Tesla’s New Compensation Plan For Musk – Meet These Goals Or You Get Nothing

Tesla Roadster

JAN 24 2018 BY DOMINIK WILDE 52

He’s already a billionaire though…

Tesla Semi

Tesla Semi reveal event

Electric car maker Tesla has come out and said that its boss Elon Musk will only be paid if the company starts performing.

Tesla has faced financial struggles of late – growing debt and production delays have hurt its bottom line.

Now, the company is taking action by insisting its CEO won’t be paid until the company achieves ‘a combination of market capitalization and operational milestones’ in a bid to turnaround its fortunes.

Musk ‘will receive no guaranteed compensation of any kind – no salary, no cash bonuses, and no equity that vests simply by the passage of time,’ Tesla said.

Musk’s new incentive includes a decade-long grant of stock options broken into 12 portions that Musk will only get if certain milestones are met by the company. The first milestone is to increase Tesla’s market capitalization to $102 billion with more stock options opening up at $51 billion intervals.

‘Thus, for Elon to fully vest in the award, Tesla’s market cap must increase to $661 billion,’ the Californian tech company said.

To achieve the operational milestone, the California-based firm said it must meet a set of ever-increasing revenue and adjusted earnings targets, which come before interest, taxes, depreciation and amortization targets.

Tesla’s board stated:

“For vesting to occur when the milestones are met, Elon must remain as Tesla’s CEO or serve as both Executive Chairman and Chief Product Officer, in each case with all leadership ultimately reporting to him. This ensures that Elon will continue to lead Tesla’s management over the long-term while also providing the flexibility to bring in another CEO who would report to Elon at some point in the future. Although there is no current intention for this to happen, it provides the flexibility as Tesla continues to grow to potentially allow Elon to focus more of his attention on the kinds of key product and strategic matters that most impact Tesla’s long-term growth and profitability.”

Source: Forbes 

Categories: Tesla

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52 Comments on "Tesla’s New Compensation Plan For Musk – Meet These Goals Or You Get Nothing"

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It is about time a board directly ties performance to pay. No more million dollar salaries. I hope to see more corporate boards follow suit.

(⌐■_■) Trollnonymous

I don’t get it.
I thought this was always the case from the beginning?

No, he was getting vested stock options which he was selling for very large profit. The vesting was time based not performance.

I don’t believe that’s true.

Yeah, I think that’s just more bull pucky from serial Tesla basher Steve. I could be mistaken, but as I recall, all or at least the overwhelming majority of Elon’s stock options were already connected to performance and milestones, not months or years served.

If the only change here is that Elon is giving up his minimum wage salary, then that’s just a fig leaf change, not a substantial one.

His previous contract at Tesla had also no salary or bonus, but only stock, based on targets, like number of cars sold, gross margin, car getting into production etc.. Technically, California law requires Tesla to send him a paycheck for a few thousand dollars a year, as no employment below minimum wage is allowed, but as reports go, he never cahsed those.
And to my knowledge, he is aquiring more stock of Tesla whenever he can. He already holds about 20% (I think), and even paid his taxes with a credit he took on his fortune to not have to sell stock.
BTW: If I’m not mistaken, his compensation for 2016 was over a billion in Tesla stock. He became the highest paid CEO in the world with that, I believe.

If he really got over a billion in compensation in one year, then the compensation package sounds like absolute crap. That’s also a pretty rich benefit for a company that’s not actually making money–sorry it’s just ridiculous. Tesla really doesn’t appear to be a corporation run for the benefit of the shareholders.

On top of that focusing on market cap for compensation seems like an absolutely ass backwards move. There’s good reason many corporations are criticised for managing for short term stock market gains. Tesla really should have tied compensation to production/financial goals and that’s it. Market cap shouldn’t even come into consideration. Yes I realize that higher market cap benefits shareholders, but focusing on that is a bad way to run a company.

Elon Musk always has been, is, and always will be committed to Tesla. At least one more decade.

Just have a look at those milestones.

Wow

Until, of course, someone makes an offer that can’t be refused or the board kicks him out.

Not on your life. He’s there in some capacity forever(lifetime) if only being a consultant.

