Only a week after Elon Musk’s $55 billion Tesla payday was struck down by a Delaware choose, a New York courtroom dismissed a problem to Apple CEO Tim Prepare dinner’s compensation package deal, which clocked in at underneath $100 million. Some coincidence.
At face worth, the 2 circumstances appear to have so much in widespread. Each had been shareholder fits waged in opposition to a number of the highest-paid famous person tech CEOs on this planet. And each had been filed amid a backdrop of elevated public scrutiny over government compensation in recent times, which is close to all-time highs throughout S&P 500 corporations.
However for all their similarities, from a authorized standpoint the 2 circumstances are apples and oranges—and Prepare dinner was all the time going to face a greater likelihood of holding on to his paycheck.
Elon Musk’s $55 billion compensation package deal at Tesla made headlines final month after Delaware chancellor Kathaleen McCormick dominated in favor of a shareholder who argued that Tesla was paying its CEO an unfairly excessive quantity with the moonshot grant. Plaintiff Richard Tornetta argued that as a result of Musk wields a lot energy at Tesla and maintains shut relationships along with his board members, the supposedly unbiased board of administrators’ vote approving his large pay scheme was something however.
“Chancellor McCormick discovered that the method for setting Elon Musk’s pay was basically managed by Elon Musk,” mentioned Tulane College legislation professor Ann M. Lipton in an interview with Fortune. “The board didn’t have interaction in any sort of pushback or actual bargaining.”
In response, Musk has threatened to relocate Tesla from Delaware (the place virtually 70% of Fortune 500 corporations are integrated) to Texas, the place a extra favorable political local weather might go away him much less uncovered to a lot of these challenges.
Whereas the Musk case was centered on a broad, extra summary authorized query associated to the Tesla board of administrators’ diploma of independence, the Prepare dinner case resolved yesterday was a lot easier.
“The query earlier than Delaware [in the Musk case] was merely, ‘Was the pay substantively unfair?’ whereas the query within the Tim Prepare dinner case was solely, ‘Was the proxy assertion deceptive?’” mentioned Lipton.
The Teamsters’ pension fund sued Apple final yr, arguing that the corporate had misled traders by misrepresenting Prepare dinner’s 2021 and 2022 pay in its proxy statements and paying him greater than it had initially proposed.
As a result of Prepare dinner and different Apple executives are primarily paid in fairness referred to as RSUs, the corporate enlists monetary fashions to estimate what Prepare dinner’s precise pay might be for shareholders’ approval annually.
(For CEOs, being compensated primarily with inventory isn’t unusual. Mark Zuckerberg famously earns simply $1 in annual wage, however he’s made billions by way of Meta inventory grants included in his compensation package deal. The Financial Coverage Institute present in a report final yr that stock-related pay accounts for over 80% of CEO compensation.)
The pension fund that sued Prepare dinner argued that Apple misrepresented its CEO’s precise compensation package deal by downplaying the worth of his fairness. Prepare dinner and different Apple executives netted over $90 million in compensation for 2021 and 2022, larger than the $77.5 million estimate the corporate initially requested shareholders to vote on for approval.
(Each of these figures are nicely beneath Prepare dinner’s present annual compensation; at his personal request, the Apple CEO took a 40% pay minimize final yr. That change was authorized by shareholders and the Apple board’s compensation committee, which counts former Vice President Al Gore as certainly one of its members.)
The plaintiffs claimed that Apple used an uncommon monetary mannequin to artificially deflate Prepare dinner’s pay estimate, and in addition buried the compensation tables in a colorless, grey part of the proxy assertion, the place shareholders can be much less prone to discover it earlier than casting their Say-on-Pay votes. The courtroom didn’t purchase it.
“What occurred with Tim Prepare dinner is quite common in public corporations,” mentioned Marc Hodak, companion at government compensation consultancy Farient Advisors. “They award efficiency shares based mostly on the face worth of the inventory. And every of these efficiency share items has a market worth that’s larger than the face worth inventory on the time of grant.”
One key distinction between the 2 circumstances was the scale of the contested pay package deal. Musk’s $55 billion award from Tesla was a part of the largest compensation plan in company historical past. Whereas Prepare dinner’s $100 million annual pay is certainly not a small sum, it’s on par along with his friends. In reality, Apple makes use of a bunch of its opponents, together with Meta, Netflix, Visa, and Cisco, to benchmark its executives’ compensation. (Notably, it added Tesla to that peer group final yr.)
“I don’t have any query that the scale and scale of [Musk’s] pay package deal was a driver, each when it comes to the litigation and the choice that we noticed,” mentioned Hodak. “[$55 billion] is robotically going to draw an uncommon quantity of scrutiny.”
Taken collectively, these two circumstances do appear to trace at a broader pattern towards better scrutiny of bloated CEO pay—however Lipton suggested in opposition to studying the tea leaves prematurely.
“Elon Musk is thrashing this drum that everybody ought to go away Delaware, to recommend that in some way it is a pattern,” mentioned Lipton. “I feel that is an Elon Musk downside. That Tim Prepare dinner factor, it was a special legislation. It was a special argument.”
Representatives from Apple didn’t instantly reply to a request for remark.
This story was initially featured on Fortune.com
