The $1 trillion pay package for CEO Elon Musk that Teslashareholders approved on Nov. 6—the world’s first—was labeled by the board as an exemplar of pay for performance. And at first glance, the program appears to fit that description in a big way: The hurdles it establishes for Musk to receive any compensation at all, let alone achieve the maximum 13-digit payout, appear the ultimate in stretch goals. Skeptical observers might wonder: “How could anyone be motivated by targets this seemingly unachievable?”
On the other hand, Tesla loyalists and the three-quarters of Wall Street analysts issuing either a “buy” or “hold” on the EV maker praise the arrangement’s similarity to one from 2018 that spurred Musk to work wonders—at least in boosting the share price. Now, they’re positing: “Elon’s already done it once. Now he’ll be super-motivated to stay in the job and conjure a second miracle. And if that happens, stockholders will pocket another king’s ransom.” Musk concurs.
A close examination of the new plan, however, reveals that it harbors a “betwixt and between” problem. The lower-hanging fruit are too easy to harvest, and the harder goals that would mark substantial and genuine progress in profitability too difficult to attain. Probable outcome: Musk gets nothing resembling the $1 trillion, but still pockets one of the biggest payoffs in corporate America—as shareholders suffer along the way.
The reason the epic scheme risks backfiring: It contains two loopholes that enable Musk to fare handsomely by doing something he’s great at, hyping the stock via making big promises, then delivering just enough on the basic business end to clinch a rich reward.
How Musk’s new pay package is structured
The package consists of 12 tiered grants of restricted stock. Unlocking each “performance milestone” requires reaching both a valuation and an operational goal. It’s the safety deposit model: You need two keys to open the box. The market cap triggers start at $2 trillion and ascend by increments of $500 billion to the summit of $8.5 trillion, a number that’s 70% bigger than the $5 trillion that Nvidia recently notched to reign as the world’s most valuable company. The second group of keys are the “operational milestones.” Four cover sales for key products: separate, cumulative targets for deliveries of vehicles and “bots,” chiefly humanoid robots, as well as for robotaxis in commercial operation and subscriptions for full self-driving software. The other eight are Ebitda tiers that start at $50 billion, and max at $400 billion.
Put simply, anytime Musk hits a new valuation goal, and also captures any one of the dozen operational targets in any order, he receives 35.312 million shares in Tesla restricted stock, adding roughly 1% to his current stake of almost 16%.
The stunner that grabbed headlines, of course, is the $1 trillion in stock—424 million shares—Musk would receive for taking the market cap to $8.5 trillion, and also clinching all 12 of the operational objectives. Musk’s got 10 years to make the numbers that trigger the grants. The “earned share” tranches have two vesting periods: early 2033 for those achieved in the first five years, and late 2035, or at the end of the decade-long program, for the ones reached in years 6 through 10. On the Q3 earnings call, Musk repeatedly insisted that he needs to reach an ownership percentage in “the mid-20s” to ensure “enough voting controls to give a strong influence.” He effectively praised the board for handing him the opportunity to get there, and apparently thinks he stands a great chance at sweeping the board. That coup would get Musk where he wants to go by raising his stake to about 28%.
The higher goals in Musk’s pay package look like a stretch too far
In reality, Musk faces low odds of garnering any of the higher targets. Let’s start with the operational side. Hitting almost all but one of them would require moonshots. For example, the robotaxi target requires achieving an active fleet of 1 million. Today, Tesla offers only an extremely limited pilot plan in Austin, and Waymo, the industry’s largest player, has only 2,000 of the vehicles on the road. And the easiest Ebitda level stands at a towering $50 billion. Ringing the bell would likely require multiplying its current Ebitda run rate around fivefold. Yet Tesla’s now going in the wrong direction by booking puny and declining profits. Reversing that downward trend to reach even the minimum profitability mandated in the operational milestones can only happen if its unproven products prove wildly successful in highly competitive, and capital-intensive sectors.
Now to the valuation milestones. Tesla’s stock already appears vastly overpriced. Its current multiple, based on “core” earnings from its auto and battery businesses of just $3.6 billion in the past four quarters, excluding such items as sales of regulatory credits, towers at 375. Hitting the second highest valuation mark of $2.5 trillion alone would require an 85% jump in its stock price. Huge progress that’s not happening is already baked into the valuation, making the chances of huge, sustained gains from here remote, though a Musk-orchestrated, ephemeral surge can always happen.
Musk’s best shot: Ringing the bell on the two easiest goals
Though Musk probably can’t scale the mountain, he may be able to mount the foothills.
