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In November 2025, Tesla shareholders approved a compensation package for Elon Musk potentially worth $1 trillion over ten years—the largest executive pay arrangement in corporate history.¹ More than 75 percent of voting shareholders supported the plan, despite opposition from both major proxy advisory firms, ISS and Glass Lewis, as well as Norway's sovereign wealth fund, which cited concerns over total award size, dilution, and key-person risk.² The advisory recommendations were overridden, and comfortably.
The Tesla package is an outlier in scale but not in structure. It illustrates a broader dynamic that has become one of the most consequential—and least examined—governance failures in American public markets: the transformation of executive compensation from a tool of shareholder alignment into an architecture of guaranteed outcomes, wrapped in the language of performance.
Median total CEO compensation at S&P 500 companies reached $17.1 million in fiscal year 2024, a 9.7 percent increase over the prior year.³ The average CEO-to-worker pay ratio rose to 285-to-1, up from 268-to-1 a year earlier.⁴ At Starbucks, newly installed CEO Brian Niccol received approximately $97.8 million in total compensation during a partial fiscal year—6,666 times the median employee's pay of under $15,000—producing the widest pay gap among all S&P 500 companies.⁵ Yet despite these figures, median say-on-pay approval among S&P 500 companies in 2025 was 92.7 percent, and the Russell 3000 failure rate of 1.4 percent remained near its historical low.⁶
The question for institutional investors is not whether CEO pay is "too high" in absolute terms. That is a political question. The question is whether the performance-based compensation structures that purportedly justify these figures are genuine mechanisms of accountability or sophisticated instruments designed to ensure that executives are paid regardless of outcomes. A forensic examination of how these structures actually operate suggests the latter.
The foundation of the modern executive compensation process is peer group benchmarking. More than 97 percent of S&P 500 companies disclose benchmarking peer groups, and compensation committees routinely target pay at or above the median of the selected peer set.⁷ The process appears rigorous. In practice, however, the discretion afforded to boards in constructing peer groups creates a structural upward bias that compounds over time.
The mechanism is straightforward. A company selects a peer group composed of companies that are somewhat larger, somewhat more profitable, or operating in adjacent industries with higher compensation norms. The median pay of this peer group becomes the benchmark against which the CEO's compensation is calibrated. Because companies across the index are simultaneously benchmarking against peers that are, on average, larger and better-compensated, the result is a self-reinforcing escalation cycle—what governance scholars have termed the "ratchet effect."⁸ ISS data confirms the dynamic: companies whose peer groups deviate significantly from network-implied comparators tend to have higher levels of CEO compensation, and the median pay of their company-selected peers exceeds that of the crowd-sourced peer group in 53 percent of cases—a figure that rises to 59 percent among companies with the greatest deviation.⁷
Glass Lewis has observed that inappropriate use of peer group comparisons can contribute to a cyclical compensation "arms race," with companies selecting aspirational peers based on ambitious growth targets or setting pay levels above the peer median based on the perceived worth of their executive team.⁹ The effect is not symmetrical. When performance declines, compensation committees rarely select a downwardly-adjusted peer group. The ratchet turns in one direction.
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If the peer group determines how much a CEO should be paid, the performance metric determines whether the CEO earns the payment. Here, too, the system is structurally biased toward payout.
Many annual incentive plans at large public companies use non-GAAP financial metrics—most commonly adjusted EBITDA, adjusted revenue, or adjusted earnings per share—as the performance measures against which executive bonuses are calculated.¹⁰ These metrics exclude categories of expense that management deems non-recurring or outside its control: restructuring charges, acquisition-related costs, stock-based compensation expense, litigation reserves, and similar items. The exclusions are determined by management, approved by the compensation committee, and disclosed in the proxy statement—often in language that is technically compliant but functionally opaque.
