Elon Musk’s $83 billion package: Should executive pay be capped?

Executive pay became a talking point again recently with Elon Musk’s $83 billion pay package that even people who earn a good salary, battle to comprehend.

Should executive pay be capped? The answer is not that simple, Dr Chirs Blair, CEO of 21^st Century, a remuneration consultancy, says. He compares executive pay to Bitcoin’s meteoric rise.

“From mere cents at its origin to its peak of almost $69 000 in November 2021, Bitcoin’s return on investment has dwarfed traditional financial instruments. This sort of growth is appealing and on the surface, seems like a good analogy for rewarding top corporate executives who drive exponential growth in their companies.”

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He points to Musk’s $83 billion pay package, which was a significant multiplier over standard CEO earnings, even within his industry. “This massive payout was tied not to a flat salary, but to reaching staggeringly high market cap, revenue and earnings targets.

“To many, this might seem justified. After all, under Musk’s leadership, Tesla’s market value skyrocketed, akin to the early investors in Bitcoin witnessing their stakes multiply by over tenfold. However, the Delaware Court ruled this package unfair, primarily due to concerns about the independence of the board that approved it.”

Musk’s case opened Pandora’s box of questions

Blair says this incident opens Pandora’s box on corporate governance and raises questions akin to those faced by Bitcoin investors: Just because something is immensely profitable, does it also mean it is structured in a way that is sustainable or equitable?

However, there are critical distinctions to be made when comparing the likes of Bitcoin to that of traditional companies like Tesla, he says.

Considering market dynamics and volatility, it is important to remember that Bitcoin operates in a decentralised, highly speculative market that is less influenced by traditional economic indicators such as company performance, governance, or macroeconomic policies, he says.

“However, traditional companies operate in more regulated markets and are subject to economic forces, consumer demand and competitive pressures that make their stock prices less volatile and speculative compared to cryptocurrencies.”

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When it comes to sustainability and longevity, Bitcoin’s value is largely driven by investor sentiment and market speculation, not by sustainable business practices or long-term strategic planning. Blair says, in contrast, companies like Tesla are built on tangible products, services and market strategies.

“Rewarding a CEO solely based on stock price performance could encourage short-term tactics, such as aggressive accounting, cost-cutting, or other strategies that might boost short-term returns at the expense of long-term sustainability.”

What about governance and accountability?

Regarding governance and accountability, Blair says the governance structure in traditional companies involves a board of directors, shareholders and regulatory bodies that oversee company management and strategy.

“This structure is designed to balance the interests of various stakeholders, including employees, customers and shareholders. High executive pay that mirrors the high-risk, high-reward model of Bitcoin investment can undermine this balance, focusing on shareholder returns without regard to other stakeholders.”

The broad economic impact must also be considered, Blair says. “Traditional companies have a broader economic impact through employment, innovation and contribution to GDP. Tesla, for instance, not only boosts investor portfolios but also affects global automotive and energy markets, employment and technological innovation. The societal impact of corporate leadership decisions is far more extensive than that of cryptocurrency fluctuations.”

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Blair says in the case of limits on executive pay, there should be governance over greed. “The argument for capping executive pay, even in high-return scenarios, leans heavily on the principle of balanced corporate governance. Critics argue that without independent oversight, pay packages can become disconnected from wider company health or employee remuneration.

“Imagine a scenario where a CEO is paid a bounty akin to a Bitcoin boom, while the company’s foundations, its employees, see little change in their compensation. This disparity can breed resentment and decrease overall morale and productivity.”

Unchecked executive pay can spiral into excess

In addition, he says, unchecked executive pay can spiral into excess, with leaders potentially prioritising short-term gains to hit targets linked to their compensation, over long-term company stability. It is akin to a Bitcoin trader encouraging risky investments without regard to future market conditions, aiming for immediate high returns that may jeopardize future stability, he points out.

However, there is also a case to make against capping executive pay and rewarding the visionaries, Blair says.

“On the flip side, why should a CEO not reap exceptional rewards for delivering exceptional returns? If a leader like Musk can steer a company to valuations that dwarf giants like Microsoft, as noted in the court documents, is that not worth a princely sum? After all, Bitcoin’s astronomical rise was not capped and those who saw its potential early on and invested are now sitting on fortunes.

“Supporters of high remuneration argue that it attracts top talent who can make bold, transformative decisions, much like investors in emerging technologies like Bitcoin. They contend that capping pay, especially for high performers, could stifle innovation and deter top-tier executives from aiming for truly ambitious goals.”

Is there a middle ground? Blair says perhaps the real solution lies not in whether we cap or not, but how these packages are structured. “Take the Bitcoin analogy: while it offers high returns, it is also volatile and not tied to traditional asset values.

“Similarly, if executive pay were more dynamically linked to both short-term achievements and long-term company health, including employee welfare and sustainability practices, it could offer a more balanced approach.”

Rationale for sky-high uncapped executive compensation is problematic

Blair says given these differences, the rationale for sky-high, uncapped executive compensation, akin to Bitcoin’s returns, becomes problematic. “While high rewards for extraordinary performance can be justified, they must be balanced with considerations for sustainable growth, ethical governance and equitable stakeholder impact.”

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A more balanced compensation structure might include:

• Performance metrics that align with long-term strategic goals, not just stock price
• Claw-back provisions that allow companies to reclaim bonuses in the event of later financial restatements or scandals
• Caps or thresholds that prevent runaway compensation packages based on transient stock market gains
• Independent oversight could ensure that compensation packages are designed not only to reward sky-high market caps but also to encourage leaders to foster robust corporate cultures, prioritize cybersecurity, and manage other modern risks as highlighted in corporate governance guidelines.

Should we cap executive pay, even for high performers? “Perhaps the better question is how we make sure these rewards truly align with the long-term health of the companies they lead and the wider ecosystem they influence and ensuring that today’s soaring market cap does not become tomorrow’s cautionary tale.”