Musk’s $1 trillion pay package renews focus on rising CEO compensation

Elon Musk’s pay package of up to $1 trillion underscores the continued growth in CEO pay even as employee pay slows and shareholder rewards remain mixed, according to various studies.

Musk is already the richest person on the planet with the highest net worth 660 billion dollarsAccording to Bloomberg. Musk saw his 2018 Tesla pay package, now valued at over $130 billion, reinstated in December, and his company, SpaceX, appears poised for a potential IPO in 2026. These two events could put Musk on track to become the world’s first trillionaire this year. Additionally, the new pay package, worth up to $1 trillion, could start paying off over the next decade.

While Musk is an outlier, his stock-driven gains highlight CEOs’ increased pay and wealth gains in recent years amid rising stock markets and broader adoption of stock-focused pay packages.

Remuneration of top CEOs over the last 50 years climbed 1.094%According to the Economic Policy Institute. This is compared to one 26% increase In typical workers’ compensation.

Average total compensation for S&P 500 CEOs $17.1 million in 2024According to corporate analysis firm Equilar, there was an increase of approximately 10% from 2023. CEOs are doing it now 192 times The rate will increase from 186 to 1 in 2023, more than the average worker.

Driving the momentum in CEO compensation is a shift in the types of stock awards used to incentivize and reward corporate chiefs.

CEO compensation generally consists of four categories: salaries, long-term incentives, short-term incentives, and bonuses. Long-term and short-term incentives largely consist of stock awards and make up the largest portion of CEO compensation. Stock awards announced 72% of CEO pay packages In 2024, the median value increased by 15% that year, according to Equilar.

For example, Musk’s trillion-dollar salary package does not include any salary. The potential value of $1 trillion would come entirely from stock awards pegged to various targets. Tesla needs access to the key for Musk to receive full payment milestonesincluding certain market capitalization and operational achievements. Even if Tesla doesn’t hit all its targets, it could make billions of dollars from its stock.

“Milestone achievements included in CEO compensation packages may become the norm in the future,” said Amit Batish, senior director of marketing at Equilar.

Corporate boards and CEOs say their pay reflects the greater wealth created for shareholders because their pay is closely tied to stock performance. They argue that the CEO can only be successful if shareholders are successful. If stocks fall, CEOs could also see big reductions in their pay.

Others argue that CEOs have only partial influence on their companies’ share prices. A. 2021 MSCI study A study of top executives’ salaries between 2006 and 2020 found a weak correlation between high CEO pay and company performance.

“The idea that the guy in the corner office is somehow almost solely responsible for the value of the company, and everyone else is little slaves who don’t contribute much of anything… anyone can see that that’s not true,” said Sarah Anderson of the Institute for Policy Studies.

According to 2021 MSCI research, average-performing CEOs take home just 4% less than top-performing CEOs. More importantly, the lowest-paid CEOs generated the strongest returns for shareholders.

“When we measure pay and performance by CEO tenure, we find little evidence that high CEO pay achieves this lofty goal of incentivizing the CEO,” according to MSCI, an investment research firm.

Company boards of directors since the 1990s moved away from stock optionsIncentivizing short-term performance through stock awards that boards claim are driven by long-term incentives. Shareholders of publicly traded companies can now vote in an advisory capacity on CEO pay, known as “say on pay” votes, but company boards have the final say when it comes to compensation packages.

While restricting CEO pay has proven ineffective, given that average CEO pay is naturally “boosted” by board compensation committees, some economists advocate giving employees more stock awards to help narrow the gap between employees and CEOs.

For example, Employee Stock Ownership Plans, or ESOPs, are qualified retirement plans that give employees their shares of the company through a trust. Loren Rodgers, executive director of the National Center for Employee Ownership, said employees who can participate in ESOPs tend to have better financial security. He said this also benefits their company.

“Employee-owned businesses are more productive,” Rodgers said. “They’re better at hiring people. People leave at lower wages. They’re more competitive.”

Watch the video above to learn more about CEO pay growth and what’s driving these massive payouts.