How Elon Musk helped lift the ceiling on CEO pay

When Tesla awarded Elon Musk a multimillion-dollar pay package in 2018, the landmark deal helped to vastly increase the potential compensation of the CEOs at many of America’s biggest public companies.

The package was composed entirely of an enormous stock grant tied to the company’s performance. As Tesla has sold enough electric vehicles to become the most valuable automaker on the planet, Musk has so far received shares worth nearly $60 billion — helping to make him the world’s richest person.

Compensation experts say they see the influence of Musk’s deal everywhere.

“There’s a lot of companies out there that saw that award and its structure,” said Brian Johnson, executive director with ISS Corporate Solutions, which advises businesses on executive pay and other practices. “They think it’s a good way to incentivize performance.”

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A new survey conducted for The New York Times by Equilar, a compensation consulting firm, shows that many of last year’s highest-paid executives got packages that, like Musk’s, could pay out the sort of sums that would have been unthinkable a few years ago. And even as the gap between what executives and workers earn continued to widen during the pandemic, companies opened the floodgates for what they paid their leaders in 2021.

All of the 10 highest-paid executives had compensation over $100 million, a first. Their average compensation was $330 million, the highest ever. But it’s not just a few executives at the top enjoying the spoils. Underscoring how widespread the pay increases were last year, the median CEO made $32.1 million in 2021, up 27% from $25.3 million in 2020 and far higher than in pre-pandemic years.

Jeff Green, CEO of The Trade Desk, a digital advertising company, reported compensation of $835 million last year, making him the top-paid executive in the Equilar survey, which encompasses 200 companies, all of which have revenue over $1 billion. Green’s pay in 2021 was the third-highest amount that Equilar found in its past five annual surveys, which are based on companies’ pay disclosures; Musk’s deal in 2018, which Tesla valued at $2.3 billion, is still the biggest in those years.

Zig Serafin, CEO of Qualtrics, a software company, was second last year, with compensation of $541 million. It was the fourth-highest sum of the past five years. Peter Kern, CEO of Expedia, the travel company, was third last year, with pay worth $296 million.

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Although those compensation totals are taken from the companies’ financial filings, they are often estimates driven by the companies’ attempts to value the stock their CEOs might receive. As a result, the executives may earn less than those totals, especially if the bear market persists and their companies’ stock prices remain depressed, but they could also take home far higher amounts should the stocks recover.

Many of the highest-ranking executives in the survey received pay packages that were far larger than those of the heads of far bigger companies with much larger profits. For example, Tim Cook, CEO of Apple, received his first equity award since 2011 last year and had total compensation of $99 million, putting him just 13th in the survey.

Despite the growth in pay, shareholders, apparently believing that it is being tied to performance, have voted in favor of most packages. Only 3% of “say on pay” votes got less than 50% support from shareholders in the year through June 3, according to an analysis of 1,444 public companies by Willis Towers Watson, a consulting firm that advises companies on executive pay programs and corporate governance matters.

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For several years, public companies have had to compare their CEOs’ compensation with that of a typical employee, the result of a regulation passed by Congress that aimed to help investors assess the level of executive pay. Last year, CEOs earned 339 times more than the median pay of employees at their companies, up from 311 times in 2020, according to Equilar. The median employee wage rose 10% last year, to $92,349 from $83,808.

Last year’s executive pay jumped in part because corporate boards, which decide CEO compensation, wanted to reward top officers for navigating their companies through the pandemic.

In addition, the stock market rallied in 2021, and the value of stock grants, which typically constitute the largest share of CEO compensation, was also higher. When stock prices are rising, boards tend to say executives are doing a good job and pay them more.

And in a world mesmerized by Musk and his successes at Tesla, boards are even more likely to view CEOs as indispensable and give them huge pay deals.

“There’s a mindset that the whole thing will fall apart if we don’t have this off-the-charts talented person in that office,” said Sarah Anderson, a program director at the Institute for Policy Studies, a liberal think tank that often analyzes CEO pay. “So many people on these corporate boards are benefiting from the system. They’re either executives themselves or they have some other stake in keeping the compensation system the way it is.”

