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Elon Musk $55 Billion Compensation Package Ordeal

Elon Musk, the world’s richest man, has an estimated net worth of $200 billion. His wealth is primarily attributed to his stake in Tesla, which he amassed through investments and three rounds of compensation packages. His largest compensation package began in 2018 and could pay out a maximum of $55 billion if Tesla reaches various market capitalization and operational milestones in 2022. In 2019, Tesla shareholder Richard Tornetta sued Musk for the excessive compensation package, alleging that Tesla misled its investors about the negotiation process.

On January 30th, 2024, a Delaware Court ruled that the process by which Musk secured the pay package was corrupt, and Musk had to return the $55 billion worth of Tesla stock he was awarded. Musk was unhappy with this decision and tweeted that Tesla is incorporated in Delaware, which led to the trial being held there.

In 2017, Musk proposed a new pay package, where he would receive stock options worth 1% of Tesla’s outstanding shares for every $50 billion increase in the company’s market valuation. The compensation committee, made up of board members with conflicts of interest, was highly debatable.

Musk’s compensation package, which included stock options and a $105 billion payout, was a controversial issue. The compensation committee’s independence and the involvement of board members have raised questions about the fairness and transparency of Musk’s compensation decisions.

The Tesla board proposed a compensation plan for Musk, which was met with resistance from Tesla’s CFO, DPAC AOA, and Tesla’s general counsel, Todd Marin. The CFO wanted operational milestones to account for Gap accounting rules, as a grant based solely on market cap would cause a massive net loss and draw attention to the massive pay package. However, adding operational milestones allowed for a longer period of time for the expense.

In 2017, Tesla faced production hell as Musk worked on the Model 3 production line. Musk was consumed working on the Model 3 production line, and the process with the compensation committee was put on hold. In October 2017, Musk was more optimistic about Tesla’s prospects and sent a quarterly update to the board. He proactively sent a revised proposal, which was less generous than his previous proposal.

Musk’s new proposal would give him more new shares, but it was calculated based on the fully diluted share count, which represented 17% of the undiluted share count. This led to Musk watering down his proposal to just 10% of the current share count.

The compensation committee reviewed Musk’s new proposal and decided whether to accept or counter it. They made slight changes, such as having 12 tranches of 1%, increasing the market cap required to achieve the full package to $650 billion each. The board increased the package to 12%, which was almost exactly the same as 10% of the fully diluted share count. This change was not the committee’s rationale for making the counter proposal, but rather because they preferred Musk’s proposal.

In January 2018, 73% of shareholders approved Musk’s $55 billion compensation package. The compensation package was performance-based and approved by shareholders, but the judge found it to be well in excess of what was required to motivate Musk. Musk had made it clear to the board that he had no intention of leaving Tesla, and his pre-existing 19% stake in Tesla should have been enough to motivate him.

All of the compensation committee’s members were independent directors, and they negotiated the compensation package. However, multiple independent directors had close personal and financial relationships with Musk. The milestones were selected as stretch goals, and the compensation was commensurate with the difficulty of achieving them.

Tesla’s internal forecasts showed the company reaching 11 of the operational milestones within 3 years. Companies like ISS and Glass Lewis recommended voting against the package, arguing that the lower tiers were not that difficult to achieve. They also argued that the stock market as a whole increases by about 10% per year, and the milestones expire after 10 years.

The compensation package for Musk was deemed fair due to its performance-based nature and approval by shareholders. However, the judge criticized the compensation package for being excessively expensive and argued that the lower tiers were not difficult to achieve.

Tesla’s general counsel, Ted Moren, was concerned about public reaction to the compensation package for Elon Musk. He called up Tesla’s largest shareholders to see how they planned to vote, and two of them indicated they would vote against the package. Musk became enraged and gave Marin the order to inform one shareholder that he found their actions offensive. He then set up a call with other shareholders to convince them to divest from Tesla and all his other companies.

As a publicly traded company, anyone can buy shares of Tesla, but Musk can decide who he lets invest in his private companies like SpaceX and Neuralink. James Murdoch invested $50 million into SpaceX in 2019, and voted in favor of Musk’s compensation. Other members of Tesla’s board, including James Murdoch, ran Venture Capital funds and actively advertised their connection to Tesla while fundraising.

In court, Tesla’s board argued that the compensation plan was all upside for Tesla’s shareholders, as Musk only gets paid by Tesla and the stock price goes up if the share price does go up. However, this argument is fallacious, as Tesla’s share price could double or decrease if the stock price starts at $100.

Musk’s motivation for setting ambitious market cap targets was likely due to his belief in minimizing existential risk by focusing on Mars. The judge ruled that Musk’s pay package needs to be rescinded, meaning the options awarded will be voided. Tesla’s share price decreased slightly following the ruling, and investors may fear that Musk could step down as CEO or sabotage Tesla from the inside as an act of revenge.

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