We Need To Talk About Elon Musk’s Pay

We Need To Talk About Elon Musk’s Pay
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Tesla CEO Elon Musk is nearing the threshold to have stock options worth around $US2.4 ($3) billion available to him, the second of 12 tranches of options worth potentially tens of billions. It’s a big, possibly scandalous amount of money for a CEO! It will also be very difficult for Musk to ever see a dime of it.

That hasn’t stopped media outlets from running with the big numbers, which I understand, because big numbers are good for headlines. Here’s CNN, for example:

Screenshot: CNN

And here’s the Detroit News headline on a Bloomberg story:

Screenshot: Detroit News

And here’s from Bloomberg’s story, emphasise mine:

Now, with Tesla Inc.’s stock on a seemingly unstoppable rise, Elon Musk is poised to collect the second tranche of his pay award, worth $US2.4 ($3) billion.

Barring a sudden drop in the electric-car maker’s shares, the final performance threshold tied to market value should be met in a matter of days. That would unlock 1.69 million stock options, yielding Musk the 10-figure sum if he were to exercise and immediately sell the shares.

These headlines and the Bloomberg story might lead you to believe that one day soon Musk is gonna log on and discover another billion or two in his checking account.

Except: He won’t. Musk can’t “immediately sell,” for one thing — Musk must hold the stock that he buys in the options for at least five years, according to his compensation agreement — and since the value of the options is tied to Tesla’s stock, that value will rise and fall alongside Tesla. (The differing figures in the two headlines above, for example, reflect how much Tesla’s stock price changed in the three days between those stories were published.)

Musk also can’t go anywhere if he hopes to ever realise all of the money. From a document Tesla filed with the SEC in May:

In addition, Mr. Musk must continue to lead Tesla as our Chief Executive Officer or, alternatively, as our Chief Product Officer and Executive Chairman (with any other Chief Executive Officer reporting directly to him), at the time each milestone is met in order for the corresponding tranche to vest. With limited exceptions, Mr. Musk must hold any shares that he acquires upon exercise of the 2018 CEO Performance Award for at least five years post-exercise. There will be no acceleration of vesting of the 2018 CEO Performance award upon Mr. Musk’s termination, death or disability, or a change in control of Tesla.

The options are also tied to financial goals that until pretty recently seemed faintly ridiculous.

In establishing the Revenue and Adjusted EBITDA milestones, the Board carefully considered a variety of factors, including Tesla’s growth trajectory and internal growth plans and the historical performance of other high-growth and high-multiples companies in the technology space that have invested in new businesses and tangible assets. These benchmarks provided revenue/EBITDA to market capitalisation multiples, which were then used to inform the specific operational targets that aligned with Tesla’s plans for future growth. Nevertheless, the Board considers each of the market capitalisation and operational milestones to be challenging hurdles. For example, in order to meet all 12 market capitalisation milestones, Tesla will have to add approximately $US600 ($861) billion to its market capitalisation at the time of the grant of the 2018 CEO Performance Award, and in order to satisfy all eight revenue-based operational milestones, Tesla would have to increase revenue by more than $US163 ($234) billion from its annual revenue of approximately $US11.8 ($17) billion in 2017, the last fiscal year completed prior to the grant of the 2018 CEO Performance Award.

For context: Tesla is currently worth around $US277 ($398) billion, and was worth a little more than half that when this document was written. It generated $US24.6 ($35) billion in revenue last year, or a fraction of what Musk needs for it to generate to realise all the options.

Further, a $US650 ($933) billion valuation — the top achievement in the compensation plan — would make Tesla among the most valuable companies in the world, a stunning business achievement. Even in that scenario, however, Musk’s stock options would still only be worth their value five years after exercising because of the holding requirement, making Musk’s compensation plan — he receives zero in salary — an extraordinary swing for the fences.

For the options to work out, in other words, Tesla must be a successful company not just now but for years to come. Maybe you think that will happen, maybe you don’t. For Musk, his compensation almost isn’t even worth thinking about. His big payday is gonna be a while, if it ever comes. Until then he gets zero.