Until he’s not… You have no idea what he’s going to do.

Some people don’t have a clue, that’s true.

Yeah, Tesla will definitely want to keep Elon on as a board member specializing in investor relations, if nothing else. The only way I see that not happening is if there’s an acrimonious split between Elon and the rest of the board and he is forced out.

As I recall, Elon has said he might eventually want to step back from CEO position to be head of design, which I guess is what he really enjoys doing at Tesla.

Let’s not forget that he has a second full-time job as CEO of SpaceX!

Until he’s bored with it and frustrated by people nagging him to make a profit for the company instead of planning the next big party, or obsessing about the details on the next product concept, or scheming on how to get people to move through holes in the ground…

Really?!

Yes really. A mind like that does not do well in the day to day running of an established car company, or really any company. As long as the company remains a “start up” with the start up mentality of, spend all the money now, make money later, concept, he will be happy. As soon as they tell him enough is enough, now we need to get serious… that’s when he is out.

Yeah, I thought he was nuts in starting ANY kind of car company in the US, but an ELECTRIC car company?? That was some mad science there!

Someone with more financial experience help me out and explain how these milestones are “good” for TSLA, or even achievable.

From my strictly-amateur investor experience, using Market Cap and EBITDA as milestones appear to be unusual metrics of performance for a CEO. Especially the levels.

$600B in Cap and only $14B EBITDA as the 10-year “goal” milestones? I would think that those values would be evidence of a very unhealthy company that the market has up-priced in anticipation of even MORE growth. i.e. – a continuation of the current situation in the long-term. Eventually a start-up has to quit being a start-up growth-investment and become a more-stable value-esque investment with a high EOI.

As an alternate example, GM is achieving $21B EBITDA with only $62B Cap, and only $136B total Enterprise Value – the metrics of a financially-healthy company using its resources profitably.

Investments will always be as high as possible.

Therefore earnings will not grow that much.

Revenue will increase significantly.

It there is always going to be very little earnings, why would people buy Tesla stock?

Stock Price Appreciation will be based on asset growth in the balance sheet.
-More Gigafactories.
-More product on the market: the Model Y, a Pickup Truck, …

In other words rapid marketshare penetration is the goal.
Until that’s achieved, in 10 years, you won’t see a dividend.

Speaking of Gigafactories, where is the announcement of GF 3,4 and 5? It was supposed to be in august last year IIRC. Funny how we forgot that

Tesla will never ever pay dividend.

Still people invest their money in TSLA.

As long as annual investments will remain very high, annual earnings will not grow that much.

After 2030 Tesla will have both (high investments and high earnings) because revenue will keep increasing to much higher levels.

But $14 billion earnings is not “very little” (the way you put it).

Although you are a troll, I will reply so others might read it:
If someone bought Tesla stock for like 100 k back in 2012, and held it until now, it is worth roughly 1 million dollars.
Stock from some other car manufacturers is more or less the same value as 2012, some are even worth less. 100 k$ of stock might have given 20-30 k$ in dividends (might be even lower, I did not check). The sum of the payouts and the original stock is less than 1 million, even if reinvested. One of the few things that had a higher profit rate in that time was Bitcoin.
When Elon hits all his targets, 100 k of Tesla stock today would be ~2 million in 10 years. He himself will be highly incentiviced to hit his target, as he (in case he can keep all current stock) will have close to 200 billion dollars in Tesla shares alone. If he succeeds, everybody wins. Even the shorters, because when living on the streets after losing all their money, at least they will be able to enjoy cleaner air and reduced noise levels, due to the electric cars.

The “troll” comment was aimed at dav8or

The difference between growth and value.
People need to stop comparing the legacy car companies to Tesla.
Tesla is growing market share while they are losing it.
No competition, miles ahead in the ev revolution, with plenty of blue sky, opportunities to take more market share, are some of the reasons people buy Tesla stock.

They’re growing market share but their market share is still minimal. The stock is very overvalued.

Tesla’s stock is to at least 90% built on hype. The stock price in no way reflects the real value of the company.
What goes up must at some point come down. Hype doesn’t last forever and looking at Tesla’s fumblings with the model 3 it’s unlikely that Tesla will ever come even close in terms of productivity to the car makers that actually makes money from selling cars.

