Elon Musk has agreed to remain at the helm of Tesla for at least another 10 years. And in exchange for this commitment, the company’s board has approved an unconventional pay package: Musk will only be paid if Tesla’s stock and performance achieve a series of lofty milestones in a scheme that ultimately envisions the cash-burning behemoth’s market capitalization swelling to $650 billion.
The company is planning to unveil the new compensation plan on Tuesday; Andrew Ross Sorkin of the New York Times described it as “perhaps the most radical in corporate history.”
Tesla has set a dozen targets, each $50 billion more than the next, starting at $100 billion, then $150 billion, then $200 billion and so on, all the way to a market value of $650 billion. In addition, the company has set a dozen revenue and adjusted profit goals. Mr. Musk would receive 1.68 million shares, or about 1 percent of the company, only after he reaches milestones for both.
By comparison, Tesla is worth about $59 billion today. Apple Inc. is worth $900 billion. A valuation of $650 billion would make Tesla one of the five most valuable companies in the US, according to Sorkin’s figures.
The notion that Tesla is worth anything close to that figure – indeed, Jim Chanos would argue that the company is essentially worthless – is patently ridiculous. But fortunately for Musk, investors have never really felt compelled to assign Tesla a rational valuation. Instead, they’ve been captivated by Musk’s showmanship, of which this latest PR stunt is probably the most blatant example.
Mr. Musk’s critics – and there are many – are likely to contend that the new compensation plan is just the company’s latest publicity stunt. He has been called a modern-day P.T. Barnum who has created the illusion of success while consistently missing production estimates. The company continues to lose money; at one point last year, it was losing almost a half-million dollars an hour, according to Bloomberg News. Jim Chanos, a short-seller who has bet against Tesla’s shares – and has thus far been on the losing side of that trade – has contended that Tesla is worthless.
Despite the hokey overtones surrounding today’s announcement, Sorkin insists that it’s legitimate, and that Musk will be bound by its terms.
But Mr. Musk’s compensation plan is no illusion: He gets paid only if the company succeeds over the long term with significant gains in market cap. And it’s impossible for him to manipulate the system by trying to prop up the stock price for a temporary period. Under the terms of the arrangement, even once his shares vest, he has to hold them an additional five years before he is allowed to sell them.
The way the deal is structured, Musk will only be paid if he satisfies all of the requirements: Even if he manages to hit 90%, he’d get nothing.
We’re beginning to grasp why Tesla’s board decided to approve this plan…
“If all that happens over the next 10 years is that Tesla’s value grows by 80 or 90 percent, then my amount of compensation would be zero,” he said. (His calculations were based on the stock price at the beginning of this year when the company was worth about $50 billion.)
Still, he contended, “I actually see the potential for Tesla to become a trillion-dollar company within a 10-year period.”
The announcement also won Musk a heap of praise from Sorkin, who described his pay package as “about as friendly to shareholders as they come.”
As executive compensation plans go, Tesla’s is about as friendly to shareholders as they come. Many other companies have installed outsize packages that often come at the expense of shareholders because the executives get paid even when they underperform their peers.
Asked how he thinks shareholders should feel about Mr. Musk’s new pay package, Ira Ehrenpreis, chairman of Tesla’s compensation committee, told me, “It’s heads you win, tails you don’t lose,” meaning if Mr. Musk is gaining billions then shareholders are winning, too. And if Mr. Musk does not perform, shareholders pay nothing.
Of course, what Sorkin is missing – and what many of Musk’s media chroniclers have so far failed to spot – is that this is just another example of the patented Elon Musk confidence game. He makes outrageous and exaggerated claims about the company – its ability to deliver orders, the capabilities of its technology its ability to achieve long-term viability (or even profitability in the short term) – and then persistently under delivers, but somehow, the company’s shareholders appear to have developed chronic amnesia.
And Elon Musk isn’t stupid. He knows what he’s doing. But perhaps he’s become a little arrogant. All his prior tricks have worked. So why stop now? Let’s see if he can talk Tesla’s valuation all the way to $1 trillion!
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