Musk’s 55 billion reasons to succeed
Some question the giant amounts in Tesla incentive proposal.
SAN FRANCISCO — Aggressive, audacious, bristling with risk. That describes Tesla Chief Executive Elon Musk. It also describes the pay plan Tesla’s board of directors wants to grant him.
In a special meeting to be held Wednesday, shareholders will decide in a binding vote whether they’ll go along.
Even by the Olympian standards of executive pay, the Musk plan is a jaw dropper. The deal could allow Musk to take in more than $55 billion over its 10-year duration.
Other outsize pay plans — such as Apple Chief Executive Tim Cook’s 10-year, nearly $400-million stock option plan, or Disney Chief Executive Robert Iger’s $100-million deal last December — pale by comparison.
The Musk plan is unusual in other ways. It’s a pure performance package: no salary, no bonus, no stock grants based on showing up for work. Only stock options will be offered, pegged to Musk’s ability to elevate Tesla’s total market value far above its current $56 billion while boosting revenue and, eventually, profit.
Musk’s existing pay plan, formulated in 2012, likewise is based mainly on stock options linked to performance. But the focus has been on making sure products get out to market, and less on financial metrics. Options accounted for much of the 22% share of the company he now owns. Under the new plan, he will no longer be offered a salary, which amounted to just $49,720 in 2017.
For maximum payout, the new plan requires Musk to multiply Tesla’s market value twelvefold, to $650 billion.
The plan is contingent on Musk remaining at the company, though not necessarily as CEO, and meeting a series of milestones based on either revenue or profit. If he can’t hit any of them — because, say, Tesla proves unable to fix serious produc-
tion problems hampering sales of its new Model 3 electric sedan and revenue falls short — he gets nothing.
The plan pays out stock options in increments, every time Tesla’s market value rises by $50 billion and a revenue or profit milestone is achieved.
Still, two major firms paid to advise institutional shareholders on such matters are recommending that they vote no.
“There is a lot to be said for Elon Musk’s star power, but at the end of the day, this is a publicly held company,” said Julian Hamud, compensation research director at Glass Lewis in San Francisco.
Granting up to 20.3 million shares to Musk would dilute the shares of existing shareholders and skim their potential upside, Glass Lewis said.
Plus, Glass Lewis and the other major firm, Institutional Shareholder Services, question why such a plan is necessary at all. As laid out in Tesla’s official 14A proxy filing with the Securities and Exchange Commission, the Tesla board of directors seeks to “motivate” and “incentivize” Musk to lead the company to greater financial glory.
Musk’s current Tesla holdings, worth about $12 billion, will increase by billions more if the company’s market value continues to grow. A maximum payout under the new plan would put Musk’s total ownership at about 28% with a market value around $182 billion.
“Musk’s financial interests are already strongly aligned with Tesla,” ISS said in a prepared statement. “It is questionable whether an additional … grant is necessary or appropriate to further align his interests when he already owns a 22% stake in the company.”
Compensation consultants and academics who study executive pay have joined the chorus of critics. Even fans of Musk’s vision of a sustainable-energy economy wonder, as Robin A. Ferracone, chief executive of compensation consultant Farient Advisors put it, “How much is enough?”
“This is a guy who’s promising to send people to Mars. He thinks big. It’s worked for him. He’s a billionaire,” said Steven Balsam, a compensation specialist and professor at Temple University’s Fox School of Business. “But I do question why he needs it to begin with. It’s not like he’s using it to motivate his employees or other managers.”
Michael Dorff, a professor at Southwest Law School in Los Angeles and author of a book about executive pay, “Indispensable and Other Myths,” said Musk is one of few company leaders to whom that myth might not apply.
“I do believe a motivated Elon Musk matters,” he said. But he doesn’t see Musk going anywhere, rich pay plan or not.
“He lives for these projects, he lives to make them succeed. He wants to save the world. I say this with admiration. But it’s hard to see how money (at this point) motivates Musk at all,” Dorff said.
Musk might disagree. Perhaps he aims to rank as the world’s richest person while he carries out his social mission. (That title currently belongs to Amazon.com founder Jeff Bezos, at $132 billion; Musk ranks 44th with a net worth of $20.7 billion, according to Bloomberg.)
Maybe he wants to publicly emphasize his great ambitions as Tesla issues new stock to keep the cashburning company afloat. Or, he has other reasons why the pay plan is necessary. Musk and members of the Tesla compensation team were invited to discuss the matter with The Times, but declined.
A Tesla representative said Musk’s 22% stake constitutes a “baseline incentive” and the new pay plan “aims to maximize the incentives for him to lead Tesla over the long term and ensure maximum shareholder alignment and value creation.”
As to motivation, the representative said that if milestones are met, the resulting compensation “will provide especially meaningful resources for someone like Elon who has a number of well-known endeavors to push humanity forward. As just one example, he has a well-known ambition to see human life on Mars.”
Some big shareholders figure they’ll score rich returns if market growth booms — even if Musk’s pay skims a bit from their total gains. A Tesla representative likened the situation to a travel agent able to take you where you want to go, for a small fee: no agent, no trip.
Investment firm Baillie Gifford & Co., which owns 7.6% of Tesla stock, and mutual fund giant T. Rowe Price, which owns 6.4%, each said they’re voting yes. The plan “is well aligned with shareholders’ long-term interests,” T. Rowe Price said in a prepared statement.
A Baillie Gifford executive told Bloomberg that “Elon Musk — his drive and his vision — has been a really important part of getting us to this point. Tesla still needs that drive and that vision to push the business.”
Supporters also like the fact that, as Tesla’s proxy filing states, Musk’s “only compensation will be a 100% at-risk performance award, which ensures that he will be compensated only if Tesla and all of our stockholders do extraordinarily well.”
Still, Musk will need to emerge from what he’s called “production hell” at Tesla’s factories. A CNBC report on Thursday quoted a Tesla engineer saying that 40% of the parts made or received at the company’s Fremont factory require rework, causing production delays. (Tesla disputes the CNBC story, and notes that rework on parts is common in manufacturing.)
Meanwhile, the pay plan would allow Musk to hit eight revenue milestones without ever having to register a profit. (The 14-year-old company has reported annual losses every year since it went public in 2010.) Tesla said that the plan focuses on growth and that an overemphasis on immediate profit could hamper that ambition.
All the criticism is frustrating to some of Musk’s supporters. There are those who say the pay plan is being viewed through an oldfashioned lens. Tesla, which also makes solar panels and storage batteries, should be considered a technology company, not an automaker, with all the tremendous potential growth that implies, said Dan Walter, chief executive at compensation consultant Performensation.
The auto industry is under radical transformation, he said, and Tesla is poised to take advantage by turning its cars into computers of the highway and spreading artificial intelligence through its manufacturing plants.
From an auto industry perspective, a $650-billion market value looks “patently ridiculous,” Walter said. But, he added: “Musk understands that the value of companies is not necessarily driven by the number of cars produced or the number of people you employ. It’s a bigger, more emotional thing than that.”