Under the leadership of Elon Musk, Tesla has popularized electric vehicles and become the world's most valuable car company, making Musk a multi-time billionaire while generating huge returns for investors.
Still, Tesla shareholders may decide this week that Musk is being paid too much.
The results of the vote are due to be announced on Thursday, and investors could potentially reject Musk's compensation package, which represents a significant chunk of his wealth (paid in stock options and currently worth $45 billion).
This makes him arguably the richest man in the world, with a fortune well over $200 billion, something that would otherwise put him behind other billionaires like Amazon's Jeff Bezos.
Shareholders approved the pay formula in 2018, but this is the second time it has been voted on since a Delaware judge struck it down in January, finding that Mr. Musk had largely dictated the terms to a board of directors made up of his close friends, people he enriched and his brother.
Tesla's board is asking shareholders to approve the bill again in the hopes that a court will reinstate it.
For Musk to get all of his options, Tesla's sales, profits and stock market value would have to grow to levels that most people thought impossible in 2018. Many investors believe Musk deserves every penny.
“Without his indomitable drive and uncompromising standards, Tesla would not exist,” Ron Baron, chairman of investment fund manager Baron Capital, said in a letter to fellow shareholders urging them to re-approve Musk's compensation package. “Tesla is Elon.”
But the vote is expected to be close, and many opponents of ratification argue that the cost is too high.
Norges Bank Investment Management, which manages Norway's oil assets and is its largest sovereign wealth fund, said last week it had voted against the deal. “We remain concerned about the total value of this contract,” Norges Bank said in a statement.
The debate over Musk's stock compensation raises questions about limits on executive pay and the accountability of Silicon Valley billionaires whose wealth gives them great influence. Musk is Tesla's largest shareholder and also owns the social media site X and SpaceX, the rocket company that flies NASA astronauts to the International Space Station.
Some say approving the award weakens laws designed to protect shareholders. “It's not just about Elon Musk,” said Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware. “If Musk can do it, surely anyone can do it.”
In addition to Norges Bank, several of Tesla's largest shareholders, including the California Public Employees' Retirement System (CalPERS), the largest pension fund in the United States, have also said they will vote against the pay proposal.
“When we allow billionaires to ignore the rules, ordinary people suffer,” New York City Comptroller Brad Lander, who oversees public pension funds that hold Tesla shares worth more than $620 million, told reporters last week.
The hurdles are steep: To get through legal challenges, the bill would require approval by a majority of the voting stock in the company, excluding shares held by Musk and his brother, Kimbal Musk.
What made this package so valuable?
The dispute is over a contract that gave Musk options for up to 12% of Tesla's outstanding shares at the time, and required him to hit strict sales or profit thresholds and grow the company's market capitalization to $650 billion to receive those rights.
Most of these goals seemed unreachable in 2018 as Tesla struggled, but Tesla's business boomed soon after, and its market cap peaked at $1.2 trillion in 2021 before falling to $545 billion. Under the plan, the market cap would have stayed above the $650 billion target until Musk was able to collect his options.
As a result of the 2018 compensation decision, Musk will own 20.5% of Tesla shares, compared with just under 13% if the decision had not been made.
Why would shareholders vote on this again?
Tesla's board of directors is responding to a ruling by Chief Justice Katherine St. J. McCormick of the Delaware Court of Chancery, where Tesla is incorporated. In January, Chief Justice McCormick agreed with a group of disappointed Tesla shareholders who argued that their 2018 compensation package was grossly excessive.
A second shareholder approval could help address Treasurer McCormick's findings that the 2018 vote was tainted by board members' failure to disclose conflicts of interest arising from their personal and financial ties to Musk. He also found that the board overstated the difficulty of meeting milestones required for Musk to receive stock options.
Tesla director James Murdoch said in a video on the company's website that the new, more transparent shareholder vote “eliminates that debate.”
Legal experts are less sure. “It could have an impact in court, but it's unclear,” said Samantha Crispin, head of the corporate practice at Texas-based law firm Baker Botts. “There's no bright-line rule.”
Tesla acknowledged in a regulatory filing that even a yes vote “may not fully resolve the matter.”
Why does Tesla's board want to give money to Musk?
Tesla's board chairman, Robin Denholm, has argued that investors have received more than 1,000% returns since March 2018 thanks to Musk's leadership, and that the company is obligated to deliver on any promises it makes to Musk.
“Elon's unique contributions have transformed Tesla from a loss-making, ambitious company with significant obstacles and challenges to overcome in 2018 into the company it is today, literally changing the world,” Denholm said in a letter to shareholders last week.
Tesla's Model Y sports utility vehicle is the best-selling vehicle in the world, and half of all electric cars sold in the U.S. are made by Tesla. “Tesla has nailed it, and they should be compensated accordingly,” Cathie Wood, chief executive officer of Ark Invest, said on X. Tesla is one of the largest holdings for several Ark funds.
Why are some shareholders opposed?
Musk's critics credit Tesla with forcing the entire auto industry to focus on electric vehicles, but some shareholders are unhappy with Tesla's recent performance: Revenue and profits have fallen and the company has lost market share.
Some shareholders have complained that Mr. Musk's 2022 acquisition of X, then Twitter, distracted him from running Tesla at a critical time. Some say the funding that enabled him to pay about $44 billion for Twitter in the first place may have backfired.
“The 2018 compensation package did nothing to keep Elon Musk focused on Tesla,” Tejal Patel, executive director of SOC Investment Group, which has close ties to the union, told reporters last week. “If anything, it unfortunately only enabled Musk to pursue even more business opportunities outside the company.”. “
Critics also say Tesla's board is simply restating the 2018 compensation package without any new conditions. “That doesn't create any incentives,” said Michal Barzuza, a professor at the University of Virginia Law School. “It's retroactive.”
Denholm noted that Musk cannot sell his shares for five years, giving him a strong incentive to stay focused on Tesla.
What else are you voting for?
The board also is asking shareholders to approve a move to file a lawsuit against Tesla and Musk in Texas, where the company's largest factory is located, arguing that Delaware courts are unfair. But Delaware courts will continue to have jurisdiction over Tesla and Musk's lawsuits there.
If the compensation package falls through, will Musk end up not getting paid a dime?
That's Denholm's argument, but Musk has amassed vast amounts of wealth from his Tesla stock, worth more than $70 billion, excluding the money he gets from his compensation package.
Amazon's Jeff Bezos and Meta's Mark Zuckerberg became billionaires from early investments in the companies they founded, but they didn't receive any significant rewards later.
The shares Musk already owned “gave him a powerful incentive to stay and grow Tesla's market capitalization,” McCormick wrote.
What happens if shareholders reject the remuneration package?
That could happen. Vanguard, Tesla's second-largest shareholder, voted against the compensation agreement in 2018. BlackRock, the third-largest, voted in favor. Both companies declined to say how they would vote this time.
Analysts at Bernstein said in a client note on Monday that Tesla shares would fall on concerns that Musk might leave the company. Denholm did not deny speculation that a no vote could lead Musk to lose interest in Tesla or even resign.
“If Tesla wants to retain Elon's interest and motivate him to continue to devote his time, energy, ambition and vision to delivering comparable results in the future, we must honor our agreement,” she said in a letter to shareholders.