Should Elon Musk Get $55 Billion Pay Package? Shareholders Decide

Introduction

A few months ago, a Delaware Court rescinded Elon Musk’s $55 billion compensation package. The judge ruled that Tesla’s board of directors lacked independence and had misled shareholders about the negotiating process. Musk was not happy about this at all; he really wants that $55 billion.

Shortly after the Delaware Court’s decision, Tesla put up another vote asking shareholders to reapprove Musk’s pay package. Tesla really wants this vote to pass. So much so that they created a dedicated website called votetesla.com. They’ve even gone so far as to use company money to promote the vote with Google advertising.

The entire rationale for the pay package was to retain Musk as CEO and motivate him to improve the company’s operational performance and stock price. By 2021, Tesla’s performance met all the milestones, and Musk was awarded the compensation. Even if you believe Musk’s performance between 2018 and 2021 was worth $55 billion, why does it make sense to pay him now? The performance has already been achieved and can’t be taken back.

For comparison, let’s say you agreed to pay a contractor $100,000 to do some improvements to your home. After the job is completed, a judge rules that the contractor misled you and you actually don’t have to pay them anything. The work has already been done, and you have no legal obligation to pay. Would you pay the contractor anyway?

The voting is scheduled to end on June 13th, and Musk really wants to get his hands on that money. In this video, we’ll look at the arguments for and against paying Musk $55 billion and try to handicap the odds of whether or not the vote will pass.

Reasons For And Against

First, let’s look at the arguments for paying Elon Musk $55 billion. On Tesla’s website, they explained the original package was approved by shareholders in 2018. Since then, Tesla’s stock price has increased 11-fold. While the maximum payout was undeniably generous, it was completely performance-based.

If Musk failed to achieve the growth targets, he would have received zero compensation. With the pay package rescinded, Musk technically hasn’t received any compensation since 2018. It hardly seems reasonable for a CEO of a massively successful company to receive zero compensation for six years of work.

Musk has other interests besides Tesla, including his other companies SpaceX, Twitter, Neuralink, The Boring Company, and his new AI startup, xAI. If Musk feels he is not being fairly compensated, he may step down as Tesla CEO or at least divert more of his attention elsewhere. When asked by the Financial Times whether Musk would step down if he doesn’t get the $55 billion, Tesla chairperson Robin Denholm replied, “There’s always a risk, but he’s not holding a gun to anyone’s head. He hasn’t said one way or the other, quite frankly, and do I believe he’s committed to Tesla? Absolutely.”

Now, let’s look at the arguments against reauthorizing the pay package. Firstly, it’s a huge amount of money. While most media headlines talk about a $55 billion pay package, it’s actually paid in shares, so the value fluctuates based on Tesla’s stock price. Musk would get options for 304 million Tesla shares.

As of the time of recording this video, Tesla’s share price is $179, but there’s also a strike price of $23, so Musk is effectively getting $156 per share, or $47 billion of value. This will dilute existing Tesla investors by almost 10%. Paying a CEO 10% of the market cap is unprecedented for a company of Tesla’s size. For comparison, Jeff Bezos received a salary of $81,000 while he was CEO of Amazon.

Additionally, the company paid for his personal security team, including this, his compensation was $1.7 million. This security expense isn’t money in Bezos’s pocket; as a highly recognizable public figure, it makes sense that he needs a security team. It’s common practice for companies to pay for their CEO’s personal security.

In 2023, Tesla paid $2.4 million for Musk’s security team. Compared to his net worth, Bezos’s compensation was de minimis, but he was motivated by owning 10% of Amazon stock, which was worth over $100 billion. All of his wealth came from the appreciation of his Amazon shares. Meta CEO Mark Zuckerberg technically receives a $1 per year salary.

In reality, he was paid $24 million in 2023 related to his personal security and reimbursement when he uses a private jet for company-related travel. While $24 million is nothing to sneeze at, it’s a rounding error compared to Musk’s $47 billion pay package. Given that Jeff Bezos and Mark Zuckerberg effectively received no compensation, why does Elon Musk need tens of billions of dollars to remain motivated?

In addition to being CEO of Tesla, Musk is concurrently the CEO of SpaceX, Chief Technology Officer of SpaceX, Chairman and Chief Technology Officer of Twitter, and is heavily involved in Neuralink, The Boring Company, and his new generative AI startup, xAI. If the goal of the 2018 compensation package was to motivate Musk, it’s hard to view this as a success. Despite the unprecedented compensation, he’s only been working for Tesla part-time.

