The year was 2018. Tesla was valued at about $59 billion. Elon Musk agreed with Tesla to propose to shareholders a series of increasingly difficult financial milestones which would ultimately boost the car company’s value to at least $650 billion. Alongside this goal were a dozen revenue and adjusted profit targets. In return, Musk would be given the right to buy up to 304 million shares at a preset price of $23.34.
It was an all-or-nothing deal. Meet the targets and receive billions in compensation. Miss them, even by a few million, and get nothing. It was a radical, “skin-in-the-game” compensation plan, and a New York Times article on January 23, 2018, cited many experts who said it was laughably impossible, as it would make Tesla one of the five largest companies in the United States.
Many critics dismissed it as another publicity stunt by Musk. And why not? In its latest quarter, the company continued to lose money; the year before, it lost almost half a million dollars an hour. Notably, short-seller Jim Chanos was publicly betting against Tesla, contending that Tesla was worthless.
Musk repeatedly stated that he was not bothered by people like Chanos and was only concentrating on his companies. Still, he understood the magnitude of his commitment because if he failed, “then my compensation would be zero,” he said. But the upside was enticing enough for him to take the risk, given that “I actually see the potential for Tesla to become a trillion-dollar company within a 10-year period.”
This wasn’t the first time he attempted something like this. In 2012, when Tesla was valued at just $3 billion, he tied his compensation to performance. By 2018, he had met all but one of the metrics in that plan, growing Tesla 17-fold. Even then, he refused to sell his $13 billion worth of shares and zoom off. He told the board he was not accepting a salary, and even though California State law required Tesla to pay him at least minimum wage, he stored the $37,000 annual salary in a bank account and refused to touch it.
So, the new deal was taken to shareholders for a vote. About 73 percent of non-Musk shareholders approved the plan.
Over the next four years, Musk sped past those milestones. In 2021, Tesla’s share price soared above $400, lifting the company’s value to more than $1 trillion. Even today, as the stock trades at $177, Tesla has become the most valuable car company in the world—and those shares pledged to Musk are valued at $56 billion.
Musk’s deal would be the largest compensation plan in U.S. corporate history, potentially earning him 300 times more than the $162 million earned by America’s highest-paid CEO last year.
However, a problem arose as Musk sought to collect his compensation: Certain shareholders sued to block the payouts, arguing it was created with the help of overly compliant Tesla directors. In January of this year, a Delaware judge agreed and voided the 2018 compensation deal, contending that the process to decide it was “deeply flawed.” She deemed the payout an “unfathomable sum” that was unfair to shareholders.
“Swept up by the rhetoric of ‘all upside,’ or perhaps starry-eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?” wrote Kathaleen McCormick of Delaware’s Court of Chancery. McCormick noted that many of Tesla’s board members, including Kimbal Musk, Elon Musk’s brother, and James Murdoch, son of media tycoon Rupert Murdoch, lacked independence due to their close personal ties with the CEO. Two of Tesla’s other current directors, Robyn Denholm and Ira Ehrenpreis, also showed a lack of independence in the pay decision, she said.
As expected, Musk was incensed by the decision, flying off the handle on social media: “Never incorporate your company in the state of Delaware,” Musk said in a post on X.
In April, Tesla’s board of directors announced it would ask shareholders to vote again to ratify the package. Board chair Robyn Denholm argued that the vote was a matter of basic “fairness to our CEO.” Several other investors and shareholders showed their support, including billionaire investor Ron Baron, who declared Musk “the ultimate ‘key man’ of key man risk” and predicted that next week’s shareholder vote “will likely be yes.”
But not everyone is on board. Leo Koguan, one of Tesla’s largest individual shareholders, said he would vote against the package on the grounds that Musk has “abandoned” Tesla in favor of other businesses. Proxy advisors ISS and Glass Lewis recommended investors reject the deal. The California Public Employees Retirement System, America’s biggest pension fund, and the New York City retirement funds also planned to vote against the proposal.
So, the stage is set for Tesla shareholders to vote on ratifying Musk’s stock option grant for a second time next week on June 13.
Musk, for his part, is reportedly threatening to leave the company if shareholders don’t approve his $56 billion pay package. Tesla is making a full-court press to convince shareholders to approve his compensation.
“Elon is not a typical executive, and Tesla is not a typical company,” Tesla board chair Robyn Denholm wrote in a letter to shareholders filed with the Securities and Exchange Commission. “What we recognized in 2018 and continue to recognize today is that one thing Elon most certainly does not have is unlimited time,” Denholm said. “Nor does he face any shortage of ideas and other places where he can make an incredible difference in the world. We want those ideas, that energy, and that time to be at Tesla, for the benefit of you, our owners. But that requires reciprocal respect.”
An interesting week awaits…
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References: New York Times, Reuters, Fortune Magazine, CNBC, Barrons, Yahoo Finance, Bloomberg, The Verge
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