Elon Musk, a charismatic entrepreneur, is nothing if not audacious. Over the past decade, he’s worked to serially reinvent the online payments, aerospace and solar power industries, and has been compared to Marvel’s Iron Man genius/zillionaire Tony Stark. As CEO of Tesla Industries, he’s now deeply involved in creating an electric car manufacturing model that bypasses the industry’s old iron-and-gasoline roots.
You’d expect the board of Tesla Industries to shape a CEO compensation plan that suits its outsized leader, and boy, did they ever. But a look at Tesla’s newly announced pay plan reveals many elements that should cause shareholders to raise their eyebrows and pause.
At first glance, the Tesla plan rewards the CEO the way most early-stage tech founders are rewarded. Compared to automotive CEOs, such plans are based on three to five major metrics. Musk’s comp plan is based on, and heavily weighted toward, achieving a high stock price/market cap, tied to operational metrics of revenue and profit.
Unlike some CEO pay plans, it would be tough to manipulate the numbers to boost short-term payouts. The chair of the Tesla board’s compensation committee, Ira Ehrenpreis, notes the terms are a good bet for shareholders — “heads you win, tails you don’t lose.”
What’s not to love? First, the growth levels required under Musk’s pay plan are even more otherworldly that his SpaceX goals. Market value growth for Tesla is targeted in $50 billion increments over the next decade, reaching $650 billion — more than 10 times its current value.
Musk’s payout for this insane growth would be an insane level of equity in the company. He already holds 22 percent equity ownership in Tesla, and would have an opportunity to earn an additional 12 percent over the coming decade (even if he is not the CEO). Twenty-two percent plus 12 percent is an extraordinary amount of equity ownership for a founder. Worse, 12 percent additional equity is an enormous level of dilution, and hardly shareholder-friendly. If Musk hits the goals he will receive $55 billion of equity value!
There is great shareholder risk in a comp plan heavily dependent on share price/market cap (and a company so far based more on buzz than meeting production targets). Because the stock is currently trading at a remarkably high multiple, it could easily catch a cold. If bad news like a safety, regulatory or production issue hits, Tesla stock values could plunge like bitcoins. This could incentivize company management to minimize any negative disclosures.
Outrageous goals fueled by outrageous pay potential have historically driven outrageously high risks.
This “risk” matter, stoked by equity-driven incentives, is the second big problem. A bug in a software program can lead to unhappy customers, and maybe lost money. A bug in a high-tech automobile can get someone killed.
Ultimately, Tesla is an automotive company that has to produce a reliable, safe product that gets you from one point to another. What happens when its comp plan incentivizes and rewards what might be very risky behavior over time? Musk’s pay package heavily weights stock price/market cap, and an enormous quantity of equity could have that very effect.
Contrast this with the old-line automotive companies like GM, Ford and Fiat. They may not be as flashy as Tesla, but their CEO comp plans are more nuanced, and weigh additional metrics, such as market share/production, safety and quality.
As an experienced public company compensation chair, my recommendation would be for the Tesla board to add such automotive peer company metrics. Tesla has already experienced significant production issues and is unable to fulfill orders. What happens when it tries to boost production (and incentivizes it through pay) tenfold? Wouldn’t it make sense to include “meeting commitments” as one of the metrics to measure?
Keeping an inspirational CEO and leader is important, but there must be balance with the shareholders’ (and public’s) interests. Outrageous goals fueled by outrageous pay potential have historically driven outrageously high risks. I suggest that a company losing money with a share price built on future aspirations needs a balanced reward system. Take into consideration not only how early-stage tech companies reward founders, but how other public companies, including automotive, reward their leaders for the long-term interest of their shareholders. A software crash is a far different thing from one with an auto.