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$55.8 billion. That is, if he loses in an upcoming shareholder vote.

Tesla shareholders will be casting their ballot on the issue before the company's annual meeting on 13 June. Much of the focus, both of allies and critics of Musk, has been on the size of the executive pay, which was earlier deemed inappropriate by a court despite the plan having been first approved by investors in 2018.

Now, a group of shareholders with proxy advisory firm Glass Lewis has been urging other investors to vote against the payout, believing it would dilute their holdings. If approved, Tesla would be issuing some 304 million new shares, affecting the value of the holdings and likely hurting smaller investors.

"Tesla is suffering from a material governance failure which requires our urgent attention and action," the group wrote in a missive to fellow investors.

Was the US$55.8B payout necessary?

The compensation plan in question is six times more than the combined pay of 200 of the world's top earners. This would have been his payout for having remained CEO of the electric vehicle company right as it was facing turmoil.

Back in January, 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 Musk.

“[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.

Officials at Tesla, however, are working hard to convince shareholders to again vote in favour of Musk's pay package and Tesla's plan to relocate its incorporation from Delaware to Texas.

In April, Robyn Denholm, chair of the Tesla board of directors, called the ruling against Musk, "fundamentally unfair and inconsistent with the will of the stockholders who voted for it." 

Denholm said Musk hadn't been paid for his role at Tesla for the past six years despite generating growth and shareholder value. 

"If Tesla is to retain Elon’s attention and motivate him to continue to devote his time, energy, ambition and vision to deliver comparable results in the future, we must stand by our deal," Denholm told shareholders.

"This is obviously not about the money. We all know Elon is one of the wealthiest people on the planet, and he would remain so even if Tesla were to renege on the commitment we made in 2018."

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 between Tesla and his other ventures, such as SpaceX, Neuralink 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, in reality, 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 would 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 in an AFR report.

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 because Tesla had ambitious targets.

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

For some talent and business leaders, the debate about Musk’s pay also raises concerns about strategies for remunerating a top performer.

"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)?”