Tesla board pressures investors to approve Musk’s controversial pay plan
Tesla’s board has warned shareholders that CEO Elon Musk could resign if he votes against the company’s nearly $1 trillion compensation plan.
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Tesla TSLA.O’s board has thrown every chip at Elon Musk. Investors must now decide whether to back the biggest bet in company history.
Shareholders will vote Thursday on the tough choices presented by the board. The company could either pay Mr. Musk up to $878 billion in company stock or risk leaving the company — potentially causing its stock to fall. Experts say the decision amounts to a referendum on whether traditional corporate governance rules apply to the world’s richest people.
The board and many investors argue that only Mr. Musk can deliver on his promise to transform Tesla into an artificial intelligence behemoth with millions of self-driving robotaxis and humanoid robots. If Mr. Musk meets all of the board’s performance goals within 10 years, Tesla’s market value will increase to $8.5 trillion, and Mr. Musk will own about a quarter of the company’s stock.
This is exponentially higher compensation than other CEOs, and even if he fails to meet most of his performance goals, Musk will still collect record compensation (tens of billions of dollars). Many investors look at the dizzying amount of money and don’t even blink an eye.
“If the stock price goes up six times, which is the requirement here, I’m going to make a lot of money,” said Nancy Tengler, CEO and chief investment officer of Tesla investor Laffer Tengler Investments. “If he’s influencing change and vision, why should we care how much money he makes?”
Other major shareholders and executive compensation experts have warned that the proposal poses significant risks for investors. Experts say the package ignores governance principles not only because of its size, but also because the board, with its myriad conflicts of interest, is blatantly betting on Tesla’s future and seeks to consolidate its leaders’ unlimited power over the company. They argue that responsible governance requires boards to remain open to a competitive market for the best CEO at the time.
Musk did not respond to requests for comment. A spokesperson for Tesla’s board declined to comment.
Musk told the board during negotiations that unless a deal is reached, he could prioritize a number of other businesses, including rocket company SpaceX, artificial intelligence startup xAI and brain implant company Neuralink. And board chairman Robin Denholm has repeatedly emphasized the risk of losing Musk by selling off shareholders over his compensation.
Charles Elson, founding director of the University of Delaware’s Weinberg Center for Corporate Governance, said Tesla’s board is dominated by a “superstar CEO.”
“The appropriate answer for me is to say, ‘Have a nice day,'” Elson said.
Large shareholders such as California Public Employees Retirement System (CalPERS), the largest public pension fund in the United States, and Norway’s sovereign wealth fund share these concerns and publicly oppose Musk’s compensation. Norges Bank Investment Management said on Tuesday that the proposed compensation could dilute shareholder value and failed to mitigate the “key person risk” of betting Tesla’s future on Musk.
The board of directors set rules such as stock vesting periods in an effort to ensure that Mr. Musk remains the company’s leader for a long time.
Krishna Palepu, a professor at Harvard Business School who specializes in corporate governance, said the proposal aligns with shareholder interests by tying Musk’s compensation to a significant increase in stock prices and requiring Musk to hold on to the shares he gains for five years.
He said Musk has a track record of achieving extraordinary stock price growth and will only receive the largest dividend if he does it again.
“The numbers are big because the goal is big,” Palepu said.
Take advantage of bold promises
Mr. Musk’s influence over the board and shareholders depends primarily on Tesla’s current stock market value, which far exceeds the current financial fundamentals of its declining electric vehicle business. Rather, Tesla’s $1.5 trillion market capitalization rests almost entirely on Mr. Musk’s long-standing promise that Tesla will control the future of self-driving cars and humanoid robots.
Some corporate governance experts say Mr. Musk’s threat to resign now, causing Tesla’s stock to plummet, gives him enormous power to make unprecedented demands for compensation. Board Chairman Denholm hinted as much in an Oct. 27 letter to shareholders, saying, “Without Elon, Tesla could lose significant value because we may no longer be valued for what we aspire to be.”
David Larker, director of the Corporate Governance Research Initiative at Stanford Business School, said that from a purely economic perspective, the board’s position on keeping Musk in place is understandable.
“If you think there’s a chance that Mr. Musk could leave office and that Tesla stock could collapse, that’s something you never want to happen,” he said.
Gautam Mukunda, a lecturer at the Yale School of Management, said Musk already owns enough Tesla stock to become the world’s first trillionaire if he can meet the board’s performance targets, and needs little “$2 trillion” incentive from corporate investors. He said the board shouldn’t be intimidated by threats of resignation from the person who stands to lose the most if Tesla’s stock falls: its largest shareholder.
“This is a man holding a gun to his head and saying, ‘Give me a trillion dollars,'” Mukunda said. “It’s not the board’s job to just nod like a bobblehead when the CEO asks for something.”
The vote is in hand
Mr. Musk goes to Thursday’s vote with a potentially decisive voting bloc that owns 15% of his stock.
Musk did not vote his stock in his previous salary package when Tesla was incorporated in Delaware. But the board said in its current salary proposal that the CEO could do so under the laws of Texas, where Tesla reincorporated after a judge rejected Musk’s last salary proposal following a shareholder lawsuit.
A Delaware judge said Musk’s 2018 compensation package, originally valued at $56 billion and now valued at $128 billion, was an “incalculable sum” resulting from negotiations with directors who were at odds with Musk’s close ties and his own excessive compensation.
Tesla appealed and agreed to transfer its Musk stock, now worth $40 billion, as a “first step” toward compliance with the 2018 package. If a Delaware court reinstates the pay plan, that award would be forfeited.
Texas law makes it harder for shareholders to sue under a provision passed in May that allows companies to require a collective 3% ownership stake for investors who sue directors or executives, which Tesla did.
An even bigger threat to Tesla’s board comes from Mr. Musk himself: his threat to leave the company. Cornell University business law professor Charles Whitehead said Tesla’s board faces a “classic holdup.” He said the serious question the board has yet to address is “who is going to be on the bench to stop the CEO if he walks away or if something happens to him?”
Report by Chris Kirkham from Los Angeles. Additional reporting by Rachel Levy in Washington, Ross Carver in Boston and Tom Hulse in Wilmington, Delaware. Editing: Brian Thevenot and Matthew Lewis
