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Tesla directors agree to return $735M following claims they were overpaid (engadget.com)
235 points by thunderbong on July 18, 2023 | hide | past | favorite | 109 comments



"Tesla argued that stock options were used to ensure Director's incentives were aligned with investor goals."

I would think board members' actions should be aligned with investor goals as a requirement of holding the board positions. Outsized compensation shouldn't be necessary to make someone do their job reasonably well.


Outsized compensation is to acquire and retain talent, not to ensure jobs are done well.


Do you get what you pay for? Are the executives that get paid $50M/year bringing in >$40M/year more than one who only asks for $10M/year? On average?

This seems like a question that can be answered with data. My gut feeling is no, based on how bankers kept their golden parachutes intact during the Great Recession, but maybe I'm wrong.


> This seems like a question that can be answered with data.

Maybe I've worked at all the wrong companies but in my experience any comp that's based on "data" will be gamed until it's meaningless. There is no "data" because reading impact data is often like reading tea leaves.

Frankly, what I think is going unsaid here is that corporate executives make a disparately large amount compared to the people who do and plan the work. While executives can make a great difference, so can a great manager or a great engineer. I wish we'd see executives as just another role, taking on different tasks rather than something substantively more valuable when it's not, especially in large orgs.


I think most intelligent recognize that it's just a role. The comp really is just a power dynamic where having a bunch of money/power gives you a bunch of leverage to acquire more of it from anybody with less. Organizational, you don't want to hire somebody that could just be taking orders from someone else with more power to be your head.


On average, I don't know, but I certainly think in some instances, the answer is yes, e.g. if I was Apple's board, I would have been happy to overpay Steve Jobs and Tim Cook relative to an average CEO.


Considering Tim Cook's total compensation is about half what Pat Gelsinger's is as Intel CEO, perhaps increasing the compensation will not result in improved performance? I.e., if Cook really cared deeply about being more obscenely rich than he already is, he could have quit Apple and taken his pick of some other, higher-paying CEO position.

At some level of compensation, the only people motivated to pursue it are sociopaths. Are these the people you want running your company?


2014 CEO compensation vs shareholder return [1]

[1] http://si.wsj.net/public/resources/images/OG-AE821_ExecPa_NS...


That's not necessarily reliable data, sometimes a company that is in a losing position will bring in a well paid CEO to reduce the damage. -5% can be an excellent result if you were expecting -20% as the status quo.


That is just the first thing a search turned up, I personally find that chart not very informative, everything is bunched together at the bottom and obscured by the large circles. And as you point out there are many complicating factors that one should consider to get a robust answer. I can not see if there is any noteworthy correlation in the chart.

My point was just that you can probably tease out some idea about the relation between executive compensation and company performance from available data. Personally I would not even consider shareholder return to be a good metric to begin with, I think companies should be judged by something like customer satisfaction as this is what companies are for, satisfying the needs of customers, not making shareholders rich.


It probably can be answered with data, but explaining how executives get to this point is very much based on non-obective factors.

So, not much benefit even if we blow the lid open and show a much better way to make more money. That is important for a publicly traded company, but far from their only consideration.


Exceptionally talented? The CEOs brother is on the board


Exceptions to the rule doesn't mean it applies generally. At least if we're going to be using Tesla's shitty behaviour to critique businesses as a whole. If anything being honest about why things happen in practice is valuable if you're attempting to change them, even if the ball game often plays by different rules in the higher end / niche old boys club. If your goal is to simply punish those people it's often best to not make rules that apply generally but target that specifically.


What "talent" does Musk's brother have? They are all literally just sitting on the board in order to fulfill the legal requirement (the board should exist, that's all).


If they are so bad, or talentless as you say, shareholders can vote them out.


As large shareholders they

1. Have an incentive to see their company be managed well and

2. Are probably passionate about the company, its industry, and its mission

Isn't that sufficient motivation and incentive for retaining talent on the board?


