Tesla shares are down 28% this year. It warned of “significantly” slower growth as sales in its second-biggest market, China, fall. A flaw has forced the recall of the highly anticipated latest product. The CEO spends a lot of time in other companies or causes controversy. How do you reward him? With a record $56 billion pay deal if Tesla wins at the annual meeting on Thursday.
Elon Musk’s pay package – the largest ever awarded to an executive at a US-listed company – is not based on Tesla’s current or future performance. It was granted in 2018 and was built on Tesla’s stock value, revenue and profitability targets.
The targets seemed steep at the time, but after three extraordinary increases – in Tesla production, demand for electric cars and the group’s share price – all targets were met by 2022. The company’s transformation into the world’s most valuable carmaker has propelled Musk into the ranks of the world’s richest people.
Back in January, the judge hit the brakes. The Delaware Court of Chancery struck down the pay arrangement after a legal challenge by a Tesla shareholder, calling his compensation “an unfathomable amount” and questioning whether Musk’s compensation at such levels is necessary to keep him as CEO and achieve the company’s goals.
Tesla was not ready to take this decision in its stride. “Elon has not been paid for any of his work for Tesla over the past six years, which has helped create significant growth and shareholder value,” Robyn Denholm, Tesla’s chairman, said in April, adding that the decision was “fundamentally unfair.” and contrary to the will of the shareholders who voted for it”.
The company organized a repeat vote and called on investors to back the deal again. While the automaker tried to emphasize how the arrangement was tied to previous performance, the vote is also seen by some as a referendum on the current state of the company and Musk’s leadership.
Denholm appealed to shareholders again last week, saying there was a risk Musk would walk away from Tesla if they didn’t support his pay package this week. “If Tesla is to retain Elon’s attention and motivate him to continue to devote his time, energy, ambition and vision to achieve comparable results in the future, we must stand by our agreement,” she wrote.
Denholm added: “This is obviously not about the money. We all know that Elon is one of the richest people on the planet and would remain so even if Tesla broke the commitment we made in 2018.
Investors are being asked to back two proposals: Musk’s salary and moving Tesla from Delaware to Texas. Musk indicated he plans to do the latter after the January decision, prompting him to say companies should never incorporate in Delaware.
According to Dan Ives, a Wedbush analyst and company veteran, Tesla is likely to win approval for Musk’s reward, though “not by a huge margin.” Many of the company’s shareholders “understand that Tesla’s biggest asset is Elon Musk,” Ives said.
Two of the largest proxy advisory firms — which advise investors on how to vote — have opposed Musk’s pay. Glass Lewis and ISS both described it as “excessive”, prompting angry reactions from Tesla. Glass Lewis used “flawed logic”, he claimed, while suggesting that the ISS had missed the point.
In addition to the implications for Musk’s wealth, the vote on his pay will also test the power that proxy advisors have over a company like Tesla, which has a number of loyal supporters and Musk fans among its shareholders.
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Tesla and Musk launched a high-profile campaign to ensure they won. Last month, the billionaire shared a shiny video on the social network X, formerly known as Twitter, which he bought and renamed, which he claimed was made by Tesla employees “of their own free will”. He urged investors to “protect Tesla” by voting in favor of the automaker’s proposals, warning that future growth is at risk.
Musk has received support from some deep-pocketed supporters. “Without his tireless efforts and uncompromising standards, there would be no Tesla,” billionaire investor Ron Baron said last week.
This journey has earned the mogul his fair share of critics. Unions are trying to organize at Tesla plants, saying it’s high time the company’s workers get a fair share of its profits.
He also faces questions about how he divides his time with the rest of his empire, which includes X; the SpaceX group of rockets and satellites; Neuralink, a brain implant startup; and the Boring Company, a tunneling business.
“Tesla will ultimately win the narrative where, if it’s not for Musk, we won’t have EVs [electric vehicle] global transformation that we have seen,” Ives said. “He deserves a pay packet: executed.”
“But it’s at a time when Tesla is going through a tough growth period. There is a Category 5 headwind and Musk has created a lot of noise and controversy, which has frustrated some investors.”
Thursday’s victory is unlikely to end the saga. Shareholders opposed to Musk’s pay deal are expected to challenge any effort to renew it.