Everything You Should Know About the Elon Musk Pay Package Vote

Analysts Notebook joined discussion · Jun 7 02:36

The Delaware Chancery Court nullified Elon Musk's $56 billion compensation package in January, leaving him without pay for six years. Despite this, $Tesla (TSLA.US)$ is allowing stockholders to ratify Musk's 2018 pay package at the annual meeting on June 13. Tesla board chair Robyn Denholm urged shareholders to approve Elon Musk's $56 billion pay package to prevent him from leaving the company. Denholm emphasized that reapproving the 2018 compensation package is crucial for keeping Musk motivated to lead Tesla, according to a regulatory filing.

Everything You Should Know About the Elon Musk Pay Package Vote

What Happened?

Elon Musk's $55 billion compensation plan, set in 2018, required him to increase Tesla's market value from $59 billion to $650 billion within 10 years. Despite initial struggles and record losses, Tesla exceeded these goals, becoming more valuable than several major automakers combined. Shareholder Richard Tornetta sued in 2018, alleging that Tesla's board breached its fiduciary duty by awarding Musk this plan without proper procedural safeguards, and the Delaware court later agreed, noting Musk's undue influence. The claim argued that because Musk was a controlling shareholder of Tesla, his compensation required stricter judicial review unless negotiated by independent directors and approved by unaffiliated shareholders.

In response, Tesla formed a new committee and is now asking shareholders to ratify Musk's original package with full disclosure. Some scholars argue that retroactive compensation is a waste of corporate assets, but under Delaware law, such claims require showing that the transaction served no corporate purpose or offered inadequate consideration—rarely accepted by courts. Given Musk's significant contributions and Tesla's meteoric rise, it is argued that shareholders, particularly sophisticated institutions, have the business judgment to decide his compensation.

Delaware law aims to protect minority shareholders but also defers to their informed decisions. The ratification of Musk's compensation by shareholders is seen as consistent with this principle, emphasizing their authority in determining executive pay.

Massive Split On Elon Musk Pay Package

• Steve Westly, a former Tesla audit committee chair and a notable clean technology investor, stated he wouldn't support Elon Musk's $56 billion pay package and understands why other investors plan to vote against it next week.

Look, Elon's done an extraordinary job; he's built one of the transformational companies of the age. But to ask for a $55 billion pay increase at precisely the time when you've missed quarterly numbers, growth is slowing down, and you've laid off 15% of the workforce is, I'd say, hubris to say the least."

• Cathie Wood, a longtime Tesla supporter, stated on X that no executive is as aligned with shareholders as Elon Musk. She noted that Musk has worked without pay since 2018 and argued that current shareholders will benefit from his leadership for another five years or more. Wood, who is the founder, CEO, and chief investment officer of Ark Investment Management, supports Musk's pay package up for a vote next week.

How can shareholders renege on his pay package AFTER Elon and shareholders already have taken and overcome the risks associated with Tesla's rise to producing the top selling car in the world? Unconscionably!" Wood wrote.

• Tesla board chair Robyn Denholm is urging shareholders to approve Elon Musk's $56 billion pay package to prevent him from leaving.

Elon is not a typical executive, and Tesla is not a typical company," Denholm writes in a letter to shareholders filed with the Securities and Exchange Commission. "So, the typical way in which companies compensate key executives is not going to drive results for Tesla. Motivating someone like Elon requires something different."

What we recognized in 2018 and continue to recognize today is that one thing Elon most certainly does not have is unlimited time," Denholm says. "Nor does he face any shortage of ideas and other places he can make an incredible difference in the world. We want those ideas, that energy and that time to be at Tesla, for the benefit of you, our owners. But that requires reciprocal respect."

• Adam Jonas, a prominent Tesla supporter and Morgan Stanley autos analyst, wrote on June 4 that if Elon Musk does not secure a 25% voting stake in Tesla, shareholders should expect the company to significantly reduce its investment in advanced AI efforts.

While Tesla may still be in position to benefit indirectly from AI advancements, we believe that most of the adjacent AI efforts could be concentrated within non-Tesla entities where Elon Musk has control," Jonas added.

• Billionaire investor Ron Baron, chairman and CEO of Baron Capital, has expressed support for Tesla CEO Elon Musk's $56 billion pay package ahead of the upcoming shareholder vote. In an open letter, Baron urged shareholders to approve the compensation, citing Musk's accomplishments and the significant appreciation of Tesla's stock price over the years.

Elon is the ultimate 'key man' of key man risk," Baron wrote. "Without his relentless drive and uncompromising standards, there would be no Tesla. Especially considering how he slept on the floor of Tesla's Fremont factory when the company was going through what he called 'production hell!'”

What Happens After the Vote?

Tesla shareholders are deeply divided over Elon Musk's leadership and compensation package. Some have strong faith in Musk, believing that his continued leadership and compensation are essential for Tesla's innovation and success. They fear that rejecting the pay package could shake their confidence and potentially lead to Musk stepping down, causing a mass sell-off of Tesla stock.

On the other hand, many shareholders believe Musk is harming Tesla with erratic behavior, lack of new models, and poor sales growth despite price cuts. They worry that granting him more compensation could lead to more shareholders selling their shares, especially if major stakeholders like Leo Koguan decide to pull out.

Regardless of the vote outcome, there's a risk that a significant portion of shareholders could become disillusioned and withdraw their investments, suggesting that Tesla stock might face challenges either way. The passionate debates among shareholders highlight the potential impact of this vote on Musk's future role as CEO.

Additionally, Musk is aiming to increase his control over Tesla to a 25 percent stake to further his goals in developing artificial intelligence and self-driving cars. Currently, he owns about 13 percent of the company, having sold shares to acquire Twitter. On X, he has warned that he may spin off Tesla's AI work into a separate company if his demands are not met.

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Source: Bloomberg Law, Fortune, Yahoo Finance, CNBC, CleanTechnica,Investor's Business Daily, The Verge

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