Elon Musk’s potentially trillion-dollar compensation package underscores a dramatic and persistent rise in CEO pay, a trend that continues to outpace wage growth for the average worker and yield uneven results for shareholders.
Musk, already the world’s wealthiest individual with an estimated net worth exceeding $660 billion according to Bloomberg, recently had his 2018 Tesla pay package—now valued at over $130 billion—reinstated by a Delaware court. With a potential SpaceX initial public offering on the horizon in 2026, and the new pay deal potentially vesting over the next decade, Musk is positioned to become the planet’s first trillionaire. This remarkable financial trajectory for Musk, while an outlier, vividly illustrates the broader phenomenon of soaring executive compensation, largely fueled by buoyant stock markets and an increasing reliance on stock-based pay structures.
Data from the Economic Policy Institute reveals a stark contrast over the last 50 years: CEO compensation has surged by 1,094%, while typical worker compensation has seen a modest increase of 26%. In 2024, the median total compensation for CEOs of S&P 500 companies reached $17.1 million, a nearly 10% rise from the previous year, according to analysis by Equilar. This puts the average CEO’s earnings at 192 times that of the average employee, an increase from the 186-to-1 ratio observed in 2023.
The escalating executive compensation is largely driven by a fundamental shift in the composition of pay packages. While salaries, short-term incentives, long-term incentives, and perks traditionally constitute CEO remuneration, long-term and short-term incentives, predominantly in the form of stock awards, now represent the lion’s share. In 2024, stock awards accounted for approximately 72% of median CEO pay packages, with their median value climbing 15% year-over-year.
Musk’s proposed pay package, for instance, eschews a base salary entirely, with its immense potential value tied directly to Tesla achieving ambitious market capitalization and operational milestones. Even if not all targets are met, Musk stands to gain billions in stock. This structure, where substantial payouts are contingent on specific achievements, is becoming increasingly prevalent in executive compensation.
Proponents of these high-stakes packages, including company boards and CEOs themselves, argue that compensation is directly aligned with shareholder value creation. The logic follows that if shareholders benefit from stock performance, so too should the CEO, whose incentives are closely linked. Conversely, a significant downturn in stock prices can lead to substantial reductions in CEO pay.
However, the direct correlation between CEO compensation and company performance is a subject of ongoing debate. A 2021 MSCI study examining executive pay between 2006 and 2020 found a relatively weak link between elevated CEO compensation and superior company performance. Critics, such as Sarah Anderson of the Institute for Policy Studies, argue against the notion that a single executive is solely responsible for a company’s value, emphasizing the contributions of the entire workforce.
The MSCI study further indicated that CEOs of average-performing companies received realized pay only marginally less than their top-performing counterparts, and notably, companies with the lowest awarded CEO pay often delivered the strongest shareholder returns. MSCI concluded that “little evidence” supports the idea that high CEO pay effectively incentivizes executives to achieve lofty goals.
Since the 1990s, corporate boards have moved away from stock options, which often incentivize short-term gains, in favor of stock awards designed to promote long-term objectives. While shareholders now have an advisory vote on executive compensation through “say on pay” provisions, ultimate decision-making authority rests with the board.
Given the persistent upward “ratcheting” of CEO pay by compensation committees, some economists suggest alternative approaches to bridge the widening gap between executive and employee compensation. Employee Stock Ownership Plans (ESOPs), for example, offer employees a stake in the company through qualified retirement plans. Research by the National Center for Employee Ownership suggests that participation in ESOPs can lead to improved financial security for employees and foster greater company productivity, recruitment, and retention.
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