Even if Musk’s 2018 compensation package is reinstated, it’s unclear if this will motivate him. By his own admission, Musk is not comfortable growing Tesla into a leader in AI and robotics unless he has 25% voting control. Tesla only has one class of shares, and it is not possible to create a second class of super voting shares post-IPO. So, Musk is demanding 25% economic ownership of Tesla.

By his own admission, Musk’s primary motivation for accumulating personal wealth is to fund his Mars ambitions at SpaceX. In the past, Musk has shown a willingness to sell his Tesla shares to fund outside business ventures. That’s how he funded his Twitter acquisition. Even if he were to be awarded a 25% stake in Tesla, what happens when he starts selling his shares to fund SpaceX? Will he go back to Tesla’s board demanding his holdings be topped up to 25% again?

Tesla could become a giant piggy bank for Musk to extract an unlimited amount of money. Currently, Musk owns 411 million Tesla shares, which gives him 13% voting control. If the 2018 compensation package is reinstated, his ownership percentage will increase to 18%. He will need an additional 585 million shares to bring his ownership up to 25%.

Presumably, if the 2018 compensation package is reinstated, Musk will demand another compensation package to give him the desired number of shares. Based on the current share price of $179, the value of the new shares Musk is demanding would cost $150 billion. This is after subtracting the strike price of the options. This begs the question: Is Elon Musk worth $150 billion?

Value of Elon Musk as CEO

Tesla’s stock price performance was extremely good between 2018 and 2021. This is what allowed Musk to achieve the performance award. But since then, the stock has lost more than half of its value. Tesla’s revenue growth has flatlined over the past couple of years and even turned negative in the most recent quarter. Profitability has also been rapidly declining as competition has intensified.

Their lineup of cars has become increasingly stale. Their two best-selling cars are the Model 3 and Model Y, which were released in 2017 and 2020, respectively. Tesla has only made minor improvements to the cars since their release. In 2023, they began deliveries of the Cybertruck. The Cybertruck has been plagued by quality issues and is only ever likely to fill a niche market.

Insofar as Tesla’s prior success is concerned, it’s unclear how much of it can be attributed to Musk. The company has over 100,000 employees and dozens of senior executives with decision-making authority. We don’t know how involved Musk is in day-to-day operations. We don’t know how much time he allocates to Tesla versus his numerous other ventures. We don’t even know how many days per week he shows up to Tesla’s offices.

Even if Musk can be given credit for Tesla’s prior success, the Musk of today is very different from the Musk of five years ago. According to the Wall Street Journal, in recent years Musk has been a user of psychoactive substances, many of which are controlled substances with no approved medical uses. He has reportedly pressured members of Tesla’s board to partake in these activities with him. If true, this raises massive red flags about corporate governance and board independence.

This alleged activity coincides with increasingly bizarre and deranged public outbursts, which have been heavily covered by the media. Musk’s business decisions have also become increasingly erratic and difficult to understand. In May of this year, he fired Tesla’s entire supercharger team, which numbered 500 people. Reportedly, he had a meeting with the executive in charge of supercharging, a woman named Rebecca Tanucci. They had some sort of a disagreement, and in a fit of rage, Musk fired her and her entire team of 500 people.

Musk’s controversial statements are almost certainly having a negative impact on the company. Tesla used to be one of the most sought-after employers for engineering graduates. According to a survey conducted by Universum, Tesla’s ranking fell from number two in 2022 down to number five in 2023. Even more concerning is the impact on Tesla’s customers. At the end of 2021, more than 80% of consumers said they trusted and liked Tesla as a brand, with 70% saying they would consider buying one. Following Musk’s controversies, these numbers have declined to less than 60% and less than 40%, respectively.

In a separate survey conducted by Bloomberg, 21% of Tesla Model 3 owners who sold their cars in 2023 said they did so because they disapproved of Elon Musk. A further 17.8% of sellers said that they were unhappy with Tesla’s brand perception. Thus, almost 40% of people who sold their Model 3s did so for brand-related reasons. A lot of people no longer want to be associated with Tesla or Elon Musk.

Shareholder Vote on Musk’s Compensation Faces Increased Scrutiny

This is a huge problem for the company and could partly explain their declining sales. Back in 2018, when the compensation package originally went up for a vote, it passed with 73% of shareholders voting in favor. This excludes shares belonging to Elon Musk and his brother Kimbal Musk, who recused themselves. You’re not allowed to vote on your own compensation.

