• Proxy advisor ISS urges Tesla shareholders to vote against Elon Musk's massive compensation package
  • ISS also recommends rejecting a proposal for Tesla to invest in Musk's artificial intelligence startup xAI
  • The recommendations come amid growing scrutiny of corporate governance and executive pay at the electric vehicle maker

Institutional Shareholder Services has thrown a wrench into Tesla's ambitious plans, recommending that investors reject both Elon Musk's proposed $56 billion pay package and a separate proposal for the automaker to invest in xAI, Musk's artificial intelligence startup.

The influential proxy advisor's stance, detailed in a report circulated to clients on Friday, represents a significant challenge to Tesla's board as it seeks shareholder approval for the compensation plan that would be the largest in corporate history. The recommendation comes just weeks before Tesla's annual shareholder meeting, where both proposals face crucial votes.

"The sheer magnitude of the award, combined with the concentration of ownership and voting power, raises concerns about dilution and corporate governance," ISS stated in its analysis, according to people familiar with the matter. The firm specifically cited "insufficient rationale" for the compensation package's size and structure.

New York State Comptroller Thomas DiNapoli, whose office oversees the state's pension funds, has already voiced opposition to the pay package, arguing it fails to align with shareholder interests. "This proposal lacks appropriate governance safeguards and would set a concerning precedent for executive compensation," a spokesperson for DiNapoli's office said in an emailed statement.

The compensation package, which Tesla's board has framed as essential for retaining Musk and driving the company's ambitious growth targets, would grant the CEO stock options tied to achieving specific market capitalization and operational milestones. Tesla shares fell nearly 2% in after-hours trading following news of the ISS recommendations.

Regarding the xAI investment proposal, ISS expressed concerns about potential conflicts of interest and questioned whether such an investment would serve Tesla's core business objectives. The proxy advisor noted that "the terms and strategic rationale for the proposed investment remain unclear," according to sources who reviewed the report.

Tesla's board had previously defended both proposals as crucial for the company's future, with directors arguing that Musk's leadership is essential for navigating the competitive electric vehicle market and expanding into artificial intelligence and autonomous driving technology.

A Tesla spokesperson didn't immediately respond to requests for comment on the ISS recommendations. The company has been actively campaigning for shareholder support ahead of the June 13 annual meeting, where both proposals require majority approval to pass.

The developments come amid increased scrutiny of executive compensation practices across the technology sector, with several high-profile companies facing shareholder pushback on pay packages deemed excessive or poorly structured. Tesla's proposal for Musk represents one of the most significant compensation votes in recent corporate history.

Correction: An earlier version of this article misstated the date of Tesla's annual shareholder meeting. The meeting is scheduled for June 13.