- Elon Musk topped Bloomberg’s latest pay rankings, earning $6.6 billion in options awards in 2020.
- No one is on Musk’s level of compensation, but CEO pay across the board is dramatically increasing.
- He sustains this compensation by taking enormous risks for huge payouts, an executive-pay expert says.
The star of Elon Musk is growing so massive, he’s starting to pull other CEOs into his orbit.
On Thursday, Bloomberg reported in its executive-pay rankings that the Tesla CEO topped the list for the third year in a row. He made about $6.6 billion in 2020 thanks to option awards.
As the electric-car company continues to hit ambitious market-cap targets, triggered huge payouts for Musk, other companies are following suit: Similar deals helped CEOs in nearly every industry pass the threshold of earning $100 million last year.
“It used to be if you made $20 million, that was an enormous amount to make the headlines,” said Alan Johnson, managing director of Johnson Associates, an executive-pay consulting firm.
But over the past five years, there’s been a noticeable pull that Musk’s compensation deal has exerted on executive pay across the board, Johnson said. CEO pay is now increasing at breakneck speed as other companies employ compensation structures that offer the potential of outsized rewards if CEOs hitting ambitious growth targets.
“The magnitude of what he has accomplished and the value he’s got provides a cover for everybody else,” Johnson said.
The deal that launched Musk’s salary to astronomical heights
In 2018, Musk shocked everyone by striking an unprecedented deal with Tesla over his compensation package. A New York Times headline at the time read: “Tesla’s Elon Musk May Have Boldest Pay Plan in Corporate History.”
If the company hit its goals, it would unlock massive payouts for the Tesla CEO and shareholders. If not, Musk might get nothing.
Since Musk signed his 10-year pay plan in 2018, Tesla’s value has increased 12-fold, landing at a whopping $647 billion, according to Forbes. Musk exceeded all expectations, cranking up production of new car models like the Model 3 and Cybertruck. So far, his comp plan has given him around $33 billion, according to Bloomberg.
“The goal seemed silly, and then he produced,” Johnson said. “Very few people would be willing to take those kinds of risks and have those kinds of expectations.”
In hindsight, Johnson said, people underestimated how quickly the world would shift to electric vehicles amid the climate crisis. Musk made a bet that turned out to be right. He also turned out to be a savvy and unique CEO: Tesla made a car that was sleek and expensive, and customers were willing to pay.
Can executive pay continue at this pace?
Musk’s affinity for risk has put him at odds with regulators and, at times, his own employees and shareholders. Some investors speculate the Tesla bubble could burst. But still the Tesla stock price has soared.
On a broader scale, Johnson said Musk’s salary as an outlier has allowed CEOs to make the case for compensation that would have been ridiculous even five years ago.
According to a report from the Economic Policy Institute, CEO compensation grew 53% in the recovery after the between 2009 and 2019. In 2020, executive pay still increased 16% in the middle of a pandemic.
But Johnson said the norm is still incremental growth instead of warp-speed progress like Tesla’s. He worries for companies that are trying to keep up with executive pay and could end up shelling out for a leader who isn’t producing sustainable results for shareholders.
According to Johnson, it would be “mathematically impossible” for executive pay to continue at this pace. But for now, Musk is hardly slowing down, and his massive gravity is pulling other executives along for the ride.