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Tesla's Musk is not the only CEO testing new compensation limits

It’s not just Tesla (TSLA) and Elon Musk: Other companies are also pushing pay packages higher.

Tesla stockholders will have a chance on June 13 to bless a $56 billion compensation deal Musk received in 2018 that was nullified by a Delaware judge earlier this year.

While Musk’s pay would be the biggest in US corporate history, he is not the only head of a company testing new compensation limits.

Median total CEO compensation rose 11.4% in fiscal 2023 to $23.7 million, according to an Equilar analysis of firms with with revenues greater than $1 billion. That followed a 7.7% boost in 2022.

The number of CEOs in the S&P 500 who nabbed total pay packages worth more than $50 million has also jumped in recent years, according to a recent analysis from the Wall Street Journal.

FILE PHOTO: Tesla CEO Elon Musk attends the AI Safety Summit at Bletchley Park in Bletchley, Britain on November 1, 2023.  Leon Neal/Pool via REUTERS/File Photo
Tesla CEO Elon Musk. (Leon Neal/Pool via REUTERS/File Photo) (via REUTERS / Reuters)

The highest paid in 2023 was Broadcom (AVGO) boss Hock Tan, who made $162 million, predominantly from performance-based stock options exercised during the year.

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The next highest was Palo Alto Networks (PANW) CEO Nikesh Arora, who took in $151 million in pay and exercised $266.4 million in performance-based stock options.

Pay for the top boss is rising at smaller companies too.

Median CEO compensation levels at Russell 3000 companies with revenue less than $50 million increased 19.3% between 2018 and 2022, according to a separate analysis conducted by data provider Gallagher.

That was a bigger leap than CEO pay at larger firms during that period. Those with annual revenue exceeding $20 billion had awards increase by 2.4%.

Not all CEOs have found shareholders receptive to these increases. Last week, 3M shareholders voted against $16.4 million in compensation for its former CEO Mike Roman, as well as other company executives.

Whether the outsized award to Musk in 2018 helped influence all of these increases is debatable.

Greg Varallo, a lawyer for the Tesla shareholders who successfully sued the company to undo Musk's pay package, called Musk's deal a "wild outlier" that "drags the average up materially."

"What we saw immediately after the Musk deal became final was a very rapid acceleration in the amount of pay packages," Varallo said. "It single-handedly skewed the compensation data."

James Reda, managing director for Gallagher’s executive compensation consulting practice, said "it skewed the average data a little bit," but "it wasn't like football, where someone got $25 million and someone making $15 million said, 'I want that money.'"

Companies were less influenced by Musk's pay deal, Reda said, because its structure was so unusual.

"Companies looked at that and said, 'I don't think we could do that,'" Reda said. "It had an effect on Tesla and its shareholders, but not on the market for pay, that I can tell."

Oracle Corp Chief Executive Larry Ellison introduces the Oracle Database In-Memory during a launch event at the company's headquarters in Redwood Shores, California June 10, 2014. Ellison on Tuesday launched the
Oracle CEO Larry Ellison in 2001 exercised $706 million in company stock options — today worth $1.2 billion. (REUTERS/Noah Berger) (REUTERS / Reuters)

One corporate governance expert, Gunster lawyer Bob Lamm, said CEOs who preceded Musk by decades helped usher in today’s CEO compensation levels.

One notable example was in 2006, when Occidental Petroleum's (OXY) then-CEO Ray Irani earned more than $400 million, including $2.9 million in salary and bonus, $270.2 million in exercised stock options, and $93.3 million in deferred stock.

Adjusted for inflation, the sum would now be worth roughly $622 million.

Another came even earlier in 2001, when Oracle co-founder and CEO Larry Ellison exercised $706 million in company stock options — today worth $1.2 billion.

But Lamm points out that founders and creators like Amazon’s Jeff Bezos and Apple’s Steve Jobs tend to catch less scrutiny for compensation packages that break the mold.

"I certainly think Elon Musk would be in that same category," Lamm said.

There's no guarantee that Tesla shareholders will agree to Musk's pay, either.

Bloomberg reported that a small group of stockholders has called for investors to vote "no." And more legal red tape could frustrate the package if reapproved.

Musk's 2018 deal was designed to pay Musk zero compensation for his work at Tesla unless the electric vehicle maker reached certain market capitalization and operational milestones, and he remained in a leadership role at the company.

Milestones achieved entitled Musk to 1% of Tesla’s 2018 value.

The deal was invalidated in January by Delaware’s head Chancery Court judge Chancellor Kathaleen McCormick.

McCormick sided with Tesla shareholders who alleged in a derivative lawsuit that the all-equity, performance-based plan was illegally recommended by Tesla’s board because the board members who approved it were essentially controlled by Musk.

At the time of the shareholders’ suit, Musk had neither exercised nor taken any distributions from the agreement. Tesla asked shareholders to re-vote on Musk’s pay package in a preliminary proxy filing published in mid-April.

It argued it had cured the conditions that led Delaware Chancellor McCormick to void the deal. According to the board, a single-member special committee headed by independent director Kathleen Wilson-Thompson evaluated and recommended the deal with the help of third-party consultants.

Legal experts said those arguments might not be enough to keep shareholders from suing Tesla and the board all over again, arguing that the sole director who approved it was not independent enough from Musk.

Shareholders could also argue that the company's disclosures around the deal still fell short.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

Corrections: A previous version of this article listed an incorrect stock option calculation for Hoc Tan and a spelling of Kathaleen McCormick's name. We regret the errors.