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Tesla Inc.’s shareholders are betting that the largest pay deal in history will help propel the electric-car maker into the stratosphere.
A majority of investors who voted at Tesla’s March 21 special meeting supported the $2.6 billion performance award for Chief Executive Officer Elon Musk, which outlines ambitions to become one of the world’s biggest companies. If the grant fully vests within a decade, it will yield Musk and his shareholders a fortune. If he falls short, he won’t receive anything--no salary or bonuses.
The lure of big stock-price gains, which go hand-in-hand with performance-based goals, appealed both to shareholders and the board of taser-maker Axon Enterprise Inc., which ripped a page from Tesla’s playbook and in February announced a similar 10-year performance award for its CEO. But the grant has also drawn scrutiny from experts asking whether the performance goals will set Tesla up for lasting success, and questioned the idea of staking astronomical payouts on a single person.
“Is any individual worth that much?” John Roe, head of the analytics arm of proxy advisory firm Institutional Shareholder Services Inc., told Bloomberg Law.
Tesla and most of its investors think so. Musk owns about 22 percent of the company, and if the award were to fully vest, he would own about 28 percent, Tesla told Bloomberg Law. That doesn’t account for unforeseen dilution in the next decade, the company said.
Under the new plan, Musk will earn one-12th of the options every time Tesla hits a pair of goals: one tied to its market value and the other linked to either revenue or earnings before interest, taxes, depreciation and amortization. For Musk to vest in all the options, Tesla would have to become worth $650 billion--more than Facebook Inc.--and produce more revenue than Procter & Gamble Co.
If that’s achieved, Musk’s award could swell in value to more than $50 billion, regulatory filings show. But he “could make off-the charts compensation by just hitting the two lowest tranches over the next few years,” Eric Hosken, a partner at executive compensation consulting firm Compensation Advisory Partners, told Bloomberg Law.
Tesla’s market value must surpass $150 billion for Musk to be eligible for the first two tranches, a hurdle that’s more feasible, Hosken said. The annual stock price increase required to reach that level may not beat the broader market by a wide margin, proxy adviser Glass Lewis & Co. wrote in a report.
Each tranche is also tied to one of 16 financial milestones, split between goals for revenue and EBITDA, which excludes stock-based compensation expense. As a result, Musk could get more than half of his options by growing revenue, even if the firm continues to post annual losses.
“They’ve created a good amount of flexibility in the program’s design that allows the company to be an engine for market cap and revenue growth, but not necessarily profitability,” Aalap Shah, a partner at compensation consultant Pearl Meyer, told Bloomberg Law. While shareholders will benefit, will it be “mainly because of hype, or because there is a sustainable business underneath?”
Concern about the lack of profit goals was echoed by the California State Teachers’ Retirement System, the second-largest pension fund in the U.S., which said in a statement it voted against the plan.
Tesla will “begin generating positive quarterly operating income on a sustained basis” this year, Musk said on an earnings call last month. The firm’s shareholders will benefit if the goals are met, and if they’re not, Musk won’t get paid, Tesla said.
Several of the firm’s largest shareholders, including Baillie Gifford & Co. and T. Rowe Price Group Inc. publicly lauded the performance award. About 73 percent of shares voted at the meeting were cast in favor of the plan. Musk and his brother Kimbal, who’s a Tesla director, said they wouldn’t vote their shares.
Tesla said in regulatory filings that it discussed the award, which was modeled after a similar grant given to Musk in 2012, with a number of its largest shareholders, who were generally supportive of the structure.
Musk, a billionaire, has about half of his net worth tied up in Tesla stock. While the award may significantly boost Musk’s wealth, most of the increase will come from his existing ownership stake rising in value, not from his compensation, according ISS’s Roe.
The size of the award, combined with Musk’s existing stake, calls into question whether the shares could have been used to hire or pay a large number of other employees, said Pearl Meyer’s Shah. Tesla has experienced several executive departures in recent months, including Susan Repo, who was corporate treasurer, and accounting chief Eric Branderiz.
That criticism is unfounded, Tesla told Bloomberg Law, saying there is no link between recent departures and compensation. All of its 40,000 workers have equity in the company, Tesla said, and will benefit if the milestones in Musk’s compensation package are met.
The award may also set a costly precedent for whenever Tesla hires a successor for Musk, Glass Lewis said in its report. The adviser praised Tesla’s board for promising to adjust the performance thresholds if the company engages in mergers or spinoffs that would be material to the performance goals.
But to shareholders like Ross Gerber, CEO of Gerber Kawasaki Wealth & Investment Management in Santa Monica, California, which holds Tesla shares, Musk is worth every penny.
“@elonmusk make us some money,” Gerber tweeted Wednesday.
With assistance from Anders Melin (Bloomberg)
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