Voiding Elon Musk’s $56 billion Tesla pay is a ‘wake-up call’ for directors at all companies

A decision by a Delaware judge to throw out Elon Musk’s $56 billion Tesla (TSLA) pay package is a threat to the wealth of the world’s richest man. It also could alter the way CEO compensation is decided at companies across America.

“It’s a big deal,” said Cornell University visiting lecturer Brian Dunn, who noted this was the first case ever to overturn a board’s decision on compensation.

The decision from Delaware Chancellor Kathaleen McCormick is “a wake-up call for all directors on the importance of arm’s-length negotiations on CEO pay.”

What McCormick found is that Tesla’s directors had breached their fiduciary duty when they awarded Musk the largest compensation opportunity ever granted to a public company executive.

Why? Because of “extensive ties” between the people negotiating the pay package and a lack of public disclosure about Musk’s relationships with those who approved the deal.

“Put simply, neither the Compensation Committee nor the Board acted in the best interests of the Company when negotiating Musk’s compensation plan. In fact, there is barely any evidence of negotiations at all,” McCormick wrote.

The ruling will reverberate across the business world as other highly paid executives and directors watch the legal conflict unfold, according to analysts and experts.

“I think that this will make directors wary of offering big pay packages to make the CEO happy,” added Dunn, who is an expert on executive compensation. “Do I honestly think it will lower pay CEO pay overall, no, but I do think it will reign in the extremes of which Tesla was not alone.”

The shareholders’ attorney, Greg Varallo, said when Musk’s compensation plan was reached in 2018 it was around 33 times larger than the largest pay package in history, which…