A $60-plus billion pay package? Musk gives Tesla’s board a nightmare task
Summary
Corporate-governance tensions are unavoidable in owner-managed companies, but they needn’t be inflamed on social media.
It was never going to be easy for Tesla’s board to craft a new pay package for Chief Executive Officer Elon Musk. By taking the negotiations to his social-media platform X, Musk has made the task harder.
“I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can’t be overturned. Unless that is the case, I would prefer to build products outside of Tesla."
So Musk tweeted late on Monday in response to a discussion about whether the world’s richest person needed another compensation package to keep his focus on Tesla. It is six years since his last pay deal in 2018, which came roughly six years after the previous one in 2012.
He clarified the reason why he hasn’t yet got a new one in a follow-up post: A legal case against his 2018 plan is still open. Closing arguments were given to a Delaware court last February, but the judgment has yet to come.
The 2018 deal entitled Musk to a maximum gain of $55.8 billion, according to Tesla’s estimates at the time, likely more than any CEO has been paid in history. But achieving that required hitting targets that seemed equally wild, including a market value of $650 billion—11 times the numbers at the time. In the end he hit most of them, helped by the bubbly car-industry conditions created by the pandemic, as well as the global success of the Model 3 and Model Y. His options, which remain unexercised, are worth $55 billion at Tesla’s current $699 billion market value.
His 2024 deal, assuming it comes to that, sounds like it might be more of the same, only with even bigger numbers. Musk now owns about 13% of Tesla’s shares outstanding, according to FactSet. Exercising his stock options would, after selling shares for tax, take that up to perhaps 17% of the diluted share count. The difference between that and 25% would still be worth more than $60 billion at the current share price and diluted count. Factoring in further dilution and tax, Musk would need much more.
These would be extraordinary numbers for executive pay, but if they again depend on extraordinary targets there would still be alignment of management and shareholder interests. In October 2022 Musk said he “saw a path for Tesla to be worth more than Apple and Saudi Aramco combined," which was then about $4.4 trillion. Tying another batch of stock options to such dreams is unlikely to hurt other investors, even if they get substantially diluted.
The real problem with Musk’s compensation is governance. Although he has denied dictating the terms of his 2018 package, it seems too crazy to have been dreamed up by anyone else. This feeds into suspicions that he dominates the board that is supposed to hold him to account. This is a long-held worry of corporate-governance consultants such as Glass Lewis and ISS, and a focal point of both the lawsuit about his pay and a previous one about Tesla’s 2016 acquisition of SolarCity.
Publicly threatening to take his latest ideas elsewhere if he doesn’t get 25% of Tesla puts the company’s compensation committee—the three-person subgroup of directors tasked with deciding his pay—in a tough position. If they even come close to obliging his wishes, it would appear to confirm their weakness, potentially exposing them to further legal challenge. And letting him have a quarter of the company would only aggravate the governance conundrum of how to control a CEO who in turn controls the board through his voting power.
Musk will be hard to refuse, even if his threats to leave aren’t very credible. Last year he set up a separate artificial-intelligence company, X.AI, but he has every incentive to avoid deflating Tesla’s valuation and the AI hopes it is built on. His $90 billion stake in the EV pioneer is his single largest asset even after the 2022 stock sales he made to fund his rash acquisition of what is now X. Tesla’s stock didn’t move much Tuesday.
Engaged manager-shareholders such as Musk stand behind many of the world’s most valuable companies, from U.S. tech to European luxury. But the unavoidable corporate-governance tensions need to be carefully managed—not inflamed on social media.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