He stands a decent chance of scoring both the lowest valuation number of $2 trillion, and the least challenging operational tier—selling a cumulative total of 20 million vehicles, starting from the time of the grant. On the first item, the surge in Tesla stock since the board unveiled the program in early September has already pushed the price from $334 to $408, lifting its valuation from $1.12 trillion to $1.35 trillion—and the package gives Musk credit for that increase. So if Musk can boost the shares another 48% to $2 trillion, he’ll check the initial box for market cap. The rules require that the shares average $2 trillion or above for six months, and separately for the last 30 days, to hit the target.
It could easily happen. Musk has proved a master at sending the shares skyward by promising great things in robotaxis, full self-driving (FSD), and robots, even though he hasn’t yet significantly commercialized any of them. More promises could breed more excitement that could breed another speculative frenzy in Tesla shares centered on great expectations.
The operational part that’s reachable, especially over a longer period, is the goal of selling 20 million vehicles. This provision invites close scrutiny. According to the plan’s requirements contained in an SEC filing dated Sept. 5, this target doesn’t start from zero at the time the package takes effect. It’s a cumulative total over the entire history of Tesla. Here’s the wording: “20 Million Tesla Vehicles Delivered: Expanding Tesla’s vehicle fleet from 8 million EVs, which it has currently, to 20 million will further grow its adjusted Ebitda, allowing Tesla to reinvest in its other up-and-coming product lines.” Hence, since Tesla has already sold 8 million cars, it only has to deliver 12 million for Musk to capture that operational hurdle.
It’s an incredibly weak requirement, and one of the two wrinkles that aids Musk and skewers shareholders. In the past four quarters, Tesla has delivered 1.9 million cars, and Musk is pledging to expand the lineup to encompass a new affordable EV, and sell self-driving cars to customers. If it averages 2 million cars a year, Tesla would achieve the 12 million figure by the end of year six. Hence, Musk would clinch an operational target by achieving only a minimal annual increase in Tesla’s vehicle sales.
Here’s the second softball pitched by the board. If Musk manages to get the market cap to $2 trillion or above, and keep it there for six months, he’s turned that key definitively. No going back. No matter what happens to the share price after that, he’s got that bogey in his pocket. As Tesla’s SEC filing detailing the plan states, “Once a Market Capitalization Milestone or any particular Operational Milestone is achieved, it is forever deemed achieved for purposes of the eligibility of the Tranches to become Earned Shares.”
So let’s say Musk is able to notch the $2 trillion target in six years. Then the shares bounce around, going above and below that level, so that by the end of the 10-year grant period in late 2035—by which time he’s added the 20 million vehicles prize—its cap is $1.95 trillion, or $585 a share. In other words, Musk could talk up the shares, then see them pretty much go sideways for years, and they could even head below the price that unlocked the award.
Fortunately for shareholders, the stock grants come with a feature similar to equity options that somewhat reduces Musk’s payday, especially in a case like the one above where the plan flops. Musk only gets the gain over the stock price at the time of the grant—in other words, just the appreciation. He’d receive the first tranche of shares at a “net” of $251 per share, that’s the $585 at the end of the 10-year vesting period minus the effective “strike” price of $334 (the price when the program was conceived in September). Hence, he’d pocket $8.86 billion in one stroke (the equivalent of 35.3 million shares x $251).
That would be all of his compensation for 10 years of running Tesla. To be sure, he’d wait a long time for the money, and it isn’t anywhere near the trillion he apparently believes is feasible. But it’s still big, averaging almost $90 million a year. By comparison, in their respective fiscal years, Sundar Pichai earned $10.7 million, Mark Zuckerberg $27.2 million, Jensen Huang $34 million, Jamie Dimon $39 million, Andy Jassy $40 million, Tim Cook $75 million, and Satya Nadella $79 million.
What about the shareholders? Taking the shares from $334 to $585 in 10 years represents paltry gains of just 5.9% annually. That’s a lousy deal for Tesla’s shareholders. They’re suffering at the same time Musk is en route to getting a windfall of nearly $900 million.
Say Tesla’s shares do even worse and end the 10-year grant period at a market cap of $1.8 trillion, $200 billion below the goal of $2 trillion that Musk achieved at one point but couldn’t increase or even hold on to. Shareholders would get returns barely beating inflation, and Musk would still get a payout of $727 million.
To complicate matters, it’s likely that failing to collect on any of the other, extremely challenging tranches will prove a downer for Musk. In our scenario, he’d only increase his stake in Tesla by 1% when his goal is a rise of over 10 points. Musk would have a strong incentive to stay the full 10 years for the haul waiting at the end. But an unhappy Musk might mean a less-than-fully-motivated Musk. This package could hammer shareholders while they witness the decline of the idol it’s designed to empower.