Look at Amazon, if it wasn’t for the cloud business they’d probably still be losing money.

Maybe Tesla hasn’t even started what is really going to earn income profitably going forward.

That’s not bashing, just sayin’

Tesla is a young high-growth company, so it can have a large cap and low earnings.

GM is an established, low growth company, and so it’s expected to have good earnings compared to its market cap.

Maybe if we had more executive compensations tied to milestones, then we wouldn’t have such obscenely bloated top executive salaries and “golden parachutes” for poorly-performing CEOs here in the USA.

Looks like a great improvement to me, and I only wish it was the standard way to compensate top executives at large corporations!

Go Tesla!

So how many years should a new company grow in the high double digits before they slow down into single digits?

You seem to think that Tesla shouldn’t do that for another 10 years, and should give up and drop to much lower growth rates, like GM.

Why? Why wouldn’t Tesla continue on their same massive expansion path for the next 10 years?

Because never works that way. Ever. As a company gets larger it simply isn’t possible to grow at such fast rates. Each increase in market share requires selling a lot more cars. There’s significantly more resistance to it.

“Massive expansion” as in selling roughly the same number of cars 6 quarters in a row?

Forget what he gets from Tesla. I want to know what he gets from SpaceX which “has secured over 100 missions to its manifest, representing over $12 billion in contracts.”

Source: http://www.spacex.com/about

NPNS! SBF!
Volt#671 + BoltEV

I think he gets no salary from Space X. He is the sole owner, as far as I know, and thus the worth of the company is his altogether.
BTW: he is building his own Space Port in Texas, so he no longer will need to pay rent for Nasa facilities for the commercial starts in the future. This will make space travelling even cheaper.

“Musk ‘will receive no guaranteed compensation of any kind – no salary, no cash bonuses, and no equity that vests simply by the passage of time,’ Tesla said.”

Actually, that’s not true. Its not legal. To be an employee of Tesla, he must get (at least) minimum wage.

What’s the legal definition (under California law) of “employee”? Is a member of the Board of Directors an “employee”?

Silly metrics, IMO.
First, there should be a base salary because there is ongoing work to do, which he should be compensated for. The stock market is a completely irrelevant indicator for short- and medium-term performance — you don’t want a CEO that spends all his/her time on financial matters (not that Musk is likely to do so, but it’s the principle).
The debt issue is significant… Tesla shoud at this point focus on breaking even ASAP, at the expense of far-future R&D as well as growth. No more loans.

Another Euro point of view

“Tesla should at this point focus on breaking even ASAP”

They won’t do that, that explains the objective set in this remuneration package of a very low ebitda in such a distant future.

“Tesla shoud at this point focus on breaking even ASAP, at the expense of far-future R&D as well as growth. No more loans.” Why? Is Tesla teetering on the brink of financial collapse, as the anti-Tesla FUDsters want us to think? If not, then if anything, Tesla should be borrowing money faster so it can grow even faster. Elon should delegate authority to other execs so his personal oversight isn’t the bottleneck that it is now, slowing company growth. For a company like Tesla, leading the race during a disruptive tech revolution, slowing growth would be the worst possible business choice. It would be every bit as myopic and downright stupid as Eastman Kodak ignoring the digital camera revolution and continuing to focus on making film cameras while their market was in the process of disappearing. Tesla needs to grow as fast as it can, and grab as much market share as possible out of the now exponentially growing plug-in EV market, which is going to eat up the gasmobile market faster and faster every year for the next decade or two. Just my opinion, of course. Maybe Wavelet is at least partially right; maybe Tesla is already overextended and… Read more »

Yes and no. If sentiment changed tomorrow then Tesla could be out of business within 6 months (although probably in reality they’d bought up dirt cheap by a competitor). Right now it’s not a sustainable business. If the money taps closed for whatever reason, the company would fail.

Sure right now everything is going fine and plenty of people seem happy to give Tesla their money, but that is still a dangerous position to be in. Companies in similar situations have failed in the past.