The largest gap between CEO and workers in the survey was at Amazon, where this past spring a union won a battle to organize a warehouse for the first time. Andrew Jassy, who took over from Jeff Bezos as Amazon’s CEO last year, had pay that was 6,474 times that of the company’s median employee. His compensation last year, $213 million, was the eighth highest, according to Equilar. Nearly all of it came from a stock grant.

“The way the SEC rules work, we are required to report that grant as total compensation for 2021 when in reality it will be available to be paid out over the next 10 years, starting in 2023,” Chris Oster, an Amazon spokesperson, said in a statement, referring to the Securities and Exchange Commission, which regulates companies’ disclosures. “As noted in the proxy, this award is intended to represent most of Andy’s compensation for the coming years.

Only one woman, Sue Nabi, CEO of Coty, a cosmetics firm, was among the 20 top-paid executives in the survey, coming in fifth, with $284 million in compensation.

Setting an Example

Musk’s megapackage was criticized when it was announced in 2018. Skeptics said the enormous riches it promised might encourage him to take too many risks to fulfill the plan’s goals. But pay experts say it inspired boards at other companies to concoct similar deals.

The groundbreaking feature of Musk’s compensation plan was not so much the performance targets — those have been around for years — but the colossal amount of stock that covered pay for several years into the future. (Tesla’s board has not awarded Musk any subsequent stock grants.) The stock he has so far gotten for the award is worth just over $60 billion, a treasure chest that helped him finance his bid for Twitter. Musk and Tesla did not respond to a request for comment.

Although the value of Musk’s package was huge, its terms were demanding.

Just being employed by Tesla wasn’t enough for Musk to get any of the award. He received no stock just for showing up, a practice that is common in CEO packages.

For him to get the stock, Tesla’s value on the stock market — a function of its stock price — had to keep rising and the company had to hit ambitious targets for sales and operating profits.

This ensured there was a belt-and-suspenders approach to performance measurement. Because Tesla’s business and stock have done exceedingly well in recent years, Musk received nearly all the stock in the deal, according to a recent Tesla regulatory filing, something that seemed highly unlikely at the time it was announced.

The recent plunge in Tesla’s share price means the stock that Musk has received from the 2018 award is worth significantly less than it was just months ago.

Although they have the potential to pay out huge amounts, in certain respects last year’s biggest pay deals were not as demanding as Musk’s.

For Green, of The Trade Desk, to qualify for the options in his package, valued in the proxy statement at $828 million, the company’s stock price must climb well above current levels, but there are no business goals for The Trade Desk to achieve.

Melinda Zurich, a spokesperson for The Trade Desk, said the stock price targets in the company’s award were ambitious and noted that its stock was up several thousand percent since its initial public offering in 2016.

“Jeff has played an integral role in driving that growth and is key to the company’s future growth agenda,” she added.

Serafin, of Qualtrics, doesn’t have to hit any performance targets to qualify for roughly two-thirds of his stock pay last year; he just has to remain in his post to get those shares, which the company valued at $360 million in its proxy statement. And his performance-based shares, valued at $180 million, have business operating targets but no stock price goals. Serafin has already received shares from both awards.

“As a technology company that encounters significant competition for qualified personnel, long-term incentive compensation plays a critical role in our ability to attract, hire, motivate and reward qualified and experienced executive officers,” Qualtrics, which had its initial public offering last year, wrote in its proxy statement. Some companies have awarded executives a large amount of stock when going public as a way to give them “skin in the game.”

Among the highest paid, Nabi, of Coty, appears to have one of the easiest packages to earn. Not only does the $280 million in stock awarded to her last year have no share price or business goals attached, she has already received one-third of the stock outright — and stands to get the rest of the award as soon as August 2023.

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A Coty spokesperson noted that the company’s stock had risen since Nabi became CEO in 2020 and added: “Ms. Nabi is one of the beauty industry’s leading founder talents: a hugely respected business leader with an outstanding track record in the sector. In order to attract a true entrepreneur like her, Coty needed to have an enticing equity scheme.”