Exploring the History and Controversies of Elon Musk's $56 Billion Compensation Plan at Tesla

CEO Elon Musk's $56 billion compensation plan and whether the company should move its registration from Delaware to Texas.

Why is the compensation plan so massive? Let's explore the history of this astronomical salary.

In 2018, Tesla was facing tough times and media outlets described it as being on the brink of bankruptcy. In order to incentivize Musk to lead the company out of trouble, Tesla shareholders approved a compensation plan worth $2.3 billion at fair value.

The plan proposed a series of ambitious performance goals, primarily focused on Tesla's market cap growth, revenue and profit metrics, and product development milestones. The plan provided Musk with the opportunity to earn 12 tranches of options, each representing 1% of Tesla's outstanding shares on January 21, 2018.

Over the next few years, Musk fulfilled his promise and led the company through "production hell," making the Model Y the best-selling car in the world and taking the company's stock price from $20 to its highest point of $414. Tesla's revenue compound annual growth rate reached an astonishing 49%, and the value of the compensation plan has grown from $2.3 billion to $56 billion.

Despite Musk's success in fulfilling the performance goals of the compensation plan, the plan faced opposition from some shareholders who questioned its validity, especially considering that Musk was also involved in other businesses (such as SpaceX) that could distract him from focusing on Tesla.

In 2022, some Tesla shareholders sued Musk, claiming that he had spent most of his energy on other companies like SpaceX and used his control over the company and its board to finalize a long-term compensation plan. As a result, the shareholders wanted to abolish the plan. One of the institutional investors opposing Musk's compensation plan was the California Teachers' Retirement Fund, which stated that it would vote against the plan because its value of over $50 billion was too large, would significantly dilute shareholders' equity, and they were concerned that Tesla lacked a focus on profitability.

Furthermore, earlier this year in 2024, a Delaware judge ruled that the previous vote was invalid due to inadequate disclosure to investors, and therefore a new vote was needed.

Tesla's institutional ownership ratio is 46%, while retail investors account for 40%, with the remaining 14% held by insiders. Of the retail shareholders who voted, about 90% voted in favor of both resolutions.

Although the compensation plan is likely to pass in the short term, and Musk cannot immediately sell his stock options when they become available, he must wait five years to do so. Therefore, regardless of whether Musk's compensation plan is approved, he will remain at Tesla for another five years. However, Musk's other companies, such as the AI company xAI and social platform X, are also growing, raising concerns outside the company that he is distracted by other businesses.