Musk's salary storm: 56 billion plan caused controversy, the competition and impact behind the Delaware court ruling

On June 13, Musk posted on his X account that Tesla's two shareholder resolutions were passed by a large margin. The two major issues were: CEO Musk's $56 billion (about RMB 400 billion) salary plan, and whether Tesla's registered address would be moved from Delaware to Texas, where its headquarters is located. For the ins and outs of Musk's sky-high salary plan and related disputes, please refer to the post in February this year.

The original article was published in February 2024. The original title is: Analysis of Musk's 2018 compensation plan invalidated by the Delaware District Court

Summary

This article attempts to analyze the following issues:

1. The reason why the Delaware Court of Chancery ruled that Musk's 2018 CEO compensation plan was invalid

2. A brief review of the 2018 compensation plan

3. The impact of this ruling on Tesla's governance structure and Musk's future compensation plan

4. The impact of this ruling on Tesla's new businesses such as Optimus

1. The reason why the Delaware Court of Chancery ruled that Musk's 2018 CEO compensation plan was invalid

On January 30, Kathaleen McCormick, a judge of the Delaware Court of Chancery, ruled that Musk's 2018 CEO compensation plan was invalid McCormick ruled that Tesla CEO Elon Musk's 2018 CEO compensation plan involving 304 million Tesla shares was invalid, with an amount of approximately $55.8 billion. The reasons are summarized as follows:

① The compensation plan was unfairly priced

Judge McCormick believed that the fair value of the plan on the grant date was $2.6 billion, which was the largest potential compensation opportunity ever in the public market, multiple orders of magnitude larger than the median of peer compensation plans of the same period - 250 times, and more than 33 times larger than the closest comparison of the plan (i.e. Musk's previous compensation plan).

② The formulation process of the compensation plan was unreasonable

McCormick said that Tesla gave almost no reason at trial to explain how it reached the huge rewards in the compensation plan, and Musk had such a close relationship with some board members that they could not really act independently. In other words, Musk was a major shareholder and exerted a significant influence on the board, resulting in the approval of the compensation plan.

③ Musk's efforts for Tesla do not match the compensation plan

Tornetta's lawyers said that Tesla executives refused to admit that the goals or phased goals that Musk needed to achieve to win huge compensation were easier to achieve than the outside world thought. They also said that Musk's work focus should be Tesla, not other companies, and the compensation should be less and more reasonable.

Musk himself and some small and medium shareholders of Tesla expressed strong opposition to this ruling. The reasons for the opposition are:

① The court's ruling is a major interference with the democratic process of shareholder voting. There is a lot of controversy over whether the court has the right to retroactively apply this compensation bill.

① Shareholders are aware of this matter and most of them agree. On March 21, 2018, Tesla shareholders approved a $2.6 billion compensation plan for Musk. Excluding the votes of the Musk brothers, 73% of shareholders voted in favor. Musk said this is a fact.

③ Musk has made great contributions to Tesla. Instead of harming the interests of shareholders, this compensation plan has promoted the interests of shareholders because Musk has achieved a huge increase in Tesla's market value. It is necessary to allow Musk to be motivated in a way that is commensurate with the crazy difficulty of his work, that is, although the compensation plan is huge, it also matches Musk's work.

④ If the compensation plan is ruled invalid, then Musk has worked for Tesla for free for six years, which is not reasonable.

The cause of this incident is that Richard Tornetta, a minority shareholder and Tesla investor, owns 9 shares of the company. Tornetta said that when the board of directors formulated the compensation plan for the CEO in 2018, it failed to get rid of Musk and make independent decisions. Tornetta believes that the compensation plan given by the Tesla board of directors to a part-time CEO is the highest in the world.

2. A brief review of the 2018 compensation plan

The "2018 compensation plan" stipulates that the total number of stock options used to incentivize Musk accounts for 12% of the total number of Tesla shares on January 19, 2018, corresponding to about 304 million shares at present. The total amount of incentives is divided into 12 levels on average. For each performance indicator unlocked, Musk can vest a stock option, corresponding to about 25 million shares at present.