I really did wish we'd stop using the word "passionate". The passions are a matter of affect and therefore variable and changing. No mature, responsible adult grounds his life or his actions in his passions. You don't run a multibillion dollar company on passion. This is exactly the opposite of what you should be doing. Follow your reason, not your passions. The worst thing a person can do is to be led by his passions, to have them direct his life.

It is better to say "dedicated to the company and its mission". Dedication is a matter of reasoned decision and consistent activity for the good of something. How you feel is irrelevant. If you wake up cranky one day, you still go do what you need to do. You don't wait until you "feel" like it.


When I was learning to read French, I discovered La Rochefoucauld, an epigrammatist and cynic.

>> Les passions sont les seuls orateurs qui persuadent toujours. Elles sont comme un art de la nature dont les règles sont infaillibles; et l'homme le plus simple qui a de la passion persuade mieux que le plus éloquent qui n'en a point.

>> The passions are the only advocates which always persuade. They are a natural art, the rules of which are infallible; and the simplest man with passion will be more persuasive than the most eloquent without.[0]

If we agree our age is dominated by marketing and propaganda, and if La Rochefoucauld was right that the passions never fail to persuade, I think we've found our age's totemic god: the passions.

[0] https://www.gutenberg.org/files/9105/9105-h/9105-h.htm


La Rochefoucauld was a genius... His "Maximes" are definitely worth reading.


>No mature, responsible adult grounds his life or his actions in his passions.

I somehow keep it together, as a sample size of one.

Don't see much point in playing word games. You can call it "obsession" or "investment" or simply "greed". The point is they have a strong intrinsic factor that keeps them around and makes them strongly opinionated on how to best make money.

>It is better to say "dedicated to the company and its mission".

that implies they won't take the next golden parachute 12 months out if they fail, as opposed to trying their best to keep the company they "are dedicated to" afloat. I think that gives too much credit. Wheras like you say, passion can quickly burn out.

And their feelings on the company is very relevant to how much of a damn they give. They can say "I quit" and never work a day in their lives again, they don't have any "dedication" to working. You can very much tell in many cases when leadership stopped caring about the company and are looking out the door.


Ok pretend I used the word "dedicated". Does it make what I said less valid?


They’re arguing it would become more valid.


You might enjoy The Passions and the Interests by Irving Hirschman, which gives a history of how the concept of "material interest" was introduced as a kind of intermediary state between reason and passion, partly to justify an emergent set of capitalist ideologies.


> As large shareholders they…

Apart from Elon, each has less than 0.05% of the shares of Tesla, they are far from large shareholders.

If the board was to meant to represent shareholders and not to rubber stamp their mates decisions as CEO it should be comprised of representatives of the large institutions that hold the majority of the shares.


As large shareholders they

1. Have an incentive to see their company enrich the shareholders, not be managed well

As directors they

1. Have an incentive to set their own pay as high as possible

Best decisions for companies and best decisions for shareholders, best decisions for individuals are not always aligned.


Relatively speaking, more compensation is more sufficient than less.


Once you get beyond a certain amount of wealth, some things are more important than money. I don't mean people become altruistic, just that they pursue more than a number.


My impression is that the opposite can be true as well: beyond a certain amount of wealth, no number can be high enough to not chase an even higher one. I believe that the low point of pursuing more is when there is enough money to make the immediate utility of a little more unnoticeable but not so much as to make your wealth the defining characteristic of your identity. Once that happens, no number will ever be high enough, they'll seek the higher number like competitive gamers seek higher scores, runners seek lower marathon times, skaters seek ability to do more tricks, collectors seek rare collectibles.


>beyond a certain amount of wealth, no number can be high enough to not chase an even higher one

perhaps, but I think the previous point is more poigninant. If you make a billion dollars, many would care less about making 1 billion more than maybe making $200 million more and a way to start influencing others. You don't buy a large website for tens of billions because you expect to turn that into hunderds of billions. You do that because you now have the eyes and ears of billions of people.

Money correlates with Fame, but by itself isn't fame. It's a tool to gather fame or power or simply leisure. Collecting money for money's sake probably isn't unheard of, but extremely unlikely.


