Last week, Tesla (NASDAQ: TSLA) shareholders approved a controversial new long-term incentive package for the visionary CEO of electric vehicle maker, Elon Musk. This plan provides for zero cash compensation, but would grant Musk up to 20.3 million shares if Tesla overcame a number of financial hurdles and increased its market capitalization from today's $ 50 billion to at least $ 650 billion.
The value of these stocks would amount to $ 650 billion in Tesla market capitalization. In this scenario, Musk's total stake in Tesla (including the stock he already owns) would be approximately $ 1
Tesla has been criticized for the sheer size of Elon Musk's potential payday. The bigger problem, however, is that the structure of the stock price could encourage Musk to take risky "bet-the-company" measures to get the maximum payout.
The experts say no
Tesla's CEO salary plan won shareholder approval, though both major proxy advisory firms (ISS and Glass Lewis) recommended voting against the proposal. In their criticisms, ISS and Glass Lewis have agreed on the sheer size of the potential price.
The current value of the stock price is $ 2.6 billion, according to Tesla, and about $ 3.7 billion in various valuation methods, according to proxy advisors. "Even if annualized, Musk's salary opportunity would eclipse that of almost every CEO in the largest and most profitable public companies," noted ISS (via Bloomberg).
ISS and Glass Lewis also said that Musk could even receive a significant stock award if Tesla does not meet all financial targets. For every $ 50 billion worth of stock market capital added by Tesla, Musk will receive another 1 percent of the company's outstanding stock as long as Tesla meets one of eight annual sales targets of $ 20-175 billion. One in eight adjusted earnings before interest, taxes Depreciation and amortization (EBITDA) ranging from $ 1.5 billion to $ 14 billion.
Theoretically, Musk could get a significant number of shares without reaching any of the EBITDA targets. as long as it boosts sales growth and creates enough hype to push up the stock price.
The Bigger Problem
Although the amount of money Musk could make is ridiculous, it is probably fair to say that he is more important to the success of his company than any other CEO in the world. If Tesla actually reaches a market capitalization of $ 650 billion in ten years, I doubt shareholders will complain about how much Musk was paid.
In addition, Musk must hold the shares he has exercised for at least five years. This reduces the likelihood that he could reach a big payday just because of the hype. The stock market hype decreases over time.
The more troubling aspect of this stock price is that it creates incentives for unhealthy risk taking. Tesla's key priorities for the next decade are to expand its product lineup across all major market segments, expand its supercharger network, and implement industry best practices for mass production.
Achieving these goals would enable Tesla to significantly increase its production and become sustainably profitable. However, it probably would not be big enough to reach the milestone Musk needs to get most of its available stock prices.
As a result, Musk may be more likely to pursue high-risk, high-yield projects in an attempt to maintain Tesla's phenomenal growth rate. If these efforts fail, they could cause serious harm to the company.
Musk is already dreaming big
Elon Musk seems to have a natural inclination to a "bet-the-company" philosophy. For example, Musk announced last year that Tesla's next new vehicle, Model Y, would be based on a completely new platform. This would have been a massive waste of money compared to the design for the existing Model 3 platform. Fortunately, musk realized that this plan made no sense before it was implemented.
More recently, Musk and his lieutenants spent an amazingly long time on Tesla's Q4 earnings call for plans to fully automate vehicle production.
substantial profit in the form of lower production costs. However, other car manufacturers have found that the production process is too complex to be suitable for automation. Given that Tesla has not yet shown basic automotive expertise – let alone excellence or innovation – investors have wondered if this experiment will turn into an epic failure and continue to growl.
Elon Musk already has massive ambitions. That's part of what made him so successful. But investors should not assume that he is infallible. If the new compensation plan encourages him to make big bets outside of Tesla's core competencies, it could ultimately prove catastrophic for Tesla.