In order to realize the vesting of stock options, Musk must achieve two types of performance indicators: ① Tesla's market value, ② Tesla's revenue and profit.

① Tesla's market value starts at 100 billion US dollars, divided into 12 levels, each level increases by 50 billion US dollars, and the highest level is 650 billion US dollars. The average monthly market value for six consecutive months and the average trading day market value for thirty consecutive days reach a certain level threshold, that is, the level is unlocked.

② Tesla's revenue is divided into 8 levels: 20 billion/35 billion/55 billion/75 billion/100 billion/125 billion/150 billion/175 billion. Adjusted EBITDA is also divided into 8 levels: 1.5 billion/3 billion/4.5 billion/6 billion/8 billion/10 billion/12 billion/14 billion. Revenue and profit are based on the financial report, taking the sum of the last four consecutive quarters. If a certain level threshold is exceeded, the level will be unlocked.

According to Tesla's subsequent market value and performance, Musk has unlocked these indicators and obtained all 304 million stock options.

3. The impact of this ruling on Tesla's governance structure and Musk's future compensation plan

This ruling allows appeals, so it is not the final conclusion at present. Before this ruling came out, Musk was seeking a new compensation plan and consolidating his voting rights.

Since January 2023, Musk has been working for Tesla for free. Because there is no new compensation plan, Musk recently said on X that "the reason there is no new 'compensation plan' is that we are still waiting for the verdict of my Delaware compensation case. The case went to trial in 2022, but no verdict has been made yet." Musk himself hopes to obtain 25% of the voting rights because it "means that I have influence, but if the number of shareholders who vote against is twice that of the votes in favor, my influence will be overturned. If my shareholding ratio is 15% or less, it is easy for suspicious interest groups to overturn my ratio of votes against/in favor." The author believes that: ① Before the final ruling comes out, it is difficult to come up with a new compensation plan, and it is very difficult to launch a huge compensation plan again. ② Tesla's governance structure may be further optimized, because this ruling has questioned Musk's relationship with the board of directors, so no matter what the ruling is, Musk needs to consider the opinions of the board of directors and various shareholders more in various future agendas, and there may be further improvement measures. ③ Musk wants to increase his voting rights in Tesla, but it is very difficult to reach 25%. Musk currently holds 411 million shares and 304 million performance shares in 2018, which were ruled invalid this time. Tesla's current total share capital is 3.179 billion. If you want to increase your voting rights to 25%, the number of shares required is staggering, which is difficult to do under the current background. At the same time, in Delaware, the plan of AB shares to guarantee voting rights is not feasible.

4. The impact of this ruling on Tesla's new businesses such as Optimus

Musk needs a new incentive plan because he needs incentives and he is uneasy about developing Tesla into a leader in artificial intelligence and robotics without 25% voting rights.

The author believes:

① Musk himself will not reduce his influence on Tesla

For Musk, Tesla is his most important industry (even if SpaceX is included). For the various industries built by Musk, other businesses may be "stars and seas", while Tesla is the "down-to-earth" foundation. Musk will only find ways to strengthen his influence in Tesla, rather than "angry" to reduce or withdraw.

② Musk will not spin off Optimus

Optimus and the artificial intelligence business are closely related to Tesla's electric vehicle business and have strong synergy effects. There is no way to spin them off. Moreover, Optimus is still in the initial stage and cannot do without the help of Tesla's original business. Moreover, Optimus is crucial to Tesla's future development.

③ Musk needs to focus more on Tesla

One of the reasons why Musk's 2018 salary plan caused great controversy is that Musk is equivalent to Tesla's "part-time CEO". After the acquisition of Twitter, Tesla's stock price fell sharply, and other businesses also occupied Tesla's energy to a greater or lesser extent. Therefore, some shareholders expressed dissatisfaction with Musk's lack of energy in Tesla, which also led some investors to believe that the huge salary plan did not match Musk's contribution to Tesla.