Is this for real?
On Sept. 5, the Tesla board unveiled an all-new, long-term compensation package for Elon Musk that advertised far and away the biggest numbers in the annals of CEO pay. Put simply, if the EV maker’s CEO hits all the targets, he’d pocket a total payout of $1 trillion over anywhere from mid-2030 to 2035. The template rightly won kudos in the business press and among Wall Street analysts as fabulously friendly to shareholders, who’d garner sumptuous rewards on the order of their winnings in Tesla’s bygone great days.
Investors fondly recall that it was indeed the last pay deal from 2018 where Musk famously delivered on seemingly “mission impossible” goals that sent the stock on a moonshot and handed him tens of billions of dollars in Tesla stock. They’re clearly hoping for something resembling a repeat. The news lifted Tesla’s shares at the start of trading on Sept. 5 by around 5%.
An apt nickname for the fresh plan: Fantasyland. For the most part, the targets are so gigantic that given Tesla’s currently poor results and declining prospects, the chances that Musk will achieve even the lowest bogeys look highly unlikely, and the probability he’ll capture the elevated ones virtually zilch. What’s still inflating Tesla’s stock price are Musk’s extravagant claims for hugely profitable products, from FSD (Full Self-Driving) software to robotaxis to humanoid robots, that are constantly getting delayed, and none of which are yet reaching customers. What will matter going forward are the net earnings and cash flows that Tesla’s bedrock auto franchise generate and uncertain new ventures, and the comp construct’s stretch numbers are so mind-bogglingly elastic that it wouldn’t be surprising if they’re more demoralizing than inspiring for Elon Musk.
Musk’s pay is best described as ‘shooting for the moon’
Tesla presented the program in its annual proxy statement filed on Sept. 5. A “special committee” headed by chairman Robyn Denholm, former CFO of Juniper Networks, and Kathleen Wilson-Thompson, a top HR exec, designed it, and its description in the documents reads like a subtext for “Hey, Elon, you’re demanding all this voting power, you’re making promises like Superman, now prove you can fly!” It’s important to grasp the context of where Musk’s past and current pay schemes stand now. In 2024, a Delaware court invalidated the towering 2018 version that was so successful for both Musk and shareholders. The company and the CEO are now appealing that decision. In early August, Tesla presented a contingency plan that will only take hold if the Tesla side loses the appeal.
That backup arrangement aims to restore much of what Musk would lose if the Delaware ruling stands, by granting him shares now worth around $31 billion if he remains as either CEO or chief of product development for the next two years; he can’t sell the grants until mid-2030.
This all-new long-term award would come on top of that $30 billion–plus “makeup” arrangement. In the proxy, it’s characterized in effusive terms, of a type seldom seen in these usually dry documents. The proposal will now go a vote of Tesla shareholders. Denholm and Wilson-Thompson characterize the objective as creating “the most valuable company in history” and laud the standards as “even more aspirational” than the 2018 plan, a claim that’s astounding since that cliff-scaler would seem impossible to top. “In 2018, Elon had to grow Tesla by billions; in 2025, he has to grow Tesla by trillions,” write Denholm and Wilson-Thompson. In a CNBC interview, Denholm acknowledged that some might view the challenges as too great to be taken seriously, and stated that the initiative amounts to “shooting for the moon.”
The new plan is structured much like its famed 2018 predecessor
In the proxy, the board stresses that Musk is seeking a far greater ownership stake and that the best way to motivate the maverick is providing him a path to achieving that aim. The directors’ view: “We believe Elon is the only person capable of leading Tesla at this critical inflection point.” They cite the “public statements that voting influence is critically important to him if he is tasked with developing AI products for Tesla,” adding that the carrot of a big jump in ownership should rally Musk into “achieving extraordinary performance milestones while remaining at Tesla.”
The basic design mirrors the architecture of its forerunner from 2018. Unlocking the grants resembles the process for opening a safety-deposit box: It requires two keys. The plan sets 12 goals for market cap, starting at $2 trillion, around 75% over today’s valuation, and rising after that by $50 billion increments to an incredible $8.5 trillion, double what the world’s most valuable enterprise, Nvidia, sells for today. But the construct also requires a second key that consists of notching 12 operating metrics, six for rising steps of Ebitda, and six others for such achievements as putting 1 million robotaxis in circulation and selling 10 million FSD subscriptions.
Matching a market share target with any one operational metric would award Musk an additional 1% of Tesla’s shares. Scaling the $8.5 trillion market cap summit and clinching all dozen product objectives would bring that $1 trillion windfall. Right now, Musk owns around 13% of Tesla’s shares, and he’s said publicly he craves getting to 25%. Ringing the 24 combined market cap plus operational bells, worth 1% each, would lift Musk to his cherished 25% prize. The grants come in the form of restricted shares; the shares gained by hitting the twin targets would all vest at once after seven and a half years, and Musk would only pocket them if he stays on as either CEO or head of product development over that span. He could get a longer vesting runway if he stays on for 10 years.
The targets are so towering they risk being more depressing than motivating
The plan faces a fundamental problem: Tesla as an ongoing enterprise is faring so poorly that getting from where it stands now to the kind of numbers needed to win Musk what he most wants—loads more ownership and hence control of Tesla—looks like a leap too far. This reporter has written several stories assessing the size of what I call the Musk Magic Premium. That’s the part of the valuation based not on Tesla’s current earnings, but Musk’s promises for world-transforming innovations stuck in the pipeline. What makes the ambitions as presented in the proxy so unachievable: They demand huge stock gains piled on top of a valuation that’s already flying free of the fundamentals.
Under the new pay package, look at what Musk must achieve just to grab the first tranche of 1%. And that 1% would be worth plenty, around $20 billion. One key should be relatively easy to turn: achieving cumulative sales of 20 million EVs. But what about notching the lowest market-cap target of $2 trillion by early 2033?
It goes back to the earnings needed to get there. Once again, let’s give Tesla a P/E of 30 seven and a half years from now. Do the math, and you get to mandated earnings of $67 billion. That means multiplying today’s core profits of $3.7 billion by 18, or roughly 50% a year. And $3.7 billion probably overstates Tesla’s sustainable earnings, since they’re dropping quarter by quarter. The cash flow outlook is bad as well. After subtracting sales of regulatory credits that will soon fade, Tesla generated zero free cash flow in the past two quarters.
The Tesla board is dreaming if it believes this pay deal will uncork another wonder like its predecessor of 2018. The directors are practically taunting Musk by saying, “You want that huge new chunk of the company? Boost the share price enough to deserve it.” Elon Musk did it once. But as the saying goes, even for Elon Musk, past performance is no guarantee of future results.
