Dec 15 (Reuters) - Tesla's board of directors has earned more than $3 billion through stock awards that far exceeded the value of those given to peers at the biggest U.S. technology firms at the time they were paid, according to an analysis performed for Reuters by compensation and governance specialist Equilar.
The analysis found CEO Elon Musk's brother Kimbal has earned nearly $1 billion since 2004, based on the appreciated value of stock options held or liquidated. Director Ira Ehrenpreis has collected
$869 million since 2007. Board chair Robyn Denholm has made $650 million since 2014.
Directors reaped such windfalls even though they haven't awarded themselves new stock grants since 2020. The board agreed to suspend director compensation starting in 2021 to settle a shareholder lawsuit alleging excessive board-member pay. Between 2018 and 2020, however, the average Tesla director received a total of about $12 million in cash-and-stock compensation. That was about eight times as much as the average director at Alphabet, the next highest-paid among the "Magnificent Seven" companies over the same period.
The value of those original awards skyrocketed along with Tesla's share price in subsequent years. That's also true of the other six firms in the Magnificent Seven – Nvidia, Alphabet, Meta, Apple, Microsoft and Amazon – which got that name because their soaring stocks have been a big driver of the long-running bull market.
But Tesla is the only company among that cohort where the size of directors' original stock awards played such an outsized role in the vast wealth they've earned from these part-time jobs, the Equilar analysis shows. Tesla directors' average compensation between 2018 and 2024 – including the four years of suspended pay – was still two-and-a-half times that of Meta directors, the next highest-paid over the seven-year period.
In a statement to Reuters, a Tesla spokesperson said its directors' compensation "is not excessive but directly tied to stock performance and shareholder value creation." The statement added that board members provide extraordinary service to Tesla and devote "substantial time and effort," for example by attending 58 full-board or committee meetings in 2024. The spokesperson said that meeting frequency was well above industry norms.
Tesla's board also paid itself in stock options instead of shares, a rare practice criticized by some corporate-governance specialists because it magnifies directors' upside potential with no downside risk. Tesla directors have exercised tens or hundreds of millions of dollars in options to date but also continue to hold similarly large amounts, Equilar found.
Stock options are the right to buy the company's stock after a specified period for a preset price. Option holders face no risk, corporate-governance experts say, because they're not required to buy the stock if its value drops below the preset price. If it appreciates, they can buy the shares at a discount and immediately unload them at a profit.
Instead, many governance experts advise boards to pay directors in shares to align their interests with shareholders. When directors directly own shares, rather than options to buy shares, the value of their holdings drops if their company's stock price falls. Only 5% of the largest 200 companies in the S&P 500 by revenue issue directors options, according to the National Association of Corporate Directors.
The Tesla spokesperson said options create a more "at-risk" incentive structure for directors because they only get compensated if the stock rises. Directors at other firms who receive shares still get some value, even if share prices fall, "as long as the stock exceeds $0," the spokesperson said.
Four corporate-governance experts who reviewed Equilar's analysis for Reuters said the Tesla board's extraordinary compensation undermines directors' independence in overseeing Tesla and its CEO Elon Musk.
"Tesla directors are ridiculously overpaid," said Douglas Chia, an independent corporate-governance consultant at Soundboard Governance LLC. "Are you actually incentivized to do a better job by being paid this much? Probably not."
Charles Elson, the founding director of the University of Delaware's corporate-governance institute, acknowledged Tesla's argument that directors only make money if the company's stock goes up. But Elson and others recommend paying directors in restricted stock, which includes a vesting period, to better align their interests with shareholders who can both make and lose money holding shares. Further, he said, options are usually more lucrative for directors because they "tend to magnify returns dramatically."
In addition to the shareholder lawsuit, the Tesla board's compensation also came under fire in a Delaware court ruling last year that invalidated the pay package the board gave Musk in 2018, which is worth $132 billion at the company's current stock price. The judge found board members' excessive compensation and personal ties to Musk compromised CEO-pay negotiations. The board has appealed and promised Musk a replacement package worth at least $42 billion if it loses.
The board in September proposed a new compensation package for Musk that could grant him as much as $1 trillion in Tesla stock over the next decade, worth about $878 billion after subtracting what Musk must pay for the shares. Each of these packages alone would make Musk by far the highest-paid CEO in history – a title he already holds based on his Tesla earnings to date.
