Electric vehicle (EV) manufacturer Tesla (NASDAQ:TSLA) may be heading toward a pivotal moment as it attempts to resolve a thorny and complex executive compensation issue. Specifically, CEO Elon Musk is seeking to be rewarded for his role in driving TSLA stock to where it stands now, making his case on a website called SupportTeslaValue. However, institutional investors may hold the key to the Tesla pay package — and they may not exactly be satisfied.
Shareholders approved Musk’s pay package back in 2018. However, according to an Axios report, very few investors at the time believed that they would have to pay out on it. That’s because the compensation plan was tied to extreme performance goals that seemed improbable Therefore, at the time, the expected value of the Tesla pay package was “closer to zero than it was to $56 billion”
Of course, Tesla did eventually meet these targets, with the brand becoming the EV sector leader. Notably, despite the recent underperformance, TSLA stock has gained 857% of equity value over the past five years.
However, the complex issue surrounding the Tesla pay package isn’t necessarily about meeting or exceeding performance goals. Rather, a TSLA shareholder alleged that the board misrepresented the compensation plan. In January, a judge sided with the shareholder’s legal team, thus overturning it.
Tesla Pay Package Spotlight Turns to the Institutions
In the ruling, the judge remarked that the Elon Musk pay package appealed to shareholders on a superficial level. “But that appeal quickly fades when one remembers that Musk owned 21.9% of Tesla when the board approved his compensation plan,” the judge noted.
In short, the judge argued that the ownership stake in TSLA stock already gave Musk every incentive to drive Tesla forward. Further, the Tesla pay package “was not conditioned on Musk devoting any set amount of time” to the EV manufacturer “because the board never proposed such a term.”
However, the matter really raised eyebrows when the judge discovered that Musk was in control of Tesla and the board. This framework led to irregularities, along with serious questions about how the plan was processed and negotiated. Conspicuously, as Electrek points out, Tesla doesn’t adequately address this matter in its new proxy statement filed with the U.S. Securities and Exchange Commission (SEC) or the new website.
An interesting wrinkle to the story is the role that institutional investors may play. Per Axios, the entities who benchmark the S&P 500 were essentially forced to buy TSLA stock when the company joined the index in late December 2020.
Since then, shares have cratered. “[A] very large part of Tesla’s institutional investor base, far from being grateful for Musk’s wealth creation, is sitting on substantial capital losses,” Axios reports. That’s clouding the future for the Elon Musk pay package.
Why It Matters
Due to some arguably irrational developments in the market, it’s possible that Musk will get what he wants regarding the pay package. However, the discussion comes amid a terrible time for EVs. With demand plunging, it’s also possible that shareholders may question whether lightning will strike twice.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
