What Elon Musk’s pay package vote means

Performance award: A file photo of Musk at an event in Beijing. Musk is currently worth US$173.8bil, according to the Bloomberg Billionaires Index. — Reuters

NEW YORK: Elon Musk is making one of his biggest asks of Tesla Inc investors yet.

It was one thing for shareholders to approve his moonshot pay package in 2018, when it contained seemingly audacious goals and the market for electric vehicles was still Tesla’s to lose.

In requesting that they ratify the same package again, Musk and Tesla’s board are gambling that the billionaire’s cult following and his role in the carmaker’s stock surging about 700% over the past six years – which its leadership says merits a big payday – will outweigh the fact that much has changed since 2018.

Most notably, that the pay in question was voided by a Delaware court earlier this year.

Tesla’s 2024 proxy statement, filed Wednesday, asks shareholders to approve the same 2018 compensation package for its chief executive officer that was rejected by Delaware Chancery Court judge Kathaleen St J. McCormick, who argued the board wasn’t looking out for the best interests of investors.

What’s immediately at stake for Musk are Tesla stock options that make up nearly a quarter of his net worth, according to the Bloomberg Billionaires Index. But so too, according to the proxy, is his future as chief executive officer.

“If the 2018 chief executive performance award is not ratified, then Tesla may need to negotiate a replacement compensation plan with Mr Musk,” the filing said.

“There is a risk that failure to ratify would further delay any compensation for the chief executive, which could affect his incentive to continue devoting time and energy to Tesla, which is essential to the company.”

The unprecedented compensation package awarded him 12 tranches of options dependent on the company hitting increasingly steep targets related to market value, revenue and adjusted earnings. Each tranche of options corresponded to 1% of Tesla’s outstanding shares.

There was significant doubt about whether the targets were achievable at the time – the filing cites a New York Times article that called the top market capitalisation goal of US$650mil “a figure that many experts would contend is laughably impossible” – but they were all met by the end of 2022.

That gave Musk the maximum number of options outlined in the pay package, which are currently worth US$40.2bil.

Shareholders were willing to bet their money alongside Musk’s in 2018.

About 73% of disinterested shareholders voted to pass the package, even though large proxy advisers said it was too costly and openly questioned why Musk needed more equity to stay committed to the company.

But things have changed since then. For one, shareholders know the goals related to the moonshot package have already been achieved.

Rather than betting on targets that could also make them wealthy, now it’s only Musk getting rich – to the tune of about 8% of Tesla’s current market capitalisation.

The vote also comes at an awkward time for the electric carmaker.

The company is cutting more than 10% of its workforce amid slowing growth, and shares are down about 37% this year, making it the second-worst performer on the S&P 500 Index.

More awkward still, the company has “un-met” some of the award’s original goals. Tesla’s stock is currently trading well below its highest market capitalisation target, for instance. Musk would still receive all the options if the pay package is approved.

Still, dozens of institutional shareholders have contacted Tesla and expressed support for the 2018 compensation plan, including four of the top 10, according to the filing.

If the compensation package is rejected, Musk’s net worth would drop by US$40.2bil and he would be the eighth-richest person on the planet, behind Google co-founder Larry Page. — Bloomberg

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