High Pay, High Risk: What it Means to be the Most Paid CEO
We all dream to receive a pay for our services that will instantly make us rich. But, when faced in a situation that we are offered a high-paying job, we must not always focus on the rainbow after it, but also with the rainfall that come with it.
Elon Musk, the Tesla CEO, is the richest man in the world now and his wealth comes from the stock awards and gains in Tesla’s stock prices, not in cash salaries. It is not unusual for executives to receive stock options as compensation. Yet, Musk's compensation package is still more complicated than usual and may be the boldest ever.
Musk, the highest compensated CEO according to Forbes, has a compensation plan of stock options that he can unlock if Tesla achieves certain milestones for market capitalization and operational milestones either revenue or earnings before interest, taxation, depreciation and amortization. Overall, the package grants Musk 10-year maximum term stock option to purchase 20,264,042 shares of Tesla’s common stock, divided equally among 12 tranches, each equivalent to 1% of the issued and outstanding shares of Tesla’s common stock each milestone achieved.
The elaborate compensation package is unique because of the high compensation tied on high milestones. Musk’s pay directly depends on the success of the company and so, ensures to motivate him for his long-term commitment to the growth of Tesla. Yet, it is unusual as he does not need such high compensation to serve as a motivation because he already owns a lot of stocks in Tesla. The high pay was not so necessary. Moreover, the milestones on each tranches are rising and ambitious.
Such unique compensation package can be an area of significant risk for fraud because of its high, unusual amount. Considering the fraud triangle, the compensation package presents possible opportunities, pressures and a chance of rationalization of fraud. The package provides an opportunity to commit fraud, serving as a cover up for a fraud, because no one may not expect or notice it. The person in question is rich enough to hide and avoid the punishment. Musk is also the top executive which can make a way to control the disclosure of necessary information.
Furthermore, pressure can also be a factor since Musk needs to pay a huge amount of tax bill and he also incurred debts with his stocks as collateral. He may need a huge amount of money to fulfill his obligations and may not want to compromise his financial status and so, there are chances of fraud. To add, the compensation package gives way for rationalization. One can just say he will give it back after sometime since the stock options will be unlocked after achieving a milestone.
However, among the three elements of fraud triangle, pressure is of the most significance. Aside from the emerging obligations and debts to pay, the milestones itself pose a threat. To immediately reach such ambitious objectives in the compensation scheme, manipulations of financial statements to deceive. Financial pressures and work recognition is to be emphasized in considering frauds from the scheme.
To address the risk of fraud, good corporate governance is the overall response. Governance has the role to control threats and risks. The compensation scheme was constructed by the company and the company itself must have the responsibility to manage the benefits and risks that come with it. Such huge compensation tied with bold milestones to be achieved must be monitored well or it will all be for naught.
The board of directors, of course, has the responsibility to implement and maintain the governance. It rests on them the role to evaluate how near the company is in fulfilling the long-term plans in the package and how successful the compensation package in meeting the underlying adjectives. They have the role to oversee that all goes well. They have the role to control by appointing an audit committee that will oversee the financial reporting. Accordingly, it is important to elect a board that can ensure that the compensation scheme does not become an opportunity for fraud and can manage its proper implementation. Shareholder rights comprise of voting rights on who to elect. It is in their hands, the owners, to put in place the first of line of defense. Their voting rights should be responsibly utilized by being informed of the progress of the scheme. With this they can use their right on making changes.
The package that awards stock options to Musk relies on accomplishing milestones in the company’s financial position and operations. Manipulations of financial information due to pressures should be focused on to avoid the awarding of options wrongly. Internal corporate governance mechanism, specifically the appointment of audit committee can address the risk of fraud since the audit to be conducted aims to reasonably assure that there are no misstatements due to fraud or error. Manipulations of information are detected by such control. Moreover, the CEO in question is an influential man that have the resources to induce the people around him. Therefore, as a control independent directors who have no relationships or any significant financial interest must be elected to provide oversight over the leadership of the CEO.
A high compensation surely excites us. Yet, even the too good to be true remunerations and compensations are not too good in reality. When offered with a huge amount of salary, I must remain critical and avoid being hasty. There are risks, financially and ethically, underlying in it. One must make a judgment that is based on correct information though research and consultation. In my own career, I must ensure that I am paid enough – not too less and not too high.