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Only a week after Elon Musk’s $55 billion Tesla payday was struck down by a Delaware choose, a New York court docket dismissed a problem to Apple CEO Tim Prepare dinner’s compensation bundle, which clocked in at underneath $100 million. Some coincidence.
At face worth, the 2 instances appear to have quite a bit in frequent. Each have been shareholder fits waged in opposition to a number of the highest-paid famous person tech CEOs on the planet. And each have 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 instances are apples and oranges—and Prepare dinner was at all times going to face a greater likelihood of holding on to his paycheck.
Elon Musk’s $55 billion compensation bundle 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 impartial 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 primarily managed by Elon Musk,” stated 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 depart him much less uncovered to most of these challenges.
Whereas the Musk case was targeted 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?’” stated Lipton.
The Teamsters’ pension fund sued Apple final yr, arguing that the corporate had misled buyers 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 often known as RSUs, the corporate enlists monetary fashions to estimate what Prepare dinner’s precise pay shall be for shareholders’ approval every year.
(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 Meta inventory grants included in his compensation bundle. 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 bundle by downplaying the worth of his fairness. Prepare dinner and different Apple executives netted over $90 million in compensation for 2021 and 2022, increased than the $77.5 million estimate the corporate initially requested shareholders to vote on for approval.
(Each of these figures are nicely under Prepare dinner’s present annual compensation; at his personal request, the Apple CEO took a 40% pay minimize final yr. That change was accredited by shareholders and the Apple board’s compensation committee, which counts former Vice President Al Gore as one among its members.)
The plaintiffs claimed that Apple used an uncommon monetary mannequin to artificially deflate Prepare dinner’s pay estimate, and likewise buried the compensation tables in a colorless, grey part of the proxy assertion, the place shareholders can be much less more likely to discover it earlier than casting their Say-on-Pay votes. The court docket didn’t purchase it.
“What occurred with Tim Prepare dinner is quite common in public corporations,” stated Marc Hodak, associate 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 increased than the face worth inventory on the time of grant.”
One key distinction between the 2 instances was the scale of the contested pay bundle. 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 on no account a small sum, it’s on par along with his friends. Actually, Apple makes use of a gaggle 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 bundle was a driver, each by way of the litigation and the choice that we noticed,” stated Hodak. “[$55 billion] is routinely going to draw an uncommon quantity of scrutiny.”
Taken collectively, these two instances do appear to trace at a broader development towards higher 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 depart Delaware, to counsel that one way or the other this can be a development,” stated Lipton. “I feel that is an Elon Musk downside. That Tim Prepare dinner factor, it was a unique legislation. It was a unique argument.”
Representatives from Apple didn’t instantly reply to a request for remark.
This story was initially featured on Fortune.com
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