Elon Musk’s $1 trillion Tesla pay award can earn more money for you. Here’s how.
Most people will never see anything near $1 billion, let alone $1 trillion, over their working lifetimes. Still, taking a few lessons from Elon Musk can help anyone make a little more scratch.
Well, Tesla CEO Elon Musk got his $1 trillion pay package. It’s an amount of money unfathomable to normal people, but there are some lessons and strategies that people can use to earn a little more for themselves in the future.
Tesla held its annual shareholder meeting on Nov. 6. The big item on the agenda was Elon Musk’s 2025 pay package, which awards him some 400 million incentive-laden shares if he hits all of his performance targets over the coming decade, including generating $400 million in earnings before interest, taxes, depreciation, and amortization, or Ebitda, over a 12-month period. Tesla is expected to generate 2025 Ebitda of about $13 billion, according to FactSet.
Shareholders approved the package by a margin of more than three to one. “Congrats on not having to show up to work for free anymore," said one shareholder during the Q&A portion of the event.
“Free" is an interesting choice of words. The “free" idea started circulating around Tesla events after a Delaware judge voided Musk’s 2018 pay package, which awarded him some 300 million stock options, citing inadequate shareholder disclosures. Tesla stockholders, however, already voted to re-award Musk the package, which is currently worth roughly $120 billion. Before the 2018 award, in 2012, Tesla’s board awarded Musk about 80 million incentive-laden shares, worth roughly $34 billion today.
So, before the 400 million share award, Musk had earned 380 million shares worth north of $150 billion. That’s $12 billion-ish a year in annual compensation. Odd to call that working for free.
The 400 million shares are designed to get Musk’s Tesla ownership back to 25% over time. Why 25% is a reasonable question? The simplest explanation is that’s what Musk asked for.
“We get skewed very quickly, and part of that is about the psychological phenomenon of anchoring," says Jo-Ellen Pozner, associate professor at Santa Clara University’s Leavey School of Business.
Anchoring is the tendency for people to overly rely on the first piece of information they hear. Watching the Price Is Right? If the first bid is too high, it’s more likely that the rest of the bids will be over, until that last contestant bids $1.
Anchoring “is the principle that explains why it’s a good idea to make the first offer in a negotiation," adds Pozner. “I say to a prospective employer, I think the value I can bring to this company is worth half a million dollars in compensation, even if they were going to offer me $150,000, we’re going to end up at a salary for north of $150,000, closer to $500,000."
Perhaps investors or workers can remember that during their next pay negotiation. They might not want to start a $1 trillion, however, which is roughly the annual economic output of Saudi Arabia.
No matter how investors slice it, $1 trillion is a lot. If Musk hits all his milestones over the 10-year span, he will have made roughly $275 million a day, or $385 million if he doesn’t work weekends. The average annual compensation for a CEO of an S&P 500 company is currently about $20 million, according to Bloomberg. Musk will make 13 to 19 times more a day than other CEOs make in a year. Not bad, and definitely not working for free.
Over time, academics and researchers might spend some time on how Tesla’s board came up with $1 trillion. (Today, 400 million Tesla shares are worth a mere $170 billion.) Pozner has an idea about that, too: “Ego."
Musk is now the first trillion-dollar CEO in history. Those are some big bragging rights.
Write to Al Root at allen.root@dowjones.com
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