Some things are always more important than money, at all levels of wealth. That’s not the point though. While you will find exceptions, the majority of people will accept more money when offered it for the same or similar role. This is especially true when talking about folks at the level of “Tesla board members”. These kinds of folks don’t have to choose between money and power/fame/connections so much as balancing them.


How does that work? It’s a tautology. If you size the compensation to be outsized, that’s literally sized as you have decided it should be.


For comparison, bob igor gets paid 125k in cash and 250k in equity to serve on apples board. Or Joseph Jimenez, the former ceo of Novartis, gets paid 300k to serve on GMs board.

It’s unusual for board members to get paid over 1m. The average is less than 100k.


not bad for doing few meetings a year


Yeah, no kidding. I have a hard time believing that the way corporate board seats are filled has anything to do with maximizing the performance of a company. It seems like it’s just an entrenched, unspoken agreement among the executive class to keep their pockets filled with walking around money—or private-jetting money in their case.


I'm sure there's a bit of that but I think for most companies it's a way to get the foot in the door at another company.

If you think company B could use your services then company A can ask their board member who just happens to also be on company B to push for it.


The right meeting decisions in a few cases can make or break. The hard part is determining which those are, and validating it years later.


I believe a wrong decision can break, but the right decision rarely "make". A simply "adequate" decision followed by brilliant execution is what really "makes". In that sense, they should be compensating the people who execute the decisions more, not the ones who call the shot.

I also believe that a lot of the "importance" of a board member comes from their social network. "Let me call the CEO of AWS and figure out what we can do"- kind of thing.


Opposed to engineers who usually face consequences on bad decisions, these rich people rarely have any meaningful accountability. So tossing a coin is fine.


And these days, probably from the extra-large kitchen with an ocean view, on Zoom.


Seems silly, if their equity goes up in value should they have to return everything over 1m?

It's not their fault that people bought the stock and made them rich.


They're returning the equivalent of 3 million stock options. They gave themselves 11 million stock options between 2017-2020, which means they're still getting around $2 billion for being on the board. They're not returning everything over $1 million at all.

https://www.reuters.com/legal/tesla-directors-settle-lawsuit...

Do you have an opinion on whether the work they've done is worth $2 billion?


>Do you have an opinion on whether the work they've done is worth $2 billion?

Their market cap went up by 1 trillion.

Again, they were just compensated in equity. It's easy to look back and criticize them as overcompensated but at the time they were just receiving equity worth a fraction of what it is today.


At the time they were getting close to 10-20x more than an typical board member of an S&P 500 company. The lawsuit was brought up before the stock took off.


Detractors seem to have short memories.

They were cash strapped and almost bankrupt, the most shorted company of all time and they paid out in equity. They were able to flip it around and become of the all time great success stories, I'd say their directors probably earned their compensation.


Board members are generally large shareholders in the company and have fiduciary responsibility in their role. They shouldn’t need to be compensated on top of the stake they already have in the success of the company.

It makes Teslas defense that it used the stock options to ensure the incentives of directors were aligned with the goals of investors. [1] kind of ridiculous. That’s literally their job and their fiduciary responsibility as a board member.

I do have to note that a “fiduciary” has a distinct meaning here.

1. https://www.reuters.com/legal/tesla-directors-settle-lawsuit...


Seems at least in spirit related to https://www.youtube.com/watch?v=Ko8C3surjhM.

Also note for those skimming this is the board of directors. Not "directors" in the company. If that makes any sense.


> Also note for those skimming this is the board of directors. Not "directors" in the company. If that makes any sense.

Board of directors not people in middle management at the company with the title of director.


Yes, 'director' is job title in engineering management. Generally Ranks above 'manager' and below vice-president


"Director", the job title is used in EM, but there are directors in all areas of the company. It's the position between Senior Manager and a VP role


>The $735 million settlement will be paid back to Tesla in what's called a "derivative lawsuit" — the largest ever awarded by Delaware's Court of Chancerty, according to Reuters.

Musk is really making a good impression there, lol.