The forensic concern is not that adjusted metrics exist. It is that the same executives whose compensation depends on achieving these targets also control the adjustments that determine whether the targets are met. A company that misses its GAAP earnings target by a meaningful margin can, through the application of "pre-approved" exclusions, report an adjusted result that exceeds the compensation threshold. Semler Brossy's analysis of Fortune 100 proxy disclosures found that approximately 24 percent of companies made discretionary adjustments to incentive payouts or targets, and that every company making upward adjustments also reported positive total shareholder return—creating the appearance of pay-for-performance alignment regardless of whether the adjustment itself was what pushed the payout above threshold.¹¹
Beyond metric design, compensation committees retain a set of tools that function as a structural safety net—ensuring that executives are compensated even when formulaic outcomes would produce a below-target payout.
The first tool is the mid-cycle target reset. When macroeconomic conditions deteriorate or a company's performance falls short of plan, compensation committees have the discretion to lower performance thresholds during the measurement period. The Council of Institutional Investors has observed that performance-based plans are susceptible to manipulation and that executives may use their influence and information advantage to advocate for the selection of metrics and targets that deliver substantial rewards even without superior performance—such as target awards earned for median performance versus peers.¹² CII's policy states that, except in extraordinary situations, committees should not "lower the bar" by changing targets in the middle of performance cycles.¹² The frequency with which this nevertheless occurs is difficult to quantify precisely, because the adjustments are disclosed in narrative form within the Compensation Discussion and Analysis rather than in a standardized tabular format.
The second tool is the individual performance metric, or IPM. ISS-Corporate's analysis of over 2,100 companies found that companies incorporating IPMs in their annual incentive programs tend to deliver higher payouts and that executives at these companies are more likely to achieve target compensation than executives at companies using entirely formulaic metrics.¹³ The implication is that individual performance metrics—which are inherently more subjective than formulaic financial targets—function as a discretion substitute, allowing compensation committees to ensure near-target payouts without the shareholder backlash that accompanies an overt discretionary adjustment.¹³
The third tool is the one-time retention or sign-on award. These grants, often worth tens of millions of dollars, are presented as necessary to recruit or retain executive talent and are frequently treated by proxy advisors as distinct from ongoing compensation when evaluating pay-for-performance alignment. Brian Niccol's approximately $97.8 million in first-year compensation at Starbucks consisted overwhelmingly of sign-on equity awards designed to replace forfeited Chipotle holdings.⁵ While each individual element of the package may be defensible on its own terms, the cumulative effect is a compensation structure in which the concept of below-target pay has been largely engineered out of existence.
The Securities and Exchange Commission is now preparing what may be the most significant reform of executive compensation disclosure requirements in two decades. In June 2025, the SEC hosted a roundtable on executive compensation disclosure, at which panelists—including representatives from public companies, institutional investors, and compensation advisors—reached broad consensus that the current rules under Item 402 of Regulation S-K have become excessively complex, costly, and insufficiently useful to investors.¹⁴ SEC Chairman Paul Atkins reiterated in December 2025 remarks that compensation disclosure reform remains a priority, and a proposed rule is widely expected in 2026.¹⁵
The reform effort presents an opportunity—but also a risk. If the SEC simplifies disclosure in a manner that reduces the granularity of information available to investors—particularly regarding the specific adjustments applied to performance metrics, the composition and rationale of peer groups, and the exercise of committee discretion—the result could be less transparency, not more. Institutional investors should engage actively in the comment process to ensure that any simplification preserves the forensic inputs that informed analysis requires.
For the institutional investor who takes proxy analysis seriously, the following indicators merit systematic review.
First, compare the company's self-selected peer group against an independently constructed comparator set based on revenue, market capitalization, and industry classification. Where the company's selected peers are materially larger or higher-paying, the peer group is functioning as a justification device rather than a benchmarking tool.
Second, identify the specific performance metrics used in annual and long-term incentive plans and assess the gap between GAAP results and the adjusted results used for compensation purposes. A persistent and widening gap between GAAP performance and compensation-eligible performance is a red flag that metric adjustments are being used to manufacture target achievement.
