Tesla board chair explains what could happen if Elon Musk's pay package is rejected

• Tesla board chair discussed what could happen if Elon Musk's pay package is rejected.
• Robyn Denholm said a new plan could cost an extra $25 billion worth of stock-based compensation.

The vote for Elon Musk's hotly debated $55 billion pay package is next week.

The compensation plan, originally put into place in 2018, was struck down earlier this year by a Delaware judge who said the billionaire had undue influence over the board because of close ties to some of its members.

Tesla is now putting Musk's pay package to a shareholder vote on June 13 in an effort to reinstate it. So what will happen if it isn't approved?

Tesla board chair Robyn Denholm said in an interview on CNBC's "Squawk Box" on Thursday that there are multiple possibilities. The board has considered options such as creating a new pay plan — but she said that could end up costing shareholders more.

Denholm argued that the compensation tied to the 2018 pay package, which was worth an estimated $2.3 billion in stock-based compensation charges at the time, had already been paid out. Rejecting the plan wouldn't change that.

But if the shareholders overturn the 2018 pay plan, and Tesla were to craft a new plan with the same stock grants, they would cost around $25 billion worth of stock-based compensation today.

When asked if whether Elon Musk could ultimately sue Tesla if shareholders reject ratification, Denholm said it was "possible," but she didn't know how probable it would be.

"Well, the good part about the legal system in the US is anybody can sue anybody," Denholm said. But Denholm said at this point, it wasn't something that Musk had brought up to the board.

The Tesla board chair said while there may be other options, they would lead to increased costs or decreased motivation from Musk.

Denholm said the CEO has worked incredibly hard over the last six years to lead the company to "transformative growth." While shareholders and customers have both benefited, Musk himself hasn't received compensation.

"Ratifying the plan is the best option," Denholm said. "Clearly, if it doesn't pass, then there are other alternatives, but none of them are as good from a shareholder perspective as actually ratifying the plan."

There's also no guarantee that the pay plan will survive even if shareholders do ratify it on June 13. The Delaware court system could rule that it's still invalid.

Denholm said if that were to happen, it would be "detrimental" to shareholders, which is another reason she said they were fighting so hard to get it ratified.

"Well that is possible," she said. "But quite frankly, if you sit back, that is actually quite detrimental from a shareholder policy perspective."

"Shareholder votes have been pretty sacrosanct from a Delaware law perspective, from a corporate America perspective, from a legal system," she said.

Advocates for and against ratifying Musk's pay package have been ramping up their arguments in recent weeks. Several investment firms urged shareholders to vote against it, most recently the CEO of the California Public Employees' Retirement System.

Meanwhile, Tesla's board and prominent shareholders like Ron Baron have been actively campaigning for its approval, arguing that it is fair and necessary to keep the CEO's focus on Tesla.

Musk does not earn a salary and his compensation relies on the company's performance with specific metrics defined in 2018.

The executive pay plan involves a 10-year grant of 12 tranches of stock options that are vested when Tesla hits specific milestones. Once the company hits each target, Musk gets stock equal to 1% of outstanding shares at the time of the grant. Tesla said it hit all 12 goalposts as of 2023.