Elon Musk’s $1trn pay deal highlights companies’ superstar dilemma

Astronomical pay deal shows the light-years companies will go to retain talent. It also highlights the potential catastrophic risk that businesses see as loss of talent. Tesla clearly states in its annual reports that “Tesla is heavily dependent on Technoking and the services of our Chief Executive Officer, Elon Musk.” The last one is mentioned by name 25 times (not counting signatures and the like). Meta warns that “there could be a material adverse impact on our operations” if social media empire boss Mark Zuckerberg is out of action (and lists his potentially incapacitating pursuits over the past two years: “combat sports, extreme sports and recreational aviation”).

Such fears are not limited to big tech. Ralph Lauren, a purveyor of stylish clothing, makes the same point as Meta about its eponymous founder. Berkshire Hathaway’s commodity-like confession about Warren Buffett raises questions about the investment firm’s future at a time when its 95-year-old leader is, in his words, “going quiet” ahead of his impending retirement.

These concerns increasingly extend beyond the corner office. In knowledge-intensive industries, many companies depend on increasingly fewer extremely talented individuals for an increasingly larger share of their profits. Alphabet, Amazon, Oracle, and Palantir, as well as Meta, all list key “engineering” or “technical” personnel as important to their continued success. This concentration of money-making power is a boon for businesses when these individuals stick around. Their sudden absence becomes a curse.

The cost of losing critical employees can be huge. A 2020 study by a trio of business school professors Morten Bennedsen, Francisco Pérez-González, and Daniel Wolfenzon examined companies whose chief executives were suddenly hospitalized. They found that the profitability and investments of these firms suffer significantly, especially if the boss is young and the company belongs to a human capital-intensive industry. When Bill “Bond King” Gross was poached from PIMCO in September 2014, the share price of the asset manager’s parent company, Allianz, immediately fell 6%. The following month saw a net outflow of $48 billion from PIMCO’s funds.

The unexpected departure of an organization’s superstars can negatively impact those who remain. In 2010, Pierre Azoulay and Jialan Wang, then of the MIT Sloan School of Management, and Joshua Graff Zivin of the University of California, San Diego, estimated that the early death of a superstar researcher caused his collaborators to publish 5% to 8% fewer high-impact papers over the long term. In a research-dependent business like biotechnology or artificial intelligence, this difference can be measured in billions of dollars.

If superstars leave rather than die, the decline in productivity of their former colleagues may be compounded by the threat of competition they now pose from outside. Just ask OpenAI. The maker of ChatGPT is fending off rival AI labs launched by several of its co-founders (including Mr. Musk’s xAI and Ilya Sutskever’s Secure Superintelligence) and senior engineers (Anthropic and Thinking Machines). On November 11, the Financial Times reported that Meta’s top AI expert, Yann LeCun, was planning to strike out on his own.

Superstars don’t usually jump ship alone. Sometimes an exodus can unknowingly trigger an exodus. In 2008, two elite American law firms, Heller Ehrman and Thelen, collapsed within a month as a result of a self-perpetuating partner run.

Sometimes mass departures may be pre-planned rather than accidental. When Mustafa Süleyman, Alexandr Wang and Varun Mohan left the companies they co-founded and ran (Inflection AI, Scale AI and Windsurf), they took their entire engineering team with them. They now work for Microsoft, Meta and Google respectively. (Mr. Suleiman also moonlights as an executive at The Economist’s parent company.) Stranded of key staff, deaf startups rely on corporate dowries in the form of licensing deals with tech giants to snag talent. This limits their expectations and is a positive development for early venture capital backers.

From Musk until dawn

There’s not much companies or investors can do to protect against the loss of superstars. Companies regularly take out key person insurance against the hospitalization or death of critical personnel. Life policies typically pay up to ten times the employee’s gross salary or five times the net profit attributable to him or her. In other words, buying protection against Mr Musk getting run over by a robotaxi was previously eye-wateringly expensive. The new salary agreement makes him uninsured.

And there is no coverage for people who resign. What’s more, many jurisdictions, including California, the heartland of AI, prohibit non-compete agreements that limit employees’ ability to move between jobs. England wants to limit these to three months. The only solution for businesses is to increase salaries. While Mr. Musk’s 13-figure package may seem obscene today, it could be table stakes tomorrow.

Subscribers to The Economist can sign up for our Opinion newsletter, which brings together the best of our leaders, columns, guest pieces and reader correspondence.