Love that name - Court of Chancerty - second time they did this - did they not enforce the Twitter buy offer against Elon ???.


https://en.wikipedia.org/wiki/Court_of_Chancery

Derived from the word Chancellor.


>did they not enforce the Twitter buy offer against Elon

They did, I wouldn't be surprised if it was the same judge, lol.

The lesson here is that DE's Court of Chancery doesn't fool around.


As an investor, I am happy about this outcome. It’s more money in the company and less money for its employees — always a good thing.


Well I suppose he can pay out the arbitration a bit easier now...


How is Tesla stock worth nearly $1B back again, after dropping under 300B recently? The market is bonkers. And any sense of how valuations work are just made up at this point.


Stock price is a function of investor optimism. Tesla is crushing it and there is nothing stopping them from growing. Thus the stock price is high.


Having the standard charging network in North America could eventually be worth more than making cars.


Or the robot or autonomous driving. Both are possible and all the more so with the vast amounts of cash they have available.


They're the only people who a) are making a lot of EVs, b) are making a profit making EVs, c) are experts in car software, d) are anywhere near self driving for cars you can buy, e) have great charging, f) basically now own the North American charging network, g) also have a supercomputer side business, h) also have a solar side business, h) also make batteries, and battery storage, i) have their own insurance system, j) have a virtual power plant to balance the grid, k) are making cheap humanoid robots which can use their self driving vision tech.


can't edit: obvious $1T*

Another note on valuation. Even Musk said many times, it's absurd. But the valuation in his view, and some analysts, is on Tesla as a autonomous Uber-taxi network. If you take a car that is parked, etc, and offer mobility services, that revenue is apparently enough to make it worth $1T. We won't just get rid of millions of cars we have on the road today. So, that if anything will take 20 or 30 years to become a reality if anything.

And it's hope that it will create robots, etc...even though there is no evidence that it has any capability in the robotic space.

So, this boils down to a continuation of crazy market froth that we have seen for several years, and excess liquidity in capital markets. I guess valuations will come down when recession fears come back into the frame which is the reality. But really crazy amount of money that people have put into the market over the last decade. All that has made it into a huge casino supported by the Fed, to mostly make the rich richer, where assets can add or remove $700B value in swings in 6 months.


The market is in extreme greed, and while there is still some room for upside we know what usually happens eventually...

https://edition.cnn.com/markets/fear-and-greed


Many people think Tesla will do better than most other car manufacturers.


Yeah that's why they are valued as a car company?


They also have the charging network and the energy storage businesses, but I would assume it’s mostly about their cars yes.

The AI supercomputer or the sexdoll/humanoid robot are probably not what people are thinking about when they invest in TSLA. Same for their solar panels.


They are valued at a growth company because they are growing.


The market is reality. Everything else is just opinion.


The market is a reflection of opinion. Everything else is what you are told is someones opinion.


you mean nearly $1T


For meme stocks like Tesla boomer valuation metrics don’t work. You just buy and hold.


Rampant speculation.

Bitcoin is doing really well too.


> It was brought by shareholder Richard Tornette, who claimed that "the largest compensation grant in human history" was given to Musk, even though he didn't focus entirely on Tesla

Not understanding how this something related to law? Either he was given the grant legally, or he wasn't. What does it matter how it compares to other people or what percentage of his focus was on Tesla?


The board of directors has a legal responsibility to govern in the interest of the shareholders.

The argument is that the board giving $750mm of shareholder money to themselves is not in the interest of the shareholders for somewhat obvious reasons.


They didn't give directors $750mm of shareholder money. They gave about a tenth of that in stock and appreciation did the rest.


Issuing stock still costs existing shareholders money in terms of diluted ownership stake


Further, if the stock is stagnant or declining, this would be taking money from investors via stock dilution. If Jim puts $10 into the company for 10 of 100 total shares, and you increase the shares to 200 by handing out money to executives - Jim now owns $5 (10 of 200 shares) with his other $5 being used to "print" the shares.

This is not currently the case with Tesla, but the stock has a reputation for being volatile.


It’s taking money from investors no matter what the price does.

If the price is going up the existing investors now own a smaller percentage of a more valuable company.

