In the past decade, Tesla has become the leading automotive brand in the fast-growing electric vehicle (EV) space. The company’s shares have made many people millionaires, and Tesla’s founder and CEO, Elon Musk, has also become one of the richest people in the world.
While Elon Musk always seems to attract controversy – from his disruption-leading ventures like Tesla or Space X to his inflammatory online comments – in recent weeks he has made headlines because of his pay package.
The payment deal he was supposed to receive was reportedly worth up to US$56 billion but was struck down by a Delaware judge two months ago. However, it’s now back in the spotlight as Tesla’s shareholders voted online on whether to reinstate it. Around 72% of its shareholders backed it.
Origins of Musk’s Compensation Package
To fully understand the recent deal that was voted on, it’s essential to go back to 2018, when Tesla’s shareholders initially approved the US$56 billion package.
In 2018, Elon Musk’s compensation was structured to align his pay with Tesla’s share price performance. While this approach is common in corporate America, it had a unique twist: Musk stopped receiving a base salary from Tesla in 2019.
Performance-Based Compensation
The 2018 agreement set Musk’s performance targets for 10 years. If these targets were met, he would receive payouts in stock options. Specifically, Musk was eligible to earn 303 million options, adjusted for stock splits, which would have equated to approximately 12% of Tesla’s outstanding shares at that time.
The stock options were to be delivered in 12 separate tranches. Musk would be awarded 1% of Tesla’s outstanding shares for each set of goals completed. Out of 28 performance targets, 12 were tied to Tesla’s market capitalization, measured in US$50 billion increments up to US$650 billion.
Market Capitalisation and Payout Calculation
Currently, Tesla’s market capitalization stands at around US$560 billion. If the pay package had been fully applicable one year ago, when Tesla’s market cap exceeded US$650 billion, Musk would have received the full US$56 billion. However, based on Tesla’s current market cap, the theoretical payout would be around US$47 billion.
Here’s the breakdown:
Musk had 303 million options with a strike price of US$23 (adjusted for stock splits). Tesla’s stocks were trading at around the US$23 range in 2018.
With Tesla’s share price at approximately US$178, the value of each option is US$155 (US$178 – US$23).
Multiplying US$155 by the 303 million options gives a total payout of just under US$47 billion.
This amount still represents a substantial sum and accounts for roughly 22% of Musk’s estimated net worth of US$210 billion.
Additional Targets
The remaining 16 targets of the 28 in the 2018 pay package were evenly divided between earnings (eight) and revenue (eight). These targets ensured that Musk’s compensation was tied to Tesla’s market performance and financial health and growth.
Due to Tesla’s performance over the past few years, Elon Musk has hit all eight earnings milestones. Only a few revenue milestones remain. according to the 2023 proxy statement, Musk has earned all but 25 million of the options available to him.
Where Do Tesla and Musk Go From Here?
While Tesla shareholders have approved the compensation package at the firm’s annual meeting, it remains uncertain when or if Elon Musk will receive the US$47 billion payout.
At Tesla’s annual meeting on June 13, 2024, shareholders voted to move the company’s legal jurisdiction from Delaware—where the original judge struck down the pay package—to Texas. This move could significantly impact the package’s reapproval, as Tesla would then be considered a Texas corporation and fall under Texas court jurisdiction.
Although relocating to Texas may not prevent further legal challenges to the pay package, many investors, including Musk, perceive Texas as a more business-friendly state. Texas does not impose a corporate income tax, which is advantageous for companies.
Musk’s Other Ventures
Tesla shareholders likely view Musk’s pay package reapproval as a victory, as they want to retain him as CEO. However, there are concerns about whether Musk can fully commit to Tesla’s business, given his roles as CEO and founder of several other companies, including the Boring Company, SpaceX, and the recently founded xAI.
The controversy surrounding Musk’s substantial payout has reignited the debate over executive compensation and whether such astronomical sums are justified.
For now, with the approval of the compensation package by Tesla shareholders and the company’s pending move to Texas, it seems increasingly likely that Musk will receive his much-anticipated share options.
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