the award would be worth around $49 billion (185-23 x 303)

In other words, Musk is getting all the upside without taking on any downside risk. By contrast, in the world of fund management performance fees are structured with so-called high-water marks. 

This means during a period of poor performance a manager cannot earn further performance fees until the prior highest net asset value has been surpassed.

From an investor standpoint, however, it may seem perfectly reasonable to pay Musk just over 9% of the incremental shareholder value he was arguably instrumental in creating. 

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