It’s just more obvious if you get diluted while the company doesn’t change value.


If $735m is not paid to directors, for any reason, however it was generated, however it was calculated, whether options, cash, stock or anything else, no matter what - it belongs to shareholders.

It is a transfer of $735m from shareholders to directors that is being reversed and sent back to shareholders, where else could it possibly go? (Well lawyers, but that's another discussion.) Note I'm saying nothing about whether this is good or bad or anything else.


This is in reference to a different suit. It’s for Elons comp package not the boards comp.

Even in regards to the boards comp they were stock options not stock so the compensation is based on the option strike price not just appreciation.


But didn't they agree to do it if Tesla's stock got to some amount? Shouldn't they have written a limit in if they didn't want to exceed a certain amount of compensation?


No. That's Musk's personal pay package as CEO. This was just stock options that the board gave themselves for their services


> The argument is that the board giving $750mm of shareholder money to themselves is not in the interest of the shareholders for somewhat obvious reasons.

I hate business media.

FWIW, that number is really badly spun. The grants date back to 2017, when Tesla's market value was 30x lower. So at the time, the grants were more like $20-30M, hardly the kind of hyperbole-inducing sort of thing. They only look huge now because Tesla has been so successful.

And thus, more to the point: arguing that you, as a TSLA shareholder, were harmed by the behavior of corporate governance during a period where you made back a three thousand percent return on your investment is... kinda batshit, honestly.

Now that said, I don't know anything about the history of shareholder lawsuits or how likely this was to have been successful. It seems like the board capitulated, at least in part. So... no harm no foul, I guess.


They paid themselves ~$90M (priced at the time of grants) in a period of 3 years, When lawsuit was filed stock was just 3x-4x from the grant times. Seems to me you are spinning that number in the opposite direction for some reason.

Here is complaint: https://cdn.arstechnica.net/wp-content/uploads/2023/07/tesla...


FWIW, there was absolutely no attempt at spin on my part. If that $90M number was extractable from the article, I would have cited that. Clearly you agree that the $735M number that appears in the headline is incorrectly spun, right?


I do not agree. Today Directors returned this much money, and headline correctly reflects this. If headline said something like “directors were paid $735M back in 2020” then it would be a spin.


They "returned" $735M, but they never "took" $735M, did they? Seems like you're digging in on the spin. Surely you agree that the distinction is relevant to the headline, right?


It says exactly how many options were issued. Pretty easy to multiply that number times the stock price at the time the deal was made.


Being on the board of directors isn't really a job. You have power, but it's extremely part-time. People serve on many boards, usually while also having real full-time jobs. While they typically get compensated, it's usually in the area of 80k a year or so. Often, they also happen to be large shareholders, but that's because they purchased it, not had it gifted because they were on the board.

If you're saying $20-30 million is not hyperbole-inducing, I suspect you're thinking more of CEO pay, but CEO is an actual full-time job.


>more to the point: arguing that you, as a TSLA shareholder, were harmed by the behavior of corporate governance during a period where you made back a three thousand percent return on your investment is... kinda batshit, honestly.

If it turned out that they'd embezzled a hundred million would you say it's fine because the company still did well?


No, because "embezzlement" is a crime all by itself. It's a kind of theft, and requires deceit. There was no deceit here -- all the evidence was in public the whole time.

Fundamentally all they did here was pay themselves. Were they paying themselves too much? Well, yes, in hindsight (at least according to conventional notions of board propriety). But in the context of returns like that? I think the bar for proof of "harm" against the shareholders would be seemingly very high.


It’s not a tort it’s a breach of fiduciary duty.

The argument of harm would come into play if there was no disagreement that the money belonged to the directors, and the directors had harmed the plaintiffs in a quantifiable amount. Then that harm would justify transfer of assets from directors to plaintiff.

But that’s not the argument here. The argument is that the funds did not belong to the directors in the first olace and they are being returned to their actual owner.

This is based on the theory that all the money involved was the property of shareholders, and any amount of it that ended up in directors pockets has to be explained and justified.

