Tesla directors will return $735 million to the company to settle shareholder claims that they overpaid themselves, according to a Monday court filing.

The settlement concludes a 2020 lawsuit by a retirement fund that owns Tesla stock. The City of Detroit Police and Fire Retirement System criticized stock options granted to Tesla directors, including CEO Elon Musk, his brother Kimbal Musk, and Oracle co-founder Larry Ellison, effective June 2017.

Musk is also under separate scrutiny for his own $56 billion compensation package, facing his own lawsuit that went to trial last year. Shareholder Richard Tornetta filed a lawsuit against Tesla in 2019 to terminate Musk’s 2018 payment agreement. Tornetta claims the package is “the largest compensation grant in human history” and Musk is being paid unfairly, whom he called a “part-time CEO,” without requiring the executive to fully focus on Tesla.

A ruling in Musk’s case is expected soon.

Accusations against Tesla Directors

Tesla directors were accused of vesting around 11 million stock options between 2017 and 2020, which shareholders say far exceeds the standard for corporate boards. They agreed to return the equivalent value of 3.1 million Tesla stock options, according to the court filing and Reuters reports.

Tesla argued that its directors acted in good faith and in the best interest of Tesla shareholders but settled to avoid the risk of litigation against them and the company. The electric vehicle maker defended itself by stating that the company experienced unprecedented growth, causing Tesla’s share price to skyrocket as much as 10 times, which in turn increased the value of stock option awards to directors and Musk. The company claimed that it used stock options as a way to ensure directors’ incentives aligned with investor goals.

New Compensation Agreement and Changes

As part of the settlement, the Tesla directors agreed to not receive compensation for the years 2021, 2022, and 2023. The board will also have to change the way compensation is determined, a matter that will be discussed at the next shareholders’ meeting.

The settlement, one of the largest in a similar case in the Court of Chancery, will be paid directly to Tesla to benefit the company.

A Closer Look at Musk’s Compensation Package

Aside from the shareholder lawsuit, Elon Musk’s own compensation package has come under scrutiny. Shareholder Richard Tornetta filed a separate lawsuit in 2019 in an attempt to terminate Musk’s 2018 payment agreement, claiming it to be the largest compensation grant in human history. Tornetta argued that Musk is being paid unfairly as a “part-time CEO” without fully focusing on Tesla.

Musk’s case went to trial last year, and a ruling is expected soon.

Unique Insights: Corporate Boards and Compensation

The settlement between Tesla directors and shareholders highlights an ongoing debate about compensation practices and oversight on corporate boards. Here are some unique insights into this matter:

1. Stock Option Vesting and Shareholder Concerns

The accusation against Tesla directors was that they vested a significantly higher number of stock options than what is considered standard for corporate boards. Shareholders argue that excessive stock option grants can lead to overinflated compensation without proper alignment with company performance. This case brings attention to the need for shareholder scrutiny and oversight to ensure fair compensation practices.

2. Aligning Incentives for Directors and Shareholders

Tesla defended its use of stock options as a way to align incentives for directors with the goals of investors. By tying compensation to the company’s stock performance, directors have a vested interest in driving the company’s success. However, excessive stock option grants can create concerns about director independence and potential conflicts of interest.

3. Evolving Standards for Compensation Determination

The settlement also resulted in an agreement to change the way compensation is determined for Tesla directors. This signals the need for a reassessment of compensation practices and consideration of evolving standards in corporate governance. Companies should regularly review and update their compensation policies to ensure transparency, fairness, and alignment with shareholder interests.

Summary

Tesla directors have agreed to settle a a shareholder lawsuit by returning $735 million to the company. The lawsuit, filed by the City of Detroit Police and Fire Retirement System, criticized the stock options granted to Tesla directors, including CEO Elon Musk, his brother Kimbal Musk, and Oracle co-founder Larry Ellison. The settlement will see the directors returning the equivalent value of 3.1 million Tesla stock options to the company.

The settlement highlights the ongoing debate surrounding compensation practices in corporate boards and the need for shareholder scrutiny and oversight. Tesla defended its use of stock options as a way to align incentives for directors with investor goals. The settlement also brings attention to the evolving standards for compensation determination and the importance of regularly reviewing and updating compensation policies.

Furthermore, Elon Musk’s own compensation package is under scrutiny, with a separate lawsuit filed by shareholder Richard Tornetta to terminate Musk’s 2018 payment agreement. Tornetta claims that Musk’s compensation is the largest grant in human history and argues that he is being paid unfairly as a part-time CEO. A ruling in Musk’s case is expected soon.

The settlement between Tesla directors and shareholders is one of the largest in a similar case in the Court of Chancery. It sets a precedent for discussions on compensation practices and oversight in corporate boards, emphasizing the need for transparency, fairness, and alignment with shareholder interests.