Breakfast on Wall Street: Payday

Inquiry Monday

Should we limit the amount of executive compensation?

· Yes (must be linked to certain ratios or broader stakeholder interests)
· No (anything that secures talent and motivates exceptional leaders

Take the survey here and don’t forget to share your thoughts in the WSB comments section.

Payday

The recently approved compensation package for Tesla (TSLA) CEO Elon Musk has brought the executive compensation discussion back to the table, with its eye-popping headline-grabbing numbers. Legal hurdles remain, but shareholders reaffirmed their support for a 10-year compensation plan valued at $47 billion (at current stock prices) after a Delaware judge challenged the stock awards. This will make one of the world’s richest people even richer, but investors seem to think it’s worth it, with 77% of shareholders ratifying the pay package again.

Key person risk: Supporters of the proposal argued that Tesla had become a priority for Elon Musk, who is spending more time on outside projects like X, SpaceX and Starlink, Neuralink, The Boring Company and xAI. The idea here is that the stock grants would keep him highly motivated despite the growing challenges of developing an affordable consumer vehicle or diversifying into other verticals. Earlier this year, Musk threatened to develop products outside of Tesla and would be “uncomfortable making Tesla a leader in AI and robotics without having approximately 25% voting control.” .

Meanwhile, median CEO compensation at S&P 500 companies increased by about 12% in 2024, according to ISS Corporate, which is well below the 4% year-over-year increase in U.S. salary growth . The median annual salary for CEOs is also around $16.3 million, hundreds of times higher than the median salary of their employees. This is largely due to executive compensation now being tied to stock options and asset-based incentives, which are approved by company boards to please their investors. In fact, Tesla hasn’t paid Elon Musk a base salary since 2019, instead opting for performance rewards like those featured in its controversial pay package.

Governance dilemma: Much of the criticism over excessive executive pay has focused on income inequality, but it has failed to make a dent in the real world. Bigger problems could arise if rank-and-file employees perceive pay ratios to be unfair, which can weigh on quality, reliability and loyalty, or lead to other problems if they don’t focus on important considerations or risks outside of a company’s stock price. Courts are also now getting involved, as seen in the case of Tesla (TSLA), with allegations of unreasonableness, insider dealings and breaches of fiduciary duties. Complete the WSB survey.

The first state

Part of the drama surrounding Elon Musk’s pay package was the separate shareholder vote in favor of reincorporating Tesla (TSLA) in Texas. The move is seen as an effort to challenge Delaware’s dominance in the industry and could reinforce the view that the state’s shareholder protections are excessive. About two-thirds of S&P 500 companies are incorporated in Delaware, in part because of its chancery court which has an extensive history of legal precedent. However, Texas has worked to win over businesses by guaranteeing lower taxes and recently creating its own specialized corporate court system. (144 comments)

Wait for December

The Federal Reserve is well-positioned to keep an eye on economic data and be patient, according to Minneapolis Fed President Neel Kashkari, who believes the first rate cut will likely come at the end of the year . “We need more evidence to convince us that inflation is on track to come down to 2%,” he said. “We are in a very good position right now to take our time… before making a decision.” Fed policymakers last week reduced their estimates for rate cuts in 2024 to one, down from three previously forecast in March. (18 comments)

Take the popcorn

Inside Out 2 landed an estimated $155 million in ticket sales this weekend in the United States and Canada, helping to assuage some of Hollywood’s concerns about a lackluster summer box office. Disney (DIS) and Pixar’s animated sequel also generated $62 million in domestic ticket sales Friday, marking the biggest opening day at the box office in 2024. Ahead of the big release, box office sales -office were down 26% from last year, when megahits such as barbie And Oppenheimer made headlines. Worldwide sales for Inside Out 2 were also estimated to gross $140 million, bringing its total to a record $295 million and becoming the best-selling feature film that year. (11 comments)