There are a few reasons to believe that the vote will be significantly lower this time. In the three years following 2018, Tesla’s share price increased far faster than most shareholders probably expected. Many of them likely didn’t expect the compensation package to be so massive. The three largest shareholders of most U.S. stocks are Vanguard, BlackRock, and State Street. They manage passive index funds, which own significant percentage stakes in almost all U.S.-listed companies.

Many large institutional investors employ proxy advisory firms, the two largest being ISS and Glass Lewis. These advisory firms analyze shareholder votes and recommend how to vote. In 2018, both ISS and Glass Lewis recommended voting against the pay package, which they called excessive. Glass Lewis has already come out against the new vote, and ISS is expected to do the same. Thus, every investor that voted no in 2018 is likely to vote no again in 2024.

While most large institutions vote however the advisor recommends, there are exceptions. For example, BlackRock, the second largest Tesla shareholder, voted in favor of the pay package. For BlackRock in particular, there’s reason to believe they may switch their vote. In 2020, BlackRock voted against the renomination of Tesla chairwoman Robin Denholm. Their main concern was a lack of board independence. That year, Tesla paid Elon Musk personally $3 million.

In return, Musk agreed to insure Tesla’s directors against any potential lawsuits. It’s normal for publicly traded companies to provide liability insurance to directors; there are insurance companies that specialize in this. It’s highly unusual for the CEO to personally provide the insurance. In fact, I can’t think of a single instance where this has happened at any other company.

BlackRock thought that this was suspicious and didn’t like it at all. The main reason the pay package was struck down earlier this year was because the judge thought the board of directors lacked independence from Musk. Given that BlackRock was already concerned about director independence, it seems likely they will vote against the compensation this time. While institutional investors were divided on the vote in 2018, retail investors were overwhelmingly supportive of Musk at the time.

Changing Sentiment and the Impending Vote

Musk had a large following of fanboys who thought that he could do no wrong. At least anecdotally, it looks like retail sentiment has changed drastically. The third largest retail owner of Tesla’s stock is a billionaire named Leo Koguan. The only individuals who own more shares than him are Larry Ellison and Elon Musk. Koguan owns 27 million shares, which is almost 1% of the total shares outstanding.

Koguan previously called himself a Musk fanboy and presumably voted in favor of the compensation package in 2018. Recently, Koguan’s opinion of Musk has taken a 180° turn. He now calls Musk a tyrant CEO and complains that he only spends 50% of his time working at Tesla. He has already cast his vote against reauthorizing the pay package.

If you look at the r/TeslaMotors Reddit group, the sentiment seems overwhelmingly against the pay package. If you read through the comments, the most common criticisms are as follows: Musk is already one of the richest men in the world, so why pay him another $50 billion? How can Tesla afford to pay Musk $50 billion while at the same time they’re laying off thousands of employees? Tesla’s share price performance has been abysmal over the past year. Tesla would be better off if Musk quits.

The only significant shareholders I found who have publicly come out in support of Elon Musk are Cathie Wood’s ARK Invest and Scottish Mortgage Trust, an investment fund managed by Baillie Gifford. Together, these two funds own about 0.25% of Tesla’s outstanding shares.

In 2018, 73% of shareholders voted in favor, giving the vote a 23% margin. BlackRock currently owns 5.75% of Tesla’s outstanding shares, but we need to adjust for the fact that Musk’s 13% of shares can’t vote. You’re not allowed to vote on your own compensation.

We also need to adjust for voter turnout. In 2018, only 63.5% of eligible shareholders voted at all. If we assume the voter turnout percentage remains constant, BlackRock’s 5.75% stake will represent 10.4% of voting shares. Leo Koguan owns a little less than 1% of Tesla’s shares, but he has 1.55% of shares that vote. We already know that Leo Koguan voted no. It seems highly likely that BlackRock will vote no, given they already voted against Robin Denholm. Thus, only 11% of Tesla’s eligible shares need to change their vote for the compensation to be rejected.

Of course, voter turnout may be higher this time due to Tesla’s marketing campaign. We only have anecdotal evidence, but based on the massive decrease in Musk’s popularity in recent years, I would venture to guess that a no vote is the most likely outcome. We at Wall Street Millennial have no financial stake in Tesla whatsoever. We have no horse in this race, but I personally hope the vote fails for no other reason than that this will cause Musk to throw a public temper tantrum, which will provide great entertainment value.

Alright guys, that wraps it up. What do you think about Elon Musk’s pay package?