In Conversation with Dr Lalitha Naveen

Dr Tom Gosling interviews Lalitha Naveen, Associate Professor of Finance at the Fox School of Business and Management, Temple University, to discuss her paper: 
“Musk's $56 billion: Pay, Incentives, or Rewards?”, co-authored with Jeffrey Coles, Professor of Finance at the University of Utah and Naveen Daniel, Associate Professor at Drexel University.
 

The key discussion points are:

• The widely reported $56bn value of Elon Musk’s pay package illustrates many of the common misunderstandings about CEO pay.
• First, this figure is an outcome figure based on the share price today and does not reflect the value of the award or cost to the company at time of grant since when the share price has increased by over 10x.
• Second, the figure does not take into account the low probability of meeting the performance conditions, which from the perspective of the grant date was well under 5% - a winning lottery ticket may be worth $100m after the draw, but is only worth $10 before it because of the low probability of winning.
• Third, the award replaced ten years of compensation for Musk, and so needs to be allocated as compensation over a decade.
• As a result, the headline reported figure of $56bn more accurately translates into a grant date compensation value of around $200m a year – still a big figure, but much lower than what has been reported. 
• There is no academic model that tells us strictly how much is too much and the paper does not opine on the justifiability of the pay quantum, but the paper fulfils certain aspects of good compensation design which should not be overlooked in the furore over the absolute amount.

We hope you enjoy the conversation. For more interviews in this series, visit this page.