Why did Tim Cook’s pay package hold up in court while Elon’s failed?


Just one week after Elon Musk's $55 billion You're here salary was overturned by a Delaware judge and a New York court rejected a challenge has Apple CEO Tim Cook's compensation, which came to less than $100 million. A coincidence.

At first glance, the two cases seem to have a lot in common. Both were shareholder lawsuits against some of the world's highest-paid tech superstar CEOs. And both were filed in a context of increased public scrutiny of executive compensation in recent years, which is close unprecedented highs in S&P 500 companies.

But for all their similarities, from a legal perspective the two cases are apples and oranges — and Cook would still be more likely to keep his salary.

That of Elon Musk A remuneration of 55 billion dollars at Tesla made headlines last month after Delaware Chancellor Kathaleen McCormick ruled in favor of a shareholder who argued that Tesla was paying its CEO an unfairly high amount with the Moonshot grant. Plaintiff Richard Tornetta argued that because Musk wields so much power at Tesla and has close relationships with its board members, the supposedly independent board's vote approving his massive compensation plan was anything but.

“Chancellor McCormick discovered that the process of setting Elon Musk's salary was essentially controlled by Elon Musk,” said Ann M. Lipton, a law professor at Tulane University, in an interview with Fortune. “The board did not engage in any form of resistance or real negotiation.”

In response, Musk threatened to relocate Tesla from Delaware (where almost 70% of Fortune 500 companies are incorporated) in Texas, where a more favorable political climate could make it less exposed to these types of challenges.

While the Musk case focused on a larger, more abstract legal question related to the degree of independence of Tesla's board, the Cook case resolved yesterday was much simpler.

“The question before Delaware [in the Musk case] was simply: “Was the pay fundamentally unfair?” whereas the question in the Tim Cook case was only: “Was the proxy statement misleading?” “, Lipton said.

The Teamsters Pension Fund sued Apple last yeararguing that the company misled investors by misrepresenting Cook's salary for 2021 and 2022 in its proxy statements and paying him more than it was initially offered.

Because Cook and other Apple executives are paid primarily in stock called RSUs, the company uses financial models to estimate Cook's actual salary, which is subject to shareholder approval each year.

(For CEOs, it is not uncommon to be paid primarily in stock. Mark Zuckerberg, as we know, only earns $1 annual salary, but he made billions from Meta stock awards included in his compensation package. The Economic Policy Institute found in a report last year that stock-related pay accounts for a significant share more than 80% of CEO compensation.)

The pension fund that sued Cook argued that Apple misrepresented its CEO's actual compensation by underplaying the value of his equity. Cook and other Apple executives received more than $90 million in compensation for 2021 and 2022, more than the $77.5 million estimate the company initially asked shareholders to vote on for approval .

(Both numbers are well below Cook's current annual compensation; at his own request, Apple CEO took a 40% pay cut Last year. The change was approved by shareholders and Apple's board of directors' compensation committee, which includes former Vice Chairman Al Gore.)

The plaintiffs claimed that Apple used an unusual financial model to artificially deflate Cook's salary estimate and that they also buried the compensation tables in a dull, gray section of the proxy statement, where shareholders would be less likely to notice it before giving their opinion. Pay for votes. The court didn't buy it.

“What happened with Tim Cook is very common in public companies,” said Marc Hodak, a partner at executive compensation consultancy Forient Advisors. “They award performance shares based on the par value of the share. And each of these performance share units has a market value greater than the par value of the stock at the time of grant.

One of the main differences between the two cases was the scale of the contested salary package. Tesla's $55 billion award to Musk was part of the the largest compensation plan in company history. Although Cook's $100 million annual salary is by no means a small sum, it is comparable to that of his peers. In fact, Apple uses a group of its competitors, including Meta, Netflix, Visa, and Cisco, to compare the compensation of its executives. (He notably added Tesla to this peer group last year.)

“I have no doubt about the size and scale of [Musk’s] The salary package was a determining factor, both in terms of the litigation and the ruling that we saw,” Hodak said. “[$55 billion] will automatically attract unusual scrutiny.

Taken together, these two cases appear to hint at a broader trend toward greater scrutiny of inflated CEO salaries — but Lipton cautioned against reading the tea leaves prematurely.

“Elon Musk is beating the drum that everyone should leave Delaware, to suggest that somehow this is a trend,” Lipton said. “I think it’s an Elon Musk problem. This Tim Cook thing was a different law. That was a different argument.

Apple representatives did not immediately respond to a request for comment.

This story was originally featured on Fortune.com



Source link

Scroll to Top