Paul Hodgson: The Elon Musk pay package: Life on Mars

Tesla boss admits he needs “a certain amount of capital”

No one seems to have understood exactly what Tesla CEO Elon Musk’s new compensation package consists of.

Musk is being awarded more than 20m stock options, not shares. Seems like nitpicking, but it’s an important difference. Shares cost nothing to the recipient. Share options must be paid for. And at an exercise price of over $350 each, that’s quite a price tag. Shares also cost existing shareholders a lot more money than options to give away free as compensation. That’s an important consideration for the shareholders voting on this pay package at the special meeting being held to approve it.

That said, my initial reaction to the news that Tesla was going to give Musk over 20m stock options was, what on Earth does someone who already owns, as of the last full proxy, over 36m Tesla shares (22% of the company) need with more shares?

An answer was provided by comments Musk made to the NYT Dealbook’s Andrew Ross Sorkin. Musk said he’s not after dynastic wealth creation, but that he wants to do some “pretty big things”.

“I want to contribute as much as possible to humanity becoming a multi-planet species. That obviously requires a certain amount of capital.”

Musk, who is 46 now, has stated he wants to die on Mars (though not on impact). He will be 61 in 2033, the next date seen as favourable for a Mars mission.

Frankly, if Tesla ends up being worth $650bn – the final performance target for receiving all the stock options – $143bn (what he already owns), rather than $183bn (what he could own if all the options vested) already sounds like a lot of capital.

The pay package has been hailed by many as “one of a kind in corporate history”, but since it resembles almost exactly his original 2012 pay plan (of which all but one of the tranches of stock options have vested) – a point the press release makes very clearly (does nobody read these things through properly?) – it is more accurately the “second of a kind in corporate history”.So what do the 20m stock options depend on?

A series of 12 market capitalization milestones, each adding $50 billion to Tesla’s value, and 16 performance milestones, eight based on revenue targets and another eight based on adjusted EBITDA, over up to 10 years. There has been some carping about the ease of some of the early operational targets, but since both sets of targets must be met for the award to vest, that’s less material.

I don’t personally like ‘adjusted’ targets, since they often take out major expenses that really do affect bottom lines. And guess what Tesla’s adjustment does? Yes, that’s right, it excludes non-cash charges for stock-based compensation. Not just Musk’s, but everyone’s. And Musk alone made a profit of $1.34 billion on the exercise of stock options in 2016, and has a potential profit of $1.68 billion in currently outstanding options.
But there is something one-of-a-kindish about the plan. What’s really remarkable about this is not the plan itself but that the controlling owner of Tesla, Musk himself, and his brother, Kimbal, whose holding is only a few hundred thousand shares, have recused themselves from the vote at the special meeting announced via the preliminary proxy statement filed on Tuesday morning. That I’ve never seen before.

Instead, the decision to approve the package will be made by the likes of FMR, Baillie Gifford, Vanguard, BlackRock and T. Rowe Price (which appears to have offloaded a substantial portion of its Tesla holdings last year). These are the top five institutional shareholders, with more than half of the total institutional holdings.

So remember, fellas, these are options not shares. Though they still could be worth the $55.8 billion that the proxy says they might be, though only if he doesn’t exercise them until the end of the 10 years and only if he gets them all.
And they also could be worth nothing.