If you thought Tesla Inc (NASDAQ:TSLA) CEO Elon Musk was rich enough already, with a net worth of $21 billion, most shareholders disagree. Enough of them just voted to approve a compensation package that could be worth as much as $2.6 billion, payable in Tesla stock over the course of the next 10 years.
It is, calling a spade a spade, egregious. Fans and followers will argue that it puts the company’s chief on the same side of the table as shareholders. And to some degree, it does. To a larger degree, though, the plan doesn’t encourage any of the things it really should incentivize.
Milestone-Based Plan
If it seems like this is old news, there’s a reason. The plan was proposed back in January and has been making the rounds ever since.
It got a little extra time in the limelight when it was compared to an over-the-top paycheck in the works earlier this month for Walt Disney Co (NYSE:DIS) CEO Bob Iger. That one — which paled in comparison to Musk’s — was shot down by Disney shareholders. Not the Tesla chief’s package, though.
The pay plan is complicated and divided into 12 sets of milestones. Broadly speaking, it rewards growth in the company’s market cap and an improvement in EBITDA.
For example, the first 1.69 million shares of TSLA stock will vest when and if Tesla’s market cap grows to $100 billion and its annual revenue grows to $20 billion. Or, Musk would be awarded those shares with a market cap of $100 billion and adjusted annual EBITDA of $1.5 billion.
The 12th and final tranche of shares would become Musk’s when and if the company’s market cap reaches $650 billion, and when Tesla either produces commensurate revenue or commensurate EBITDA.
For perspective, Tesla’s current market cap is $53.7 billion. The electric carmaker has produced $11.7 billion worth of revenue over the course of the past four quarters and has turned $29.7 million worth of that into EBITDA.
Don’t worry, though. Production of the Model 3 is planned to reach a pace of 5,000 per week before the second quarter of the year comes to a close. Musk is still calling for a production pace of 500,000 of the lower-cost vehicles before the end of 2018, which would push the company to and likely even beyond the first set of the compensation plan’s given milestones.
What’s Missing
The compensation plan had its critics, and for good reason. Not only is it a huge (potential) figure, but it arguably incentivizes the wrong things.
For perspective, last year’s median pay for CEOs was around $11.6 million, with a big chunk of that stemming from stock grants. Apple Inc. (NASDAQ:AAPL) CEO Tim Cook, who is at the helm of the world’s biggest and most successful company (in terms of profits and in terms of revenue) took home $102 million last year, with most of that being paid in Apple stock.
As it stands right now, Tesla’s plan for Musk is mathematically worth $2.6 billion if he earns all of the earmarked shares. But if the price of Tesla stock increases as called for by the milestones, the packages could become worth just a bit more than $50 billion.
As proxy advisory firm Glass Lewis put it, “The cost of the grant is staggering relative to executive compensation levels among public companies worldwide.”
The plan also wouldn’t make Musk the richest man in the world, but it would certainly put him among the wealth leaders.
Yet — and this is the tough part of the plan for some to swallow — the milestones don’t incentivize actual GAAP profits, or even free cash flow.
This matters, because EBITDA is relatively easy to generate since it’s not weighed down by interest expenses, depreciation and stock-based compensation. Musk could spend heavily and raise funds indiscriminately to beef up production and therefore beef up revenue, but it wouldn’t have to be profitable growth.
Bottom Line for Tesla Stock
To his credit, Musk doesn’t even cash his relatively nominal paychecks, leaving him to survive only on the value of his Tesla stock, or whatever other investments he may own. Granted, he’s worth around $20 billion, so it’s not as if he’s sweating paying the bills. Nevertheless, he’s very much living and dying side by side with shareholders.
Either way, the plan itself exacerbates a long-standing worry about Tesla as a company — it’s great at growing the top line, but the bottom line is hit and miss, at best. The new plan further incentivizes adding debt and/or the dilution of existing Tesla stock owners and doesn’t incentivize the actual profits almost every other CEO is expected to produce.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
