Under the leadership of Elon Musk, Tesla popularized electric vehicles and became the most valuable car company in the world. Musk became a billionaire many times over and generated huge profits for investors.
Still, Tesla shareholders may decide this week that Musk has been paid too much.
In a vote whose results will be announced Thursday, investors could void a compensation package (paid in stock options and currently valued at $45 billion) that makes up a substantial portion of Musk's wealth.
With this, he is probably the richest person in the world, with a net worth of more than $200 billion. Without it, he could rank behind other billionaires like amazon's Jeff Bezos.
Shareholders approved the pay formula in 2018, but will vote on it a second time because a Delaware judge struck down the package in January. She ruled that Musk had largely dictated the terms to a board packed with close friends, people she enriched and his brother.
Tesla's board is asking shareholders to ratify the package again in hopes of getting the court to reinstate it.
For Musk to have all the options, Tesla's sales, profits and stock market value had to grow to heights few thought possible in 2018. Many investors believe Musk deserves every penny.
“Without his relentless drive and uncompromising standards, there would be no Tesla,” Ron Baron, president of Baron Capital, an investment fund manager, said in a letter urging fellow shareholders to re-approve Musk's pay package. “Tesla is Elon.”
But the vote is expected to be close. Many opponents of ratification maintain that the prize was too large.
Norges Bank Investment Management, which manages Norway's oil wealth and is the largest sovereign wealth fund, said last week it had voted against the deal. “We remain concerned about the overall size of the award,” Norges Bank said in a statement.
The debate over Musk's stock award raises questions about the limits of executive compensation and the accountability of Silicon Valley billionaires whose wealth gives them great influence. In addition to being Tesla's largest shareholder, Musk owns the social media site x and the rocket company SpaceX, which transports NASA astronauts to the International Space Station.
Some say upholding the award would weaken laws designed to protect shareholders. The importance “goes far beyond Elon Musk,” said Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware. “If he can do it, why can't anyone else?”
In addition to Norges Bank, several of Tesla's largest shareholders have said they will vote against the pay package, including the California Public Employees Retirement System, or CalPERS, the largest pension fund in the United States.
“When billionaires are allowed to flout the rules, regular people suffer,” Brad Lander, the New York City comptroller, told reporters last week. Lander oversees public pension funds that own more than $620 million worth of Tesla stock.
The bar for approval is high. To survive legal challenges, the measure requires approval of a majority of voting shares, not including those of Musk or his brother, Kimbal Musk.
How did the package become so valuable?
The dispute revolves around a deal that gave Musk options on up to 12 percent of Tesla's outstanding shares at the time. To cash out, he had to meet demanding revenue or profit benchmarks and increase the company's stock market value to $650 billion.
Most of these goals were thought to be out of reach in 2018 because Tesla was struggling. However, shortly after, Tesla's business took off and its market value peaked at $1.2 trillion in 2021. It has since fallen to $545 billion. Under the plan, the market value stayed above the $650 billion target long enough for Musk to cash in on the options.
With the 2018 pay award, Musk owns 20.5 percent of Tesla, and just under 13 percent without it.
Why are shareholders voting on this again?
Tesla's board of directors is reacting to a ruling by Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery, where Tesla is registered as a corporation. In January, Chancellor McCormick agreed with a group of disenchanted Tesla shareholders who argued in a lawsuit that the 2018 pay package was grossly excessive.
Shareholder approval for a second time could help address Chancellor McCormick's conclusion that the 2018 vote was tainted because board members failed to disclose conflicts of interest stemming from their personal and financial ties to Musk. He also found that the board had exaggerated how difficult it would be for Musk to reach the milestones needed to cash out the stock options.
A new shareholder vote with better disclosure “takes that argument off the table,” board member James Murdoch said in a video on a Tesla website.
Legal experts are less sure. “That may influence the court, but it's not clear,” said Samantha Crispin, president of the corporate department at Baker Botts, a Texas-based law firm. “There is no hard and fast rule.”
Tesla has acknowledged in a regulatory filing that a yes vote “may not completely resolve the matter.”
Why does Tesla's board want Musk to have the money?
Robyn Denholm, Tesla's chairman, maintains that since March 2018 investors have seen a return of more than 1,000 percent thanks to Musk's leadership, and that the company is honored to give him what he was promised.
“Elon's unique contributions have taken Tesla from a company that, in 2018, was an ambitious, loss-making company with significant obstacles to overcome to what it is today: a company that is literally changing the world,” the company said. Mrs. Denholm. in a letter to shareholders last week.
Tesla's Model Y sport utility vehicle is the best-selling car in the world, and Tesla accounts for half of all electric cars sold in the United States. “He was spectacularly successful and should be rewarded accordingly,” Cathie Wood, CEO of Ark Invest, said on x. Tesla is among the largest holdings in several Ark funds.
Why are some shareholders opposed?
Musk's critics acknowledge that Tesla forced the rest of the auto industry to focus on electric vehicles. But some shareholders are unhappy with Tesla's recent financial performance. Sales and profits have declined and the company has lost market share.
Some shareholders complain that x, which was twitter when Musk bought it in 2022, has distracted him from running Tesla at a critical time. All that money may have even been counterproductive, some say, because it allowed him to pay around $44 billion for twitter in the first place.
“The 2018 pay package really did nothing to focus Elon Musk on Tesla,” Tejal Patel, chief executive of SOC Investment Group, which has close ties to unions, told reporters last week. “If anything, he unfortunately allowed her to pursue even more outside business opportunities..”
Another criticism is that Tesla's board of directors simply resubmits the 2018 pay package without new conditions. “It won't create any incentives,” said Michal Barzuza, a professor at the University of Virginia School of Law. “It's retrospective.”
Denholm has noted that Musk cannot sell the shares he receives for five years, giving him a powerful incentive to remain focused on Tesla.
What else is on the ballot?
The board is also asking shareholders to approve moving Tesla's corporate registration to Texas, the location of Tesla's largest factory, saying Delaware courts have been unfair. But the lawsuit against Tesla and Musk in Delaware would remain a matter for Delaware courts.
If the pay package fails, will Musk have been paid nothing?
That is the argument Mrs Denholm makes. But Musk has become fabulously wealthy thanks to the Tesla shares he owns, which are worth more than $70 billion, even excluding what he would receive from the pay package.
amazon's Bezos and Meta's Mark Zuckerberg became billionaires with initial stakes in the companies they founded, and they did not receive large salary awards later.
The shares Musk already owned “provided a powerful incentive for Musk to stay and increase Tesla's market capitalization,” Chancellor McCormick wrote.
What happens if shareholders reject the salary package?
That could happen. Tesla's second-largest shareholder, Vanguard, voted against the pay deal in 2018. BlackRock, the third-largest, voted in favor. Both declined to say how they voted this time.
Tesla shares would likely fall on fears that Musk would leave the company, analysts at Bernstein said in a note to clients on Monday. Denholm has not discouraged speculation that a no vote would cause Musk to pay less attention to Tesla or even resign.
“If Tesla wants to retain Elon's attention and motivate him to continue devoting his time, energy, ambition and vision to achieving comparable results in the future, we must maintain our agreement,” he said in his letter to shareholders.
