Tesla's New Strategy of 'Not Paying' Elon Musk Costs $2.6 Billion

Tesla Motors previously announced that its CEO, Elon Musk, wouldn’t be paid unless its already high stock valuation continued to climb. His compensation package — valued at roughly $2.6 billion — is tied to a dozen operational milestones, all of them primarily linked to the company’s share price. However, the board has left the strategy’s fate in the hands of its shareholders, who will vote on the motion come March 21st.

In addition to Musk’s existing stock options, that bonus could result in a total payday of more than $55.8 billion over the next decade. That’s too much, according to proxy advisor Glass Lewis & Co. With the CEO already so finically invested in the company, Glass Lewis doesn’t believe any fee would have a meaningful impact on Musks’ involvement. He already owns at least 20 percent of Tesla’s stock, so any improvement in its valuation would already benefit him immensely.

“Any relative comparison of the grant’s size would be akin to stacking nickels against dollars,” Glass Lewis & Co. said in a report from February.

Still, there’s plenty of support for the pay package among shareholders. Baillie Gifford & Co. and T. Rowe Price Group Inc, who collectively own about 14 percent of Tesla stock, told Bloomberg they both back the plan to get Elon paid.

“We think what Tesla has achieved so far is pretty remarkable, but there’s more they can do in not just automotive, but the energy markets,” Tom Slater, a Baillie Gifford partner and fund manager, said on Wednesday. “Elon Musk — his drive and his vision — has been a really important part of getting us to this point. Tesla still needs that drive and that vision to push the business.”

Musks’ compensation package consists of 20.3 million stock options that will be vested in 12 increments, assuming market-value thresholds and financial targets are met. Each grouping equals about 1 percent of Tesla’s outstanding shares. However Tesla’s market capitalization has to reach $650 billion for the award to be granted in full. The company’s current market cap is around $55 billion.

If that sounds like a lot for a company still having trouble meeting production quotas, it is. However, Musk’s vision has helped Tesla become a darling for investors — garnering a ten-fold increase in its share price since 2013. The aim here is to dangle the bonus in the hopes it will keep the CEO invested in the automaker and steal his attention away from SpaceX and The Boring Company.

“The package was designed to retain him, and we are on board with the intention,” Joel Grant, an automotive and industrial analyst at T. Rowe Price, said in an interview. “We want to make sure that Elon stays and uses Tesla as a vehicle for a lot of growth.”

So far, Musk hasn’t indicated he plans to leave Tesla anytime soon. He even stated as much during last month’s earnings conference when he said he would stay on as CEO for the “foreseeable future.” But many investors don’t want to risk it.

“Think about Elon Musk and what he’s had to overcome to achieve what he has achieved. Everyone is aligned against him,” Ron Baron, chairman and founder of Baron Capital Inc., said via a phone interview. “The only reason why Tesla is successful is because of this guy.”

[Image: Tesla Motors]