Third, examine the Compensation Discussion and Analysis for disclosure of mid-cycle target adjustments, discretionary modifications, or the use of individual performance metrics with subjective evaluation criteria. Track the payout percentage of annual incentive plans over a rolling multi-year period. A company whose incentive plans consistently pay at or above target—regardless of the operating environment—is a company whose performance thresholds lack rigor.
Fourth, assess whether the pay-versus-performance table, now required under Item 402(v) of Regulation S-K, reveals a meaningful correlation between compensation actually paid and total shareholder return over the full disclosure period. Where the correlation is weak or absent, the company's compensation structure is not functioning as an alignment mechanism regardless of how it is described in the CD&A narrative.
Fifth, evaluate sign-on, retention, and make-whole awards as a percentage of total named executive officer compensation. Where these awards constitute a majority of total pay in a given year, the company's reported compensation figures may overstate the role of performance-based pay in its overall compensation philosophy.
The executive compensation apparatus at large American public companies is not broken in the conventional sense. It functions precisely as designed. The design, however, serves the interests of the executives whose pay it determines—not the shareholders whose capital it deploys. The peer group ratchet ensures that target pay levels rise in all environments. The use of management-defined adjusted metrics ensures that targets are achievable even when GAAP results deteriorate. The discretionary safety net ensures that formulaic shortfalls are corrected before they reach the payout calculation. And the say-on-pay vote—advisory, non-binding, and supported by a median approval rate above 92 percent—provides the appearance of shareholder endorsement without the substance of shareholder control.
For institutional investors, the proxy statement is not a formality. It is a forensic document—one that, read with the same rigor applied to the financial statements, can reveal the difference between a company that genuinely ties executive pay to performance and a company that has spent considerable resources ensuring that it never has to. As the SEC prepares to revisit the disclosure framework for the first time in nearly twenty years, and as median CEO compensation reaches new highs, the distinction has never been more consequential.
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Referenced Sources
[1] CBS News, "Tesla shareholders approve CEO Elon Musk's $1 trillion pay package" (November 6, 2025), reporting that the plan was approved with more than 75 percent of voting shareholders in favor at Tesla's annual meeting in Austin, Texas, and that the package would be delivered over a ten-year period subject to performance milestones including an $8.5 trillion market capitalization target, 20 million vehicle deliveries, and 1 million Optimus robots deployed. See also CNBC, "Tesla says shareholders approve Musk's $1 trillion pay plan with over 75% voting in favor" (November 6, 2025).
[2] The Hill, "Tesla shareholders approve trillion-dollar pay package for Musk" (November 6, 2025), reporting that ISS and Glass Lewis both recommended shareholders vote against the package and that Norway's sovereign wealth fund voted against, citing concerns over "the total size of the award, dilution, and lack of mitigation of key person risk."
[3] Equilar and the Associated Press, "2025 CEO Pay Study" (May 2025), reporting that median total compensation for S&P 500 CEOs was $17.1 million in fiscal year 2024, a 9.7 percent increase from the prior year. See also ISS-Corporate, "2025 U.S. Compensation Post-Season Review" (October 16, 2025), reporting that median S&P 500 CEO pay reached an all-time high in fiscal year 2024.
[4] AFL-CIO, "2025 Executive Paywatch" (July 2025), reporting that the average CEO-to-worker pay ratio was 285-to-1 for S&P 500 companies in 2024, up from 268-to-1 in 2023, and that average S&P 500 CEO compensation reached $18.9 million.
[5] Fortune, "Starbucks CEO Brian Niccol made 6,666 times more than the median employee at his coffee chain last year" (July 25, 2025), reporting that Niccol received $97.8 million in total compensation versus median employee pay under $15,000, with the overwhelming majority of compensation consisting of sign-on restricted stock units designed to replace forfeited Chipotle equity. See also AFL-CIO, "2025 Executive Paywatch" (July 2025), identifying Starbucks as having the widest CEO-to-worker pay gap among S&P 500 companies.
