The $1 Trillion Question: Will Elon's Pay Package Pass?

The $1 Trillion Question: Will Elon’s Pay Package Pass?

Shareholders will have until November 5^th to vote for the current proposed pay package for Tesla (TSLA) CEO Elon Musk. The pay package could be valued at a staggering $1 trillion if lofty performance targets are met over the next decade. Musk’s first pay package seemed ambitious but was ultimately met. This time, the structure is similar: potential awards will be split into 12 tranches of stock, with each only unlocked only if challenging milestones are met. Below are the details of the proposed pay package.

Will Tesla Sharholder’s Approve the Elon Musk Pay Package?

There is a high degree of certainty (I would put the odds at ~90%) that the Elon Musk pay package will be approved. Below are three reasons why:

1.      The pay package is extremely shareholder-friendly: Shareholders are likely to vote in favor of it because Musk must meet both a market cap and operational milestone to unlock each tranche of pay. Not only are the milestones lofty goals, but Musk gets zero pay without reaching them. These incentives are constructed such that if Elon wins, shareholders win.

2.      Elon Musk’s Importance to Tesla: Long-time Tesla shareholders are well aware of Elon Musk’s importance to the company. Musk has led Tesla through tumultuous periods, such as the global financial crisis of 2008. Not only did Tesla survive the worst recession in a century, but it was the first automaker to repay government loans in full (with interest). More recently, Tesla shares have fallen anytime Musk has stepped away (for example, when he left to run DOGE or when he spent time running Twitter). With Tesla shares up more than 35,000% under Musk’s leadership, shareholders will not want to risk Musk walking away from the company.

3.      Shareholder Loyalty and Board Backing: Elon Musk has a very loyal following among the shareholder base. History suggests that these loyal shareholders will vote in favor of Musk’s pay package. Last time, shareholders overwhelmingly voted in favor of a Musk pay package (With Musk receiving 72% of the vote). Meanwhile, Musk enjoys the full backing of Tesla board chair Robyn Denholm. Finally, influential Tesla investors like Cathie Wood have already announced that they will back the pay package.

In conclusion, though eccentric and sometimes controversial, Elon Musk is America’s most decorated innovator. While the pay package seems high on a dollar basis, it aligns shareholder and Musk’s incentives, creating a win-win situation. For these reasons, it’s good corporate governance. I believe the vote will pass by a wide margin, and TSLA shares will rally as a result.

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This article originally published on Zacks Investment Research (zacks.com).

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