3 tips for designing a compensation package less scrutinized than Elon Musk’s

On June 13, Tesla shareholders will vote on whether to restore a pay package CEO Elon Musk was granted in 2018, previously valued at $56 billion. Earlier this year, the compensation plan was rescinded by a Delaware judge, who argued that the billionaire was overpaid and investors were misled about the independence of the board when they approved it the first time around.

There’s a fairly straightforward reason why this pay package has attracted so much scrutiny, according to Ani Huang, president and CEO of the Center On Executive Compensation, a division of the HR Policy Association: “Because it’s $56 billion,” she said. “I think a lot of these conversations, we may not have been having if the pay package had been smaller.”

When a company is tasked with designing a pay package for an executive, CHROs are often critical to the process, according to Huang, working closely with the head of the compensation committee and an outside compensation consultant. And given the increasing scrutiny surrounding CEO pay, there’s likely to come a time when companies are asked to justify why they want to award their executives certain pay packages.

Huang offered three tips for HR leaders navigating the complex world of executive pay.

Make sure your board is independent. One of the central issues the Delaware judge expressed with Musk’s pay package was that it was negotiated by Tesla board members with close ties to the CEO. In an opinion explaining her decision to void the package, Judge Kathaleen McCormick noted two board directors who served on the compensation committee had long-standing relationships with Musk; at least one had even vacationed with his family.

In light of concerns surrounding board independence, “make sure that to the extent that you’re saying you have an independent board, you really have an independent board,” Huang said.

Most companies would be careful about having personal friends or family members of a CEO serve on their board, and would make sure to bring in an independent compensation consultant to advise on an executive pay package, she added.

Don’t let the CEO design their own compensation package. Another unusual feature of Musk’s pay package was that he proposed it himself, Huang said. In her opinion, McCormick described the negotiations as a “cooperative venture” with Musk, and noted he proposed the grant size and structure, which in turn informed the terms considered by the compensation committee.

“That’s not how it’s supposed to work,” Huang said. “It’s supposed to be that a compensation expert or the compensation committee is really formulating this award…and negotiating it with the CEO.”

Be ready to justify the compensation plan. Investor votes and proxy advisor recommendations on executive compensation are increasingly in the public eye, Huang said. Criticism of executive pay packages can more easily circulate on social media, and she noted that some Tesla investors with public profiles—New York City Comptroller Brad Lander among them—have called on shareholders to reject Musk’s compensation ahead of the June 13 vote.

To withstand scrutiny, she recommended HR leaders lay out clearly the negotiating process they went through to land on a particular package. This should include “the advice you got from your compensation consultant, [and] benchmarking, both on pay and performance against peers…why you came to the goals you came to, and why you came to the amount you came to."