DIRECTORS REAP WINDFALLS FROM SOARING STOCKS
Equilar analyzed Magnificent Seven directors' cash-and-stock compensation to find annual averages from 2018 through 2024. Equilar excluded members who left boards during any given year to ensure those included received a full year's compensation.
Tesla directors averaged $1.7 million annually for those years, despite having pay suspended for most of the period. Meta was next highest at nearly $685,000. Amazon was lowest at about $307,000.
Equilar also calculated the lifetime compensation of every current Magnificent Seven director, including the appreciated value of all shares or options held or sold.
Tesla's total of more than $3 billion was paid to just five of its eight current nonexecutive members. The other three – Jeffrey Straubel, Jack Hartung and Joe Gebbia – joined the board after it suspended pay. The lawsuit settlement also requires the board to seek shareholder approval for director compensation after 2023, which it hasn't yet done.
All five well-compensated Tesla directors have cashed out options. James Murdoch has liquidated the lowest amount, nearly $81 million, while board chair Denholm has cashed out the highest, at about $595 million, or 91% of her total compensation.
A few board members at other Magnificent Seven firms have also reaped huge sums as their companies' value surged, the analysis found. But lifetime-compensation comparisons among different firms are complicated by their directors' varying lengths of service and by the fact that board members at some firms made personal purchases of company stock that Equilar was unable to exclude from their estimated total compensation.
Equilar could not determine what company-stock purchases directors might have made before 2003 because regulators did not require board members to disclose such purchases before that year.
The examination found that Nvidia's directors collectively held or had sold about $17 billion in the chipmaker's stock and Google-parent Alphabet directors held or had sold about $5 billion in company shares. Those amounts include large numbers of shares the directors were paid for their board service but also could include shares they purchased with personal funds before the 2003 regulations took effect.
None of Tesla's directors joined before those rules applied, which means that all personal purchases of its stock by its board members are disclosed publicly.
Stock-purchase disclosures examined by Equilar show that two Tesla board members have bought relatively small numbers of shares that are included in Equilar's estimates of the directors' lifetime earnings. Denholm and Kathleen Wilson-Thompson bought Tesla stock that would be worth about $6.8 million and nearly $2.5 million, respectively, if they still hold the shares. For both directors, that amounts to about 1% of Equilar's lifetime compensation estimate.
Alphabet, Meta and Apple said some of their directors had purchased some of the shares included in Equilar's analysis but declined further comment on directors' compensation. Nvidia, Microsoft and Amazon declined to comment.
'WHAT MAKES TESLA DIRECTORS SO SPECIAL?'
No other Magnificent Seven firm has faced legal challenges similar to Tesla over allegedly excessive compensation. The governance specialists Reuters interviewed said stock awards at the other six Big Tech companies were in line with industry norms at the time they were granted.
Tesla's comparatively generous stock-option grants could compromise directors' oversight of the company and its CEO because it discourages them from highlighting problems for fear of losing their board seat, the experts said. They didn't have the same criticism for cases like that of Nvidia – where board members were initially compensated within industry norms and only saw the value of their stock compensation soar after long tenures presiding over transformational company growth.
The two Tesla board members on a committee to craft Musk's latest pay package were Denholm and Wilson-Thompson. Both have said Tesla compensation accounts for the vast majority of their wealth.
Denholm, a former accounting executive who advises Musk from Australia, has called her Tesla compensation "life-changing." The earnings became the seedbed of her family investment firm in Australia, where she has invested in startups and in two professional basketball teams.
Denholm has led public-relations campaigns selling shareholders on Musk's compensation packages. She repeatedly warned that Musk might leave the company – potentially driving down its stock – unless shareholders approved his latest record-setting package, which they did last month.
Wilson-Thompson, a former human-resources executive, has made $234 million in seven years, Equilar found.
Denholm and Wilson-Thompson declined interview requests.
The governance experts interviewed by Reuters said directors' independence is particularly compromised when a board seat offers much higher-than-standard compensation or represents the largest source of a director's wealth. Both are true for Denholm and Wilson-Thompson.
Chia, of Soundboard Governance, said nothing about Tesla suggests its directors deserve vastly higher pay than their peers. "It's the same job as any other public company," he said. "What makes Tesla directors so special?"
(Reporting by Rachael Levy; additional reporting by Chris Kirkham. Editing by Brian Thevenot and David Crawshaw.)
