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What’s the Story?

In January 2024 a Delaware court struck down the Tesla pay deal worth $56 billion to CEO Elon Musk, the most in US corporate history which would have increased his stake from 13% to 20%.

The Delaware court ruled that the Tesla board had not acted in the best interests of shareholders with the board being “supine servants of an overweening master”. The court made it personal for Chair, Robyn Denholm, saying that she had a “lackadaisical approach to her oversight obligations”.

On allegations that she is too close to Musk, Denholm replied “crap”, and defended the deal as a matter of “fundamental fairness and respect for our CEO”.

In 2018 Tesla shareholders approved this stock option package for Elon Musk by a wide margin. The pay deal baked in market capitalisation targets from $100 billion to $650 billion at a time when the Tesla capitalisation was only some £59 billion.

In response to the Delaware decision, Musk has reportedly threatened to develop critical AI products outside of Tesla. In addition, Tesla wants it’s shareholders to approve a change, to the Tesla state of incorporation from Delaware to Texas.

The Tesla Chair said “It’s like Mt Everest” to describe the task of winning the 13 June vote to move the incorporation state. It needs a majority of all outstanding shares, not just a simple majority.

She also said the original targets were “impossible, ludicrous, overly ambitious” but “knowing Elon, they needed to be really ambitious goals” to motivate him.

Why Does it Matter?

The Tesla option plan is a Value Creation Plan. These LTIPs aim to deliver a major upshift in market capitalisation, measured typically over five years. VCP plan designs are situational, and are based on the commercial drivers in play at the inception of the plan, and often pay out very heavily on success.

But institutional investors approach VCPs with caution. They ask: Is the gain sustainable? Is it measured from a bombed-out starting share price? Will the rise in value drive unethical actions; or extreme risk behaviours? Normally a cap on total pay-out value is required and the plan should be for the top team, not just the CEO.

Tesla’s plan is a VCP on steroids. The rise in market capitalisation for the options to vest starts at 70% growth and full vesting required 11x the start value. These are astonishingly high targets; but so too are the jumbo rewards.

In May 2024, Tesla’s market capitalisation was c. $585 billion, so the $56 billion due to Musk is c.10% of the growth in value.

Newspoint view

Options are a good LTIP vehicle for growth companies. That said, the pay deal makes no real economic difference to Elon Musk. He is the world’s third richest person, with interests in Tesla, SpaceX, The Boring Company, Neuralink and famously X (formerly Twitter).

But as a fundamental matter of compensation, does the Musk package work? While the money makes no difference to Musk, recognition does, strongly. And the willingness of both the board and the 2018 shareholders to back this plan and reward Musk should be recognised as a capitalist free choice, even though the numbers stretch the imagination.

So, is it right for a court to over-ride a shareholder approved incentive? The court argument that the plan was not in the best interests of shareholders is an interesting one, when those 2018 shareholders are now sitting on gains of c.10x their 2018 value.

But is this pay as we know it? Plainly not, but normal engagement, retention and motivation aims are in play.

Normally you should pay for the job, not the person, their wealth is not a consideration. But this breaks down when THE PERSON IS WHAT MATTERS UNIQUELY. When that happens, irrespective of their personal wealth, the pay and incentives need bespoke tailoring and very detailed explanation.

Pay aside, Musk is a director of Tesla and has a director’s duty to act in the best interests of the company. His threat to withhold AI technology from Tesla might need examination. If the AI exists and is controlled by Musk, conflict of interest and/or Related Party Transaction issues might be in point. If not, the Tesla board, Musk included, should take steps to secure the AI technology for Tesla urgently.

Tesla was once considered a weird, risk-riddled concept, maybe going bust for lack of cash before a single car was produced. Now, Tesla’s market value exceeds the combined value of Ford, GM and VW - by a factor of three. Much of that value was derived from a Musk based impact. Tesla’s future AI uplift is vital, the stakes are high and are rising.

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Executive Compensation and Incentive Design

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

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