“Why? Is Tesla teetering on the brink of financial collapse?”
Actually, fairly close.
Recall, with 33K employees, just meeting payroll every month is nontrivial.
The amount of short-term debt (due for repayment this year or the next) is huge, and if huge revenues don’t materialize in months, the company’s in trouble. Tesla has consistently, several times, raised more and more money via debt and public offerings right after saying they wouldn’t need to.

Right now, if the stock tanks, they’ll find it very hard to raise more money, and would be in hot water, going bankrupt in less than a year. A public company this big shouldn’t be in this position.

And please don’t say “but Amazon…”:
Amazon had an operating loss for 4 years before they starting showing operating profit (which they plow back into investment, but that doesn’t affect financial stability); Tesla has had an operating loss for 14 years, and it just gets worse every year.
A startup has to fund initial R&D somehow. Tesla is no longer a startup and there is no justification for these bad habits.

How about tying CEO pay to a ratio of the lowest paid person in the company? A raising tide lifts all boats.

All employees receive stock options. Their boat is also rising.

And then they get fired just before they can cash in those stock options.

I’d love to see this in any company.

“Musk’s new incentive includes a decade-long grant of stock options broken into 12 portions that Musk will only get if certain milestones are met by the company.”

Looks like just PR spin to me. That sounds pretty close to Musk’s current compensation plan — that is, very little salary and compensation tied to achieving milestones. Wasn’t Elon at one point bragging about being paid minimum wage? Also, I strongly suspect any change was Elon’s idea — not something forced onto him by Tesla’s Board of Directors.

It appears to me that this is a mostly meaningless publicity measure intended to quell grumbling among investors disappointed with Tesla’s significantly delayed/reduced plans for ramping up Tesla Model 3 production.

Not that I think Tesla is really in trouble. It stumbled badly in the second half of last year, but didn’t fall, and it appears to be back on track. No doubt that is a great disappointment to all the serial Tesla bashers and Tesla Hater cultists.

It’s a badly designed compensation package as I’ve mentioned in other posts, but ironically I think it’s bad for Musk as well because I think the market cap milestones are likely to prove impossible to reach. The company could survive and become profitable while still missing those market cap mile stones by a mile–or many miles.

$650B in market cap means Tesla would be bigger than all other car companies put together. That is simply a ridiculous goal, especially for a company that has virtually no unique technology. Everything Tesla does can easily be replicated by any other car company. The only real difference is that while the others demand profitability, Tesla is happy making a loss selling cars. Of course, that’s not a very good long term strategy.

Some Troll Out There gets it wrong yet again.

So what other companies have “easily replicated” Tesla’s tech or ecosystem?

Tesla is highly profitable on the margins for its cars (20-25%)and as it starts to enter serious mass production it stands to make 5-10 billion in revenues alone on the Model 3 with the Y, Semi, Roadster 2.0, and pickup coming up behind them.

Key is controlling your battery supply which Tesla has done unlike the laggard competition.

Tesla has already shown that the legacy, laggard Euro luxury/sport OEMs are hopelessly behind in this new market.

Also as an energy company, Tesla is already starting to become dominating in large energy storage systems and will probably also do this in homeowner systems along with their high-end solar roofs.

This business alone could be bigger than even their autos.

Tesla wisely plows all their revenue back into asset growth and borrows to further expand so it will get to that dominant position in these new and fast growth potential markets.

Investors see this and wisely invest into this longer-range high profit potential which explains their already high market cap.

Musk and Tesla’s plan is audacious unlike the timid and laggard OEMs who have now found themselves far befind the curve.

This means that actual finance experts with internal knowledge of Tesla finances have counted the beans and have made their projections based upon the best available inside information as to what will be an achievable yet challenging target numbers.

Anybody not recognizing that this is as close to inside information that normal folks like us will ever get, is intentionally blind.

Members of the compensation board are legally bound to create a compensation package that is neither too easy to accomplish that it doesn’t push the limits, nor is it too difficult to attain that it is not attainable.

So these numbers represent what insiders complete with full access to inside information believe will be the “Mama Bear” path for the stock. Not too optimistic, not too pessimistic. These numbers represent what is 70% to 80% probable with aggressive but not perfect execution.

Ignore rare legal insights into insider information at your own peril.