Tech entrepreneur Elon Musk will have to forgo what would have been the biggest executive pay package in the history of Corporate America: a staggering US$56 billion.

The amount, which is six times more than the combined pay of 200 of the world's top earners, was his payout for having remained the CEO of the electric vehicle company right as it was facing turmoil.

A judge in the US state of Delaware decided against the billionaire CEO in a lawsuit by Tesla shareholders. Complainants led by an individual, Richard Tornetta, alleged Musk’s pay package was exorbitant even as a reward for the turnaround strategies the board of directors had laid out for the CEO.

“[The] board never asked the US$55.8 billion question: was the plan even necessary for Tesla to retain Musk and achieve its goals?” Judge Kathaleen McCormick wrote in her decision cancelling the payout.

“The incredible size of the biggest compensation plan ever – an unfathomable sum – seems to have been calibrated to help Musk achieve what he believed would make ‘a good future for humanity,’” the judge said.

The value of Musk’s role at Tesla

Questions about the value of Musk’s role at Tesla emerged when the complainants pointed out the purported lapses of the directors. They argued that the board should have hired another CEO, offered a more reasonable compensation, and forced Musk to focus on Tesla instead of dividing his time and attention between Tesla and his other ventures, such as SpaceX and social media platform X.

Tornetta alleged Musk influenced the decisions around his pay and that the board – far from acting as oversight against inappropriate conduct – were beholden to the CEO. They were purportedly concerned Musk would leave Tesla if his wishes were left unsatisfied.

The judge’s ruling against Musk was a “good day for the good guys,” a lawyer for Tornetta said, as quoted by ABC News.

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While the decision can be appealed before the Supreme Court, analysts believe this scrutiny will prompt Tesla’s directors to take Musk’s behaviours more seriously. “It is too risky for the board to carry on as it is,” Jefferies analyst Philippe Houchois said, as reported by AFR.

Musk holds Tesla stocks equivalent to about 10% of the company. It’s also worth noting that the billionaire does not earn any salary for his role as Tesla CEO.

However, the compensation package cancelled by Judge McCormick was meant to be a handsome payout precisely because Tesla had ambitious targets and Musk aimed for them.

The directors wanted to motivate Musk to achieve at least 12 of the 16 financial targets the board had set; among them, revenues of US$175 billion and a market capitalisation of US$650 billion. The caveat: if Tesla failed to reach a valuation of US$100 billion, Musk would get nothing. Ultimately, he achieved 12 of the performance-based targets.

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The debate over Musk’s CEO pay

The debate surrounding Musk’s payout echoes concerns about how to remunerate a top performer in a company.

"Do you believe in being paid for the value you create? Well, Elon Musk was just robbed of US$55 billion after achieving the 'impossible' with Tesla," said Frank Iozzo, founder of the financial advisory and investment firm FMI Financial.

"Would any business owner or board complain about paying their salespeople $0 in salary and an 8.4% commission? That’s any business's dream arrangement," he said. "I know people won’t feel sorry for Elon, but this isn’t about Elon – it’s about the message it sends, and it’s horrible."

For Lora Kolodny, tech reporter for CNBC, the implications of the decision could lead to a drop in Musk's wealth: “If this is not successfully appealed, essentially Musk may see tens of billions of dollars worth of his wealth evaporate.”

Andrew Daniels, founder of Brisbane-based business consulting firm Aurelius Advisory, compared the experience of Musk to asking for a pay increase and getting rejected. It's a question for HR and talent leaders just as much as it is for the board.

“It’s not a great feeling. In a week where Elon Musk had two incredible achievements, he also has had a monumental hit to his hip pocket,” Daniels said. “This pay increase request is laughable. So to avoid the embarrassment, recruiters, how do we work out how much we can ask for? And how can we improve our chances of getting it approved (by your boss, not a judge)?”