CEO pay is hitting stratospheric levels—Should society step in to limit excessive compensation?

Depending on your point of view, Musk is enigmatic, mercurial, brash, unfiltered, hyperactive, intensely competitive and vile—or visionary, charismatic, innovative, strategic and boldly disruptive. As the name Tesla implies, the company co-founded by Musk was a pioneer in creating high-quality electric vehicles (EVs) based on electric motors and power systems invented by the Serbian-American inventor Nikola Tesla.

Unlike Musk, the original Tesla, his hero, had sunk all his money on experimentation and died a pauper. Nearly a quarter century ago, Musk also founded SpaceX, the most successful private space company in the world.

SpaceX is now the world’s dominant space launch provider, thanks to its reusable Falcon rockets. The company’s Falcon 9 rockets have exited and re-entered earth’s orbit nearly 500 times, averaging 1-3 launches a week. Their feature of reusability has let Musk dominate civilian satellite-based internet services through Starlink, a wholly owned subsidiary of SpaceX. With over 7,000 satellites in its constellation and a subscriber base of 8 million, Starlink makes up about 80% of SpaceX’s annual revenue.

After a brief and ill-advised sojourn at the US government in the early months of the current Donald Trump administration, Musk returned to Tesla and SpaceX. To incentivize his focus on the company, Tesla’s board proposed a $1 trillion performance-based equity compensation package. That package was approved by shareholders this month with an overwhelming majority of 75%.

An earlier procedurally botched attempt to pay Musk $56 billion from 2018 onwards was struck down by a Delaware court. The latest trillion-dollar package is made up of 424 million restricted stock units (RSUs) in Tesla that will accrue to him in 12 separate tranches, each to be unlocked if and when specific targets are met. Each tranche is tied to Tesla’s market capitalization, with the first available at $2 trillion and the final one at $8.5 trillion.

To attain his pay package, Musk must deliver on all these operational goals: One, deliver a cumulative 20 million vehicles over 10 years; two, deploy 1 million robotaxies; three, produce 1 million humanoid robots; four, reach 10 million active, full and self-driving subscriptions; and five, achieve $400 billion in trailing earnings before interest, taxes, depreciation and amortization (Ebitda).

The ratio of the annual compensation of the median Fortune 500 CEO to the median worker in the US has held steady for two decades at about 200:1, though both have risen in nominal terms. At one end are companies like McDonald’s, where this ratio is nearly 2,000:1. While not included in public company figures, hedge fund managers like Ken Griffin of Citadel and Ray Dalio of Bridgewater are routinely paid over $1 billion a year. For the UK, the pay ratio for FTSE 100 company CEOs to the median worker is 75:1.

In India, the median compensation of Nifty 50 CEOs is ₹22.6 crore ($2.6 million) and the ratio to the median worker is 700:1. This is for the formal workforce; the ratio to the median pay for informal or subsistence work would be much higher. The highest paid Indian CEOs earn about $15-20 million a year ( ₹100-150 crore). Like in the US, a significant portion (often over two-thirds) of this is equity-linked compensation.

Should society moderate these differences? On one hand, if shareholders as owners of a company opt to authorize a huge pay package (in equity), do others have a right to complain? As in Musk’s case, if shareholders incentivize disruptive moonshots, is it not their own business?

On the other hand, are companies endowing individuals with superhuman powers and expectations and distorting reality to such an extent that society can no longer see straight? What does that imply for these ratios? Should they be reduced? If so, how can or should society go about doing that?

In the US, widespread awareness and transparency have kept relative compensation in a particular band over a long period of time. In India, the market does offer transparency on CEO compensation, but society inherently appears to have accepted a huge class divide.

I come from the persuasion that for long-run harmony, society must be egalitarian: not equal, but fair and meritocratic, with broad-based prosperity. Taking a leaf from political philosopher John Rawls’ book, inequality is fine only if the structure maximally benefits the least advantaged and if everyone has an equal opportunity to rise. That still begs the question of how society can go about achieving this.

US regulations require that each company reports the ratio of its CEO compensation to the median worker’s pay. India should require the same. For India, the answer to the challenge of reducing this ratio partly lies in lifting what the median worker earns. This will require greater skilling and productivity contributions from workers at large, so that the median worker’s rate of real wage growth can improve.

P.S: “The natural distribution is neither just nor unjust; nor is it unjust that persons are born into society at some particular position. These are simply natural facts. What is just and unjust is the way that institutions deal with these facts," said John Rawls in his classic ‘Theory of Justice.’

The author is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand