Tesla Shareholders Vote on Elon Musk’s Pay Package

Tesla (TSLA) is poised to announce the results of a pivotal shareholder vote on Thursday, a decision that will determine whether CEO Elon Musk receives a compensation package potentially worth nearly $1 trillion in stock over the next decade. The announcement will follow Tesla’s annual meeting in Austin, Texas.

While some debate remains, the likely outcome seems increasingly clear. The electric vehicle giant’s board has staunchly advocated for the plan’s approval. Coupled with Musk’s substantial ownership stake and a dedicated base of retail investors who historically align with the CEO’s vision, opposition faces an uphill battle, even with prominent proxy advisors like Glass Lewis and ISS recommending against the package.

The core argument from Tesla’s board, led by Chair Robyn Denholm, and vocal supporters like Baron Capital’s Ron Baron, centers on the assertion that Musk’s continued leadership is paramount to Tesla’s future competitiveness, especially in burgeoning fields like robotics and artificial intelligence. Baron, in a recent post on X, emphasized Musk’s “key man” status, arguing that Tesla’s success is inextricably linked to his “relentless drive and uncompromising standards.”

However, the proposal faces notable resistance. The $2 trillion Norwegian sovereign wealth fund, managed by Norges Bank Investment Management (NBIM), a significant Tesla shareholder, has publicly stated its intention to vote against the pay deal. NBIM, in a statement, acknowledged Musk’s “significant value creation” but expressed concerns regarding the “total size of the award, dilution, and lack of mitigation of key person risk,” aligning with their broader views on executive compensation.

Shareholder advocate James McRitchie, even as a Tesla owner himself, is another vocal opponent. He believes Tesla needs to address critical risks, including demand fluctuations and profitability pressures resulting from the gradual phasing out of federal EV tax credits. “Tesla has all these fanboys. So many retail investors bought the stock because they love the cars,” McRitchie notes, adding, “There’s a lot to love there, but you should also pay attention to the finances and risks.”

Despite these concerns, Tesla shares have demonstrated resilience, climbing 14% this year, partly fueled by a third-quarter rally and bolstered by Musk’s $1 billion stock purchase earlier in the year. The stock’s performance underscores the complex interplay between investor sentiment surrounding Musk’s leadership and the company’s operational realities.

The proposed pay plan, initially unveiled in September, outlines a structure where Musk, already one of the world’s wealthiest individuals, would receive 12 tranches of stock options contingent on Tesla achieving specific performance milestones over the next decade. These milestones not only relate to market capitalization but also grant Musk increased voting power within the company, addressing his stated desire for greater control, a sentiment expressed publicly since early 2024. This desire, encapsulated in his remarks about influencing a potential “robot army,” highlights Musk’s vision for Tesla’s future beyond electric vehicles.

“If we build this robot army, do I have at least a strong influence over that robot army?” Musk questioned during the company’s third-quarter earnings call last month. “I don’t feel comfortable building that robot army if I don’t have at least a strong influence.”

The full award would translate to over 423 million additional shares for Musk, who currently holds approximately 13% of Tesla, raising his stake to around 25%. The vesting of these tranches is tied to a series of ambitious targets.

The initial tranche of stock vests upon Tesla reaching a market capitalization of $2 trillion. Subsequent tranches are unlocked as Tesla’s value increases in $500 billion increments, up to $6.5 trillion. The final two tranches require even more substantial market cap increases of $1 trillion each, pushing Tesla’s valuation to $8.5 trillion for Musk to receive the entire package.

Beyond market capitalization, the plan incorporates operational targets, including achieving 20 million vehicle deliveries, 10 million active Full Self-Driving (FSD) subscriptions, delivering 1 million humanoid robots, and deploying 1 million robotaxis in commercial operation. As of Tesla’s September proxy statement, the company had delivered over 8 million vehicles.

A crucial point of contention lies in the details surrounding the FSD subscriptions. The plan doesn’t explicitly define whether these subscriptions must be paid or can include free trials. Tesla currently offers “FSD Supervised” in the U.S., a partially automated driving system, with plans to enhance its capabilities to enable fully autonomous operation without human supervision.

Furthermore, the pay plan incorporates a series of ambitious earnings targets, ranging from $50 billion to $400 billion in annual adjusted profit. In the most recent third quarter, Tesla reported adjusted EBITDA of $4.2 billion, illustrating the magnitude of the climb required to meet these profitability goals.

Musk’s potential windfall extends beyond the explicit performance targets. As reported, Musk could still accumulate tens of billions of dollars by achieving only a portion of the outlined goals, potentially surpassing $50 billion by meeting a select few of the more readily attainable objectives. This aspect of the award structure is under scrutiny from those who view the overall package as excessive.

The award terms also include a provision for “covered events,” which could enable Musk to earn shares even without meeting the specified operational milestones. These events encompass potential disruptions like natural disasters, wars, pandemics, and changes to “international, federal, state and local law, regulations or other governmental action or inaction” that might impede Tesla’s production and sales.

The proposed arrangement also grants Musk considerable flexibility. The plan does not impose any minimum time commitment to Tesla and places no restrictions on his political activities. This aspect has drawn criticism, given Musk’s involvement in multiple ventures, including xAI (merged with X), SpaceX and Starlink, Neuralink, and The Boring Company, as well as his increasingly prominent role in politics.

Recent academic research has suggested a potential negative impact on Tesla’s brand stemming from Musk’s political engagements. A paper published by the National Bureau of Economic Research estimated that Tesla sales in the U.S. from October 2022 through April of this year could have been 67% to 83% higher absent Musk’s “polarizing and partisan actions.”

The current shareholder vote comes after a Delaware Court of Chancery ruling last year invalidated Musk’s previous 2018 pay plan, deeming it improperly granted by the Tesla board. This legal backdrop adds another layer of complexity to the ongoing debate.

Nell Minow, a corporate governance expert and chair of ValueEdge Advisors, has stated her intention to vote against the new pay plan, describing Musk as a “part-time CEO” in today’s environment.

“If they said we’re going to pay him a trillion dollars, but he’s going to give up all of his outside activities, he’s going to shut up about politics, and really spend all this time making this a great company, then I’d say, OK, let’s talk about it,” Minow stated. “But he’s not doing any of those things.”