[6] ISS-Corporate, "2025 U.S. Compensation Post-Season Review" (October 16, 2025), reporting median say-on-pay support of 92.7 percent for S&P 500 companies during the 2025 meeting season, with the number of failed votes well below levels observed between 2021 and 2023. See also Semler Brossy, "2025 Say on Pay Reports" (February 11, 2026), reporting a Russell 3000 failure rate of 1.4 percent.
[7] ISS Analytics, "Peer Selection and the Wisdom of the Crowd: Considerations for Companies and Investors" (June 26, 2018), reporting that more than 97 percent of S&P 500 companies disclose benchmarking peer groups, that companies whose peer groups deviate from network-implied comparators tend to have higher CEO compensation, and that the median pay of company-selected peers exceeds the wisdom-of-the-crowd median in 53 percent of cases overall and 59 percent among companies with the greatest deviation.
[8] Harvard Law School Forum on Corporate Governance, "CEO and Executive Compensation Practices in the Russell 3000 and S&P 500" (December 31, 2025), noting that the "ratchet" effect is more pronounced in the S&P 500, where firms benchmark CEO pay against peers, driving continual increases as companies compete for top talent.
[9] Glass Lewis, "Avoiding Pitfalls in Peer Group Selection and Executive Pay Benchmarking" (August 6, 2024), observing that "inappropriate use of peer group comparisons can contribute to a cyclical compensation 'arms race,' whether inadvertently or by design," and that companies "have also become adept at using peer comparisons to illustrate purported retention risks that necessitate additional compensation."
[10] Harvard Law School Forum on Corporate Governance, "Impact of Non-GAAP Earnings and Adjustments on Incentive Plan Payouts" (January 11, 2024) (Pay Governance memorandum by Mike Kesner and Steve Pakela), discussing the widespread use of non-GAAP financial metrics in executive compensation incentive programs and the increased scrutiny of certain adjustments by proxy advisory firms and investors.
[11] Semler Brossy, "When Should Companies Consider an Adjustment to Executive Incentive Payouts?" (November 29, 2023), analyzing 92 Fortune 100 companies and finding that 22 (approximately 24 percent) adjusted incentive payouts or targets, and that all eight companies making upward adjustments displayed positive total shareholder return.
[12] Council of Institutional Investors, "Policy Overhaul—Executive Compensation" (September 17, 2019; published November 30, 2019), stating that "performance-based plans also are susceptible to manipulation" and that "executives may use their influence and information advantage to advocate for the selection of metrics and targets that will deliver substantial rewards even without superior performance."
[13] ISS-Corporate, "Individual Performance Metrics: Discretionary Adjustments or Pay Flexibility?" (November 14, 2024), analyzing annual incentive programs across 2,124 companies in the S&P 500 and Russell 3000 and finding that companies with individual performance metrics tend to deliver higher payouts and that executives at these companies are more likely to achieve target compensation.
[14] Harvard Law School Forum on Corporate Governance, "Preparing for the 2026 Annual Reporting and Proxy Season" (February 17, 2026), reporting that the SEC hosted an Executive Compensation Roundtable on June 26, 2025, at which panelists discussed the overcomplexity and "patchwork" nature of current disclosure rules. See also Morrison Foerster, "What to Expect in 2026: Anticipated Changes to Executive Compensation Disclosure" (December 8, 2025).
[15] White & Case, "Key considerations for the 2026 annual reporting and proxy season part II: Proxy statements" (March 2026), reporting that SEC Chairman Paul Atkins reiterated in December 2025 remarks that executive compensation disclosure reform remains a priority.
This article is published by Buxton Helmsley USA, Inc. for informational and educational purposes only. It does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. The views expressed are those of Buxton Helmsley and are based on publicly available information as of the date of publication. Investors should conduct their own due diligence and consult with qualified professionals before making investment decisions.
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