May 31 (Reuters) - Top proxy advisory firm ISS

recommended Tesla shareholders vote against ratifying

CEO Elon Musk's $56 billion pay package, calling the

compensation excessive in a rejection of the plan set by the

electric vehicle maker's board.

In a report sent by a representative late on Thursday,

Institutional Shareholder Services also recommended a vote

against Tesla director James Murdoch, but backed votes for

director Kimbal Musk, Elon Musk's brother, and for the company's

proposed move to change its state of incorporation to Texas from

Delaware.

The move follows a similar recommendation for a vote against

Musk's pay package by proxy advisory firm Glass Lewis last week.

The vote is seen as a referendum on Musk's leadership, as

investors worry that the billionaire entrepreneur is distracted

by his other ventures and that his often controversial comments

are weighing on the reputation and sales of Tesla.

Tesla did not respond to a request for comment.

The massive compensation arrangement, the biggest for a

corporate CEO in America, set rewards based on Tesla's market

value and operational milestones. But in January, a Delaware

judge voided the plan, and Tesla subsequently sought to move its

state of incorporation to Texas.

Unusually, Tesla put the 2018 pay plan up for a

re-ratification vote at its upcoming annual meeting on June 13.

PROXY INFLUENCE

While the recommendations from the big proxy advisory firms

play a role in focusing attention on certain issues at corporate

annual meetings, their exact influence on votes is up for debate

and criticism.

A recent University of Utah study found their

recommendations can have a significant impact on votes but also

found the firms themselves may only be channeling the views of

investors, their customers.

Tesla responded to Glass Lewis' recommendations in a

securities filing earlier this week, saying Musk is creating

wealth for Tesla stockholders and has "skin in the game."

In recommending votes against Musk's pay, ISS wrote that

"although the structure of the grant's performance hurdles

arguably contributed to, as well as reflect, the company's

significant financial growth during the performance period, the

total award value remains excessive, even given the company's

success."

"In addition, the grant, in many ways, failed to achieve the

board's other original objectives of focusing CEO Musk on the

interests of Tesla shareholders, as opposed to other business

endeavors, and aligning his financial interests more closely

with those of Tesla stockholders," ISS' report said.

Other concerns include "a lack of clarity on the board's

plan" for Musk's future pay, ISS wrote.

ISS recommended a vote against director and audit committee

member Murdoch "given concerns about the risk oversight function

of the board."

ISS wrote that while it had concerns about the process used

by the Tesla board to decide to move to Texas, it is "not

readily apparent that the rights of shareholders would be

materially harmed as a result of the proposed reincorporation."

Tesla is making a public effort to rally support for the pay

package and the company's board has justified the compensation

by saying it is necessary to make sure Musk prioritizes Tesla

over his other commitments.

Tesla shares were slightly lower in premarket trading on

Friday, and have declined about 28% so far this year.

"It's a very interesting case for Tesla, given it is the

most widely held stock globally by retail investors who frankly

don't give a hoot about what ISS tells them to do," said Ben

Laidler, global markets strategist at trading platform eToro.

About 44% of Tesla's common stock is held by

non-professional shareholders including retail investors, the

highest percentage of the 10 largest companies in the S&P 500,

according to S&P Global Market Intelligence.

A report by eToro earlier this month showed that votes had

been exercised on around a quarter of all Tesla shares held by

users of the trading platform, with more than 80% voting in

favor of Musk's pay package.

"If anybody's going to buck the trend of what proxy advisors

say, it's going to be Tesla. The vote is a real test case for

the power of retail investors," Laidler said.