Payday for one
On proxy statements, $100 million rewards, and how to think about the world's biggest executive compensation package
The shareholders of Tesla have ratified an unfathomably large compensation package for Elon Musk -- one, in the words of the company's proxy statement, "equivalent to 12% of the total number of shares of our common stock". In dollar terms, NBC News calls it a $56 billion reward.
■ Warren Buffett has thought about executive compensation probably more thoroughly than anyone alive today. And for at least two decades, he has argued (as did his partner, Charlie Munger) that stock options should be expensed when used as tools of executive compensation (as shareholders have consented to doing for Musk). And there is no escaping the knowledge that $56 billion is an inconceivably large sum for an individual.
■ Musk has been one of the most dynamic figures on the world business scene in at least a lifetime, if not in a century or longer. But if one adopts the Buffett view of compensation -- that it should all be counted as expense, no matter what form it takes -- then the plain question that must be asked by the rational owner is this: By comparison with compensating one person $56 billion, how much would the company have benefited from hiring 56,000 engineers at $1 million each over the same period of time? Or 5,600 elite professionals at $10 million each? 560 at a still-eye-watering $100 million apiece?
■ If options are properly viewed as a real expense (as they should be), then one of the very first rules of economics applies: The real cost of something is what you give up in order to get it. And a titanic compensation package granted to an individual must always be weighed against the value of using the same total sum to compensate a larger number of people with smaller increments. Not small, but simply smaller.
■ Shareholders are free to consent to whatever compensation packages they see as necessary to achieve their desired results as company owners. But as a matter of intellectual rigor, they shouldn't unwittingly assume that they've gotten a better deal by rewarding one rather than 5,600 or 56,000.
