Tesla: Shareholders Approve Musk’s $1 Trillion Pay Package

Tesla (TSLA) announced that a decisive 75% of voting shareholders have approved CEO Elon Musk’s compensation package, potentially worth nearly $1 trillion. The vote, a major victory for Musk and the Tesla board, took place at the company’s annual shareholder meeting in Austin, Texas, on Thursday.

The board had actively campaigned for shareholder approval, citing Musk’s pivotal role in Tesla’s growth. However, the plan faced opposition from prominent proxy advisory firms like Glass Lewis and ISS, who argued it was excessive and not sufficiently tied to performance metrics.

The shareholder vote also addressed a proposal regarding Tesla’s potential investment in xAI, Musk’s AI venture. While a majority of votes cast were in favor, the high number of abstentions leaves the company deliberating its next steps, according to Tesla’s General Counsel, Brandon Ehrhart. The complexities of integrating an AI company with Tesla’s existing operations, particularly concerning data sharing and intellectual property, are likely under careful consideration.

The approved compensation plan entails 12 tranches of stock options awarded upon reaching specific milestones over the next decade. Achieving these milestones would significantly increase Musk’s voting power, bolstering his influence over company strategy. His ownership stake would increase from approximately 13% to 25%, adding over 423 million shares to his holdings.

The initial stock tranche is triggered upon Tesla achieving a $2 trillion market capitalization. The company currently sits at around $1.54 trillion, suggesting a substantial climb remains. Subsequent tranches hinge on $500 billion increments in market value, ultimately targeting a staggering $8.5 trillion market cap for full disbursement of the package. These market cap targets are linked to operational accomplishments, creating a dual hurdle for Musk and the company.

Beyond market capitalization, the plan includes ambitious earnings targets, escalating from $50 billion in annual adjusted profit to $400 billion. Tesla’s recent third-quarter adjusted EBITDA of $4.2 billion highlights the scale of growth required to meet these profitability benchmarks.

The compensation package also includes stretch goals centered around vehicle deliveries, Full Self-Driving (FSD) subscriptions, and the rollout of Optimus humanoid robots and robotaxis. Specific targets include 20 million vehicle deliveries, 10 million active FSD subscriptions, 1 million Optimus robots delivered, and 1 million robotaxis in commercial operation. To date, Tesla has delivered over 8 million vehicles.

Notably, the plan lacks clarity on the nature of FSD subscriptions, leaving open the possibility of including free trials. Tesla’s current “FSD Supervised” system requires active driver monitoring, and the company aims to achieve fully autonomous driving capabilities without human intervention.

At the meeting, Musk made bold pronouncements about the potential of Optimus, asserting their ability to “eliminate poverty,” “provide amazing medical care,” and “contain future crime.” He positioned the robots as a transformative force, potentially exceeding the impact of cell phones. However, no specific timeline for achieving these goals was provided, and a market-ready Optimus product remains absent.

While the compensation package is contingent upon achieving ambitious targets, some analysts point out that Musk could still receive substantial compensation even if the company falls short of certain goals. He stands to gain tens of billions of dollars by reaching a select few of the more attainable milestones.

Moreover, the agreement includes “covered events” – unforeseen circumstances like natural disasters, wars, pandemics, or regulatory changes – that could trigger stock awards even without meeting operational milestones. This clause provides Musk with a degree of protection against external factors impacting Tesla’s performance.

The current vote comes after a Delaware court invalidated Musk’s 2018 compensation plan, deeming it improperly granted by the Tesla board. Musk has appealed the ruling, and the matter will be decided by the Delaware State Supreme Court. The outcome of this legal challenge could have significant implications for the current pay package.

Musk’s influence extends far beyond Tesla, encompassing leadership roles at xAI (merged with X), SpaceX and its Starlink venture, Neuralink, and The Boring Company. This extensive portfolio raises questions about time allocation and potential conflicts of interest.

Musk has also become increasingly vocal on political matters. Some research suggests that Musk’s outspoken political views have negatively impacted Tesla sales. A recent National Bureau of Economic Research paper estimated that U.S. Tesla sales would have been significantly higher without Musk’s “polarizing and partisan actions.”

Interestingly, the new pay plan places no restrictions on Musk’s political activities and does not mandate a minimum time commitment to Tesla, raising potential concerns about his focus on the company’s core business.