CEOs can rest easy: The Musk ruling is not the end for outsized pay packages

• The ruling from the Delaware Court of Chancery, overturning Musk's eye-watering $56 billion compensation — the most ever paid to a public company CEO, per the ruling — won't do much to take the air out of inflated executive compensation, legal and compensation experts told Axios.

What they're saying: While his pay is "staggering by any measure, that was just icing on the cake," says Brian Dunn, who spent 40 years as a compensation consultant and now teaches the subject at Cornell University.

• The real issue was the Tesla board's process in signing off on the package.

Zoom in: "The process leading to the approval of Musk's compensation plan was deeply flawed," writes the court's Chancellor Kathaleen McCormick in a 201-page ruling.

• She details Musk's chummy ties with the board members who approved the pay package — particularly Antonio Gracias, a Musk loyalist, and one of the board members on the compensation committee's working group on the pay package.
• "They meet outside of work as frequently as once a month. They have spent the night at each other's homes," McCormick writes of their relationship. "They have vacationed together with their respective families, including a trip to illusionist David Copperfield's Bahamian island, a trip to Africa, and a ski trip. They have spent Christmas together."

"Given the collection of people tasked with negotiating on Tesla's behalf, it is unsurprising that there was no meaningful negotiation over any of the terms of the plan."

• The lack of board independence might have been OK, but McCormick said the board failed to disclose it to shareholders. Tesla described the compensation committee members as independent in its filing on pay. That was decidedly "untrue," per the ruling.
• That meant shareholders didn't have a clear understanding of the compensation proposal when they voted in favor of it. (The Delaware suit was filed by a shareholder in 2018.)

The big picture: It's not unusual for a board to be stocked with CEO friends and loyalists, though the Tesla board is probably cozier than most — Elon's brother, Kimbal, is on the board, for example.

• And objecting to a CEO's pay isn't the norm — boards want to keep their guys happy. "It's very rare for a comp committee or a board to really push back," says Dunn.
• Shareholders typically have little say in the process — every company has to put CEO pay to a shareholder vote, a process born in Dodd-Frank — but these "say on pay" votes are not binding. "Window dressing," Dunn says.

Between the lines: The decision to void Musk's pay is likely more about Musk and his extreme behavior, says John Coffee, a professor at Columbia University Law School.

• The ruling shows that "if you go too far, Delaware will examine the transaction closely under a microscope and you can fail it," he says. "I don't think this decision is going to threaten very many corporations."

Zoom out: The Delaware court specializes in hearing business cases from the million-plus companies incorporated in the state. And typically, it defers to a board's business judgment in pay matters.

• This is just the second time a case like this has come before the Delaware court, Dunn says. And it's the first time the court has ruled against a CEO pay package, he adds.
• Back in 2005, the court ruled against Disney shareholders who sued the company over former president Michael Ovitz's severance package. At the time it was viewed as outsized at $140 million.

For the record: Tesla hasn't commented on the decision yet, but Musk has posted to X, "Never incorporate your company in the state of Delaware."

• He recommends Texas or Nevada instead; though it's unclear if he'd move Tesla out of the state, or if other companies would follow his advice.

What's next: Observers expect that Tesla will appeal to the Delaware Supreme Court, but that the decision will likely be upheld.

• "This is an extremely fact-based decision," Coffee says. "And those are very hard to reverse."
• "I don't think this will produce any kind of pressure among corporate governance lawyers to say we've got to leave Delaware," he says, adding that this doesn't change any particular law.