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A board of directors of a major public corporation should not have to beg its chief executive officer to pay attention to the business. If that person is disinterested, fire him or her and get someone who will. But that is not how things work at Tesla, where the board is paid roughly 100 times more than board members at other major corporations. They are slaves to the wishes of one person — Elon Musk.
The topic of how much Elon should be compensated for his contributions to Tesla is a matter of some debate. The original compensation package from 2018 proposed a payout worth roughly $54 billion, but a Chancery judge in Delaware ruled that plan was so outrageous that it violated the duty of the board to represent all shareholders, not just one. Oddly enough, in May, Tesla amended its bylaws to forbid such suits from anyone who owns less than 3 percent of the outstanding shares of the company, so minority shareholders are now prohibited from suing over such trivial matters as Musk’s compensation.
Without Precedent
Bloomberg covered the story in detail on September 5. It called the proposed new compensation plan, “a massive package without precedent in corporate America. The long-awaited proposal — designed to incentify Musk to lead Tesla for years to come — sets a series of ambitious benchmarks he must meet to earn the full payout, including expanding Tesla’s nascent robotaxi business and growing the company’s market value to at least $8.5 trillion from about $1.1 trillion today. The plan spans 10 years.”
For those who enjoy reading SEC filings, you can view the entire document at this link. It could not only make Musk the first person in history to earn $1 trillion in compensation, it would also increase his ownership stake in the company to around 25 percent, something he has suggested on multiple occasions would be needed to get him to devote his full attention to Tesla. And so the board of directors has dutifully devised a plan that will give Elon what he wants.
Under the new plan, Musk must remain at Tesla as either CEO or as an executive officer responsible for product or operations in order to receive the shares, which are divided into 12 tranches. To qualify, Musk has to hit 12 market capitalization milestones matched with 12 operational milestones. The specifics are set forth on pages A 31 and A 32 of the proxy statement,
The market capitalization requirements reward Musk if Tesla is worth progressively more than it is today. In ten years, it must reach $8.5 trillion, compared to just over $1 trillion today. On the performance side, the company must reach a total of 20 million automobiles sold, 1 million Optimus robots delivered, 1 million robotaxis in commercial operation, and growth in adjusted Ebitda to $400 billion.
The SEC filing also included a non-binding shareholder proposal for Tesla to take a stake in Musk’s xAI startup, an idea Musk has previously discussed. The proposals, including the compensation agreement, will be voted on by investors at the annual meeting set for November 6.
Loopholes Abound
Sharp-eyed readers will note that Musk does not have to be the CEO to qualify for this gigantic payday. All he has to do is occupy a senior role responsible for product or operations. Some may see this as a convenient dodge that will allow Musk to collect even if he is little more than a senior executive — a situation that seems designed to allow him to pursue his multitude of other interests while letting others do the heavy lifting.
“The new package underscores Musk’s iron grip on [Tesla], despite the myriad demands on his time. Musk, who has served as Tesla’s top executive since 2008, oversees four other businesses, including xAI, X, SpaceX, and the Boring Company,” Bloomberg said. (There’s also Neuralink. Musk’s right-hand man for several years is currently CEO.)
The proxy also outlines that Musk must participate in the board’s development of a framework for someone to succeed him as CEO in order to earn either of the last two tranches of the performance award. “Simply put, retaining and incentivizing Elon is fundamental to Tesla achieving these goals and becoming the most valuable company in history,” Tesla said in a shareholder letter signed by Chair Robyn Denholm and director Kathleen Wilson-Thompson, who served on a special board committee assessing CEO compensation.
Reportedly, Musk has met personally with both of them about ten times while the terms of the offer were being hammered out. Those discussions identified four core product lines that are expected to drive the future growth of the company — its driver assistance technology called Full Self-Driving, robotaxis, robots, and the expansion of Tesla’s vehicle fleet. The emphasis on those four points indicate that producing actual cars still matters to the company.
Wishful Thinking
Credit: MSNBC via YouTube
Musk’s radical political ambitions are also a factor in the new pay package. In the SEC filing, the Tesla board acknowledged that “Musk’s high public profile attracts significant scrutiny, and that some have questioned whether his personal views or outside activities might be a distraction from his leadership of Tesla. While media coverage often emphasizes these concerns, our direct experience with Musk does not support that characterization.” The board said that it sought to “receive assurances that Musk’s involvement with the political sphere would wind down in a timely manner.”
Any first year law student knows “in a timely manner” leaves a hole in the legal language large enough to drive a Tesla Semi through. The term is so vague it is clearly unenforceable. Courts refer to such language as “precatory,” but most would simply characterize it as wishful thinking.
Does giving someone $1 trillion based on wishful thinking seem like sound business judgement to you? We have been waiting and waiting for the Tesla board to rein in Musk, whose political fulminations have done so much damage to the Tesla brand, but all we get is “in a timely manner”? What a grossly overpaid bunch of sycophants this board is.
Blowback On Tesla Board
David Wagner, head of equity and portfolio manager at Aptus Capital Advisors, said in an interview reported by Bloomberg, “It shows that the life blood of Tesla solely relies on one man, and the company knows that. They want to make sure that he stays around for quite some time.”
Gene Munster, managing partner of Deepwater Asset Management, said the incentives for Musk align with Tesla’s push to grow in artificial intelligence, making xAI a natural partner. “Tesla’s board recognizes that there’s a huge opportunity over the next decade, and they want to start lining things up to get them in a place for a potentially huge outcome.”
“One minute Tesla’s board is wondering if Elon Musk is a liability to the company given his outspoken views and political distractions; the next they’re effectively saying ‘pick a number, any number’ to lock him in for as long as possible,” Dan Coatsworth, an investment analyst at AJ Bell in London told The Guardian. He added that the pay package “beggars belief” and questioned whether one person could be worth that much.
“Tesla is a public company, and shareholders will ultimately decide if he deserves a $1 trillion pay deal. Securing this money will be dependent on hitting targets, and current progress suggests Musk will need a stroke of extraordinarily good luck to grab the 13-digit figure.
“Shareholders would love for Musk to hit the targets to trigger the payday, as they would also share in the success via a higher share price. Therefore, it feels like many investors would happily approve it. The bigger question is whether this proposal sets a new precedent and boardrooms across America will think it’s OK to add a zero or two on to the end of current remuneration packages. It all seems a tad excessive and a symptom of poor corporate governance.”
Despite such niggles from the likes of Dan Coatsworth, Tesla shareholders are virtually guaranteed to approve the new plan in November because they believe a rising tide raises all boats and they will benefit personally if Musk hits his marks.
Around the offices at CleanTechnica world headquarters today, the most commonly heard phrases are “pump and dump” and “Ponzi scheme.” Maybe we are just jealous. The potential payout “may seem outrageous to the average person,” Nancy Tengler, CEO of Laffer Tengler Investments, told Bloomberg. But the requirements, including boosting Tesla’s market cap, would be “a win for all shareholders.”
Can Elon continue to walk on water and deliver the performance required by this latest compensation package? “We’ll see,” said the Zen Master.
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