There’s no argument of “harm” being made it’s an argument of misappropriation of what isn’t theirs, and specifically that despite having a very clear legal obligation to act only in the interest of shareholders and not themselves the directors did not meet that obligation.


It says the grants were from 2017 to 2020. 2020 included most of the stock price growth. They filed the case in 2020, so that may have been when the compensation started to be out of line.

They returned $735 million, but "agreed not to receive compensation for 2021, 2022 and 2023, and change the way compensation is calculated", so presumably the total amount saved is far higher.


But if the payout was in stock, how were the other stockholders hurt because of this? Are they saying the number of shares give to the board members could have been made available to the public for purchase which hurt the stockholders that could not buy them?


The claim has nothing to do with making the shares available to the public for purchase, by the shareholders or otherwise. Issuing stock is dilutes existing stockholders. An example with much simpler numbers to make things obvious.

I have company X, which you think is worth $15. Company X has 10 shares of stock. I happily sell you one for $1. You are excited because you have decided it is worth $1.50 ($15/10). I am happy because I have a dollar. Tomorrow, I issue myself 10 new shares of stock. I am still excited, more for me. You are sad because now your one share is worth only $0.75 ($15/20).


That should not be possible.


It’s related to law because shareholders are sueing Musk and it’s up to the courts to decide if it was granted legally or not.


the question is not if the grant was legal, but if the board issuing options to themselves in this quantity is in the fiducary interest of the shareholders.


That quote is about a second lawsuit that is still being litigated. The bulk of the story is about the first lawsuit pertaining to payments to the Tesla directors.


If the board misbehaves and awards itself an unfairly large pay packet, then the shareholders can react by firing the board via a shareholder vote.

Why didn't that happen here?

I don't really see what role a court has in deciding if the board is 'fair' in its pay decisions, as long as all legal processes were followed and the board didn't do anything in secret.


Maybe because the shares are controlled by the majority shareholder and the other shareholders want some protection against that shareholder? This is why we have an SEC.


The majority shareholder has a larger chunk of the shares than he has control of the board.

A big board pay packet he has every reason to reject if it was unreasonable.


Not if he's colluding with the board to get a gigantic pay package for himself (a separate lawsuit is fighting his $56 billion pay package, calling it "the largest compensation grant in human history").


[flagged]


Musk's pay package was tied to TSLA stock hitting certain price targets -- if it failed to do so, he wouldn't be paid at all. Here's what the NY Times wrote back in 2018 [1]:

> Tesla is worth only about $59 billion today. If Mr. Musk were somehow to increase the value of Tesla to $650 billion — a figure many experts would contend is laughably impossible and would make Tesla one of the five largest companies in the United States, based on current valuations — his stock award could be worth as much as $55 billion.

Well, he managed to do the "laughably impossible" -- Tesla is worth over $900 billion today. Shareholders should be thrilled.

[1] https://www.nytimes.com/2018/01/23/business/dealbook/tesla-e...


It was based on stock value, deliveries AND profit. So it was like can you make it into a large company by valuation that is profitable?


[flagged]


What’s the crime? This is a really low brow drive by comment from an anonymous user.


It’s noted a few sentences in that there is a separate lawsuit regarding the $56B…


These are 2 different lawsuits.


What I don't understand is what the wahalla is really about, seems to be one of two: :the board granted themselves an unusually high amount of stock when it was granted :the company did performed too well in the interim bringing the value of their comp too high

seems odd to me as options are granted to 'upper management' as a performance incentive, so the lawsuit brought forth seems to base level br about the company doing too well , that is to say if it is not about the first reason all along


Technically the board is not the management. They have a very indirect effect on stock performance. More importantly, TSLA remained flat (moving around $17) between 2017 and 2020 when this huge payouts were granted:

The Defendants saved their most audacious behavior for 2018. That year, excepting two directors who joined the Board in December 2018, the nonemployee directors received compensation worth an average grant date value of $8,706,126.

Average board member comp is in $100K range.

[1] https://cdn.arstechnica.net/wp-content/uploads/2023/07/tesla...




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