Under the leadership of Elon Musk, Tesla popularized electric vehicles and became the most valuable car company in the world. Mr. Musk became a billionaire many times over generating huge profits for investors.
However, Tesla shareholders may decide this week that Mr. Musk is overpaid.
In a vote, the results of which will be announced on Thursday, investors could knock down a compensation package — paid in stock options and currently worth $45 billion — that makes up a significant portion of Mr. Musk’s fortune.
With it, he is probably the richest person in the world, worth over 200 billion dollars. Without it, he might rank behind other billionaires like Amazon’s Jeff Bezos.
Shareholders approved the payout formula in 2018, but are voting on it a second time because a Delaware judge struck down the package in January. She decided that Mr. Musk had dictated the terms to a board of directors stacked with close friends, people he made rich and his brother.
Tesla’s board is asking shareholders to re-ratify the package in hopes the court will reinstate it.
For Mr. Musk to receive all the options, Tesla’s sales, earnings, and stock market value had to rise to heights few thought possible in 2018. Many investors believe Mr. Musk deserves every penny.
“Without his relentless drive and uncompromising standards, there would be no Tesla,” Ron Baron, chairman of Baron Capital, an investment fund manager, said in a letter urging other shareholders to re-approve the pay package. of Mr. Musk. “Tesla is Elon.”
But the vote is expected to be close. Many of those who oppose ratification claim that the price was too great.
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 total size of the award,” Norges Bank said in a statement.
The debate over Mr. Musk’s stock price raises questions about limits on executive compensation and the liability of Silicon Valley billionaires whose wealth gives them enormous influence. As well as being Tesla’s largest shareholder, Mr Musk owns the social networking site X and the rocket company SpaceX, which carries NASA astronauts to the International Space Station.
Some say an approval of 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 not someone else?”
In addition to Norges Bank, some 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 break the rules, normal people suffer,” New York City Comptroller Brad Lander told reporters last week. Mr. 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 by a majority of voting shares, not including those owned by Mr. Musk or his brother, Kimbal Musk.
How did the package become so valuable?
The dispute revolves around a deal that gave Mr. Musk options for up to 12 percent of Tesla’s stock at the time. To collect, he had to meet the required revenue or profit standards and increase the market value of the company’s stock to $650 billion.
Most of these goals were thought to be unattainable in 2018 because Tesla was struggling. Soon after, however, 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 remained above the target of $650 billion as long as Mr. Musk exercised the options.
At 2018 pay, Mr. Musk owns 20.5 percent of Tesla and just under 13 percent without.
Why are shareholders voting on this again?
Tesla’s board is reacting to a decision by Chancellor Kathaleen St. In January, Chancellor McCormick settled with a group of disgruntled Tesla shareholders who claimed in a lawsuit that the 2018 pay package was grossly excessive.
Second-time shareholder approval could help address Chancellor McCormick’s finding that the 2018 vote was tainted because board members failed to disclose conflicts of interest stemming from their personal and financial ties to Mr. Musk. It also found that the board had exaggerated how difficult it would be for Mr Musk to meet the milestones required for him to collect the stock options.
A new shareholder vote with better disclosure “takes that argument off the table,” James Murdoch, a board member, said in a video on a Tesla website.
Legal experts are less sure. “It could affect the court, but it’s unclear,” said Samantha Crispin, head 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 fully resolve the matter.”
Why does Tesla’s board want Musk to have money?
Robyn Denholm, Tesla’s chairman, argues that since March 2018 investors have earned a return of more than 1,000 percent because of Mr. Musk’s leadership, and that the company is obligated to deliver what it has been promised. .
“Elon’s unique contributions have built Tesla from a company that was, in 2018, a losing, ambitious company with significant obstacles and challenges to overcome to what it is today – a company that is literally changing the world,” said mrs. Denholm. in a letter to shareholders last week.
Tesla’s Model Y sports car is the best-selling car in the world, and Tesla accounts for half of all electric cars sold in the United States. “He succeeded spectacularly and should be rewarded accordingly,” said Cathie Wood, chief executive of Ark Invest, in X. Tesla is among the largest holdings for several Ark funds.
Why are some shareholders against it?
Mr. 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 fallen, and the company has lost market share.
Some shareholders complain that X, which was Twitter when Mr. Musk bought it in 2022, has distracted him from running Tesla at a critical time. All that money may even have been counterproductive, some say, because it allowed him to pay about $44 billion for Twitter in the first place.
“The 2018 pay package did nothing to focus Elon Musk on Tesla,” Tejal Patel, chief executive of SOC Investment Group, which has close ties to organized labor, told reporters last week. “Unfortunately, this enabled him to pursue even more business opportunities abroad.”
Another criticism is that Tesla’s board is simply redistributing the 2018 pay package without any new conditions. “It’s not going to create any incentive,” said Michal Barzuza, a professor at the University of Virginia School of Law. “It’s retrospective.”
Ms. Denholm has pointed out that Mr. Musk cannot sell the shares he receives for five years, giving him a powerful incentive to stay focused on Tesla.
What else is on the ballot?
The board is also urging shareholders to approve Tesla’s move to register in Texas, the location of Tesla’s largest factory, saying Delaware courts have been unfair. But the lawsuit against Tesla and Mr. Musk in Delaware would remain a matter for Delaware courts.
If the pay package fails, will Musk have been paid anything?
This is the argument Ms. Denholm is making. But Mr Musk has become enormously wealthy from the Tesla shares he owns, which are worth more than $70bn, excluding what he would receive from his pay packet.
Amazon’s Mr. Bezos and Meta’s Mark Zuckerberg became billionaires from initial stakes in the companies they created — and didn’t get huge paychecks later.
The shares Mr. Musk already owned “provided a powerful incentive for Musk to stay and grow Tesla’s market capitalization,” Chancellor McCormick wrote.
What happens if shareholders reject the payment package?
This can happen. Tesla’s second-largest shareholder, Vanguard, voted against the pay deal in 2018. BlackRock, the third-largest, voted for it. Both declined to say how they were voting this time.
Tesla shares will likely fall on fears that Mr. Musk will leave the company, analysts at Bernstein said in a note to clients on Monday. Ms. Denholm did not discourage speculation that a no vote would cause Mr. Musk to pay less attention to Tesla or even leave.
“If Tesla wants to keep Elon’s attention and motivate him to continue to devote his time, energy, ambition and vision to deliver comparable results in the future, we must stand by our agreement,” she said in the letter. its address to the shareholders.