Tesla stock’s long-term potential may have been diminished by the company’s decision in early August to grant $29 billion of the company’s stock to CEO Elon Musk.
That’s the implication of research by Gautam Mukunda, a lecturer at the Yale School of Management and author of Indispensable: When Leaders Really Matter. In an interview he said granting large numbers of company shares to CEOs who already own huge amounts “encourages behaviors that are bad for companies and shareholders.”
Mukunda’s assessment runs counter to the conventional rationale for granting large stock awards, which is that they incentivize CEOs to do an even better job leading their companies. But he says that this rationale is unable to withstand scrutiny, particularly when the CEOs granted these large stock awards already own huge amounts of stocks. For example, on the day before Tesla’s board granted him the additional shares worth $29 billion, Musk already owned approximately 13% of the company—worth around $120 billion at prices then prevailing.
That meant that even without the additional compensation, Musk stood to become $120 billion richer if Tesla stock doubled—as it has since the beginning of last year. If gaining that much isn’t enough to incentivize someone to do their best, Mukunda says, then adding $29 billion won’t make a difference: “If billions more are needed to motivate CEOs who already own huge chunks of their companies, the entire premise of incentive compensation collapses.”
Tesla’s investor relations department didn’t respond to requests for comment.
No CEO is Infallible
Mega stock awards are more than just a waste of money, however. They actually encourage CEOs to behave narcissistically, according to Mukunda, and that in turn can harm the company’s long-term prospects.
Mukunda emphasizes that he isn’t a psychologist and he isn’t accusing Musk personally of narcissism. Instead, he is talking about so-called CEO narcissism, a topic of management research.
The concern is that mega stock awards encourage CEO self-aggrandizement and “often serve as status symbols within CEO peer groups.” Numerous academic studies have documented a correlation between such compensation and significant long-term costs to a CEO’s company.
That research is particularly relevant when it comes to CEO pay. That’s because many corporate CEOs already have a tendency to view themselves as infallible. “What you don’t want to do,” Mukunda says, “is take a CEO who is slightly more narcissistic than average and then add more fuel to the fire” by granting a mega stock award.
Researchers who have studied CEO narcissism have focused on a number of proxies for these traits, such as how big a CEO’s photograph is in annual reports, the size of his portrait in corporate offices, the size of his signature in annual reports, and the CEO’s use of first-person singular pronouns in interviews.
Mukunda says it’s unclear how Musk would fare by such measures. But he adds: “Musk clearly seeks attention for himself in a way that is exceptional among CEOs. For example, very few CEOs have a cameo in Iron Man 2.”
Mukunda says that the weight of the academic evidence is that CEO narcissism is a long-term negative for the company. One study found that it “engenders extreme and fluctuating organizational performance.” This certainly applies to Musk, whose record at Tesla has been volatile—ranging from phenomenal success like pioneering EVs to stunning failures like the slow-selling Cybertruck.
Another study found that “firms led by narcissistic CEOs experience lower financial productivity in the form of profitability and operating cash flows.” Yet another found that “CEO narcissism is associated with worse credit ratings.”
The bottom line? Concern about CEO pay is nothing new. But most of that concern up until now has focused on equity (is it fair to pay CEOs so much?) and waste (is it a good use of corporate resources?). The research on CEO narcissism points to a third reason to be concerned that potentially is even more serious: Mega pay packages granted to CEOs may actually lead to worse corporate outcomes.
Mark Hulbert is a regular contributor to Barron’s. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
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