Why Rivian and Tesla's boards offered Scaringe and Musk such big pay packages

Huge compensation agreements for the CEOs of Rivian and Tesla may not be excessive even though they range from several billion to a trillion dollars.

Ajay Samant, dean of Illinois State University’s College of Business, said the recent $4.6 billion contract for Rivian CEO RJ Scaringe has not raised too many eyebrows.

“The price of Rivian stock actually went up about 6%. So, the public perception of that compensation package is favorable,” said Samant.

Samant said the stock price of Tesla didn’t budge much either way after Elon Musk’s $1 trillion package came out.

Samant said it’s important to understand why executive packages are constructed the way they are, even though the numbers can be eye-popping.

“The intent is to align them with shareholder interests and to give the executives an incentive to increase shareholder value. Over the past several years, these compensation packages have been rising, and they are rising because shareholder expectations of what the executive should be doing have been rising too,” said Samant.

In the case of Musk, Samant said what the board wants is for Musk to devote his complete attention to Tesla and to creating new products for the EV maker. The new contract gives him an incentive to do that. Is that a reasonable expectation, given that Musk famously has had many ventures and interests?

“That has more to do with psychology than business, but I think he has adequate incentive to focus his attention,” said Samant.

Samant said for Scaringe to get the total amount of money in the Rivian contract, he’d have to increase the value of the company a lot. He said the board of Rivian set the bar high, but the targets are not fantasies.

“They have employed professional analysts. They have forecast possible sales over the next 10 years, and based on all of that they have come up with these numbers. I would not look upon these compensation packages as excessive necessarily,” said Samant.

Not just about money

And it’s not solely about the money.

“At that level of net worth, I think it’s more an issue of continuing their legacy, continuing control over the product that they see as their creation,” said Samant.

Samant also said just because Scaringe and Musk could get that much in theory, doesn’t mean they would cash in those gains.

“To actually realize this compensation these CEOs would need to sell those shares, which is a very unlikely occurrence,” said Samant.

He said the contracts for CEOs of companies that are new or in developing industries are different than those in other businesses.

“For an established company, such as GM or Ford, the percentage of salary in the compensation package will be much higher, whereas with these new companies or growth companies, the compensation is much more in the form of the rights to buy shares in the company at some future date, so they are structured differently,” said Samant.

And the compensation packages for electric vehicles may compare favorably to those of other lines of business, even hot tech companies.

“The reason for that is that the product is more tangible. In the case of AI companies, it’s really an intangible product, and it’s very difficult to monetize it, and that’s why there’s a difference in the compensation packages,” said Samant.

Another trend to be aware of is increasing objections to some packages by shareholders. He said the Norwegian sovereign fund campaigned against the agreement between Tesla and Musk.

“What is interesting is that even though there are organizations that push back on CEO compensation packages. They don’t really put their money where their words are in that the Norwegian fund did not sell any Tesla shares which they would have had,” said Samant.

He said boards are more aware today of the need for transparency than they were in the past.

“Social media may have something to do with this because information travels very quickly,” he said.

Samant said contracts may not just focus on growth in absolute terms of share price and profit. There may be comparators.

“Very often there is benchmarking against competitors in the industry, and typically the compensation package would be structured in such a way that the CEO has an incentive to outperform their peers in their industry,” said Samant.

And while the gender pay gap remains significantly present in female CEOs vs males, Samant says it’s narrowing. In absolute terms, there is still a huge disparity.

“If you look at the compensation of the gender breakup of the top, highest 100 paid CEOs, only about 10% are women, all the rest are male,” said Samant.