The Tesla 2024 shareholder meeting is scheduled for June 13th 2024. It will be live-streamed on YouTube: https://www.tesla.com/2024shareholdermeeting
Shareholders need to vote online or by phone by June 12th 2024 10:59pm Central Time in order for the vote to count.
Shareholders are asked to ratify the 2018 CEO Performance Award. The 2018 CEO Performance Award was canceled by Delaware Court on January 30 2024 through a lawsuit brought in by a shareholder with 9 shares. The court agreed with plaintiff that the Board of Directors that approved the 2018 CEO pay package and ordered the cancelation of the pay package.
Chancery Court Judge Kathaleen McCormick concluded the Board of Directors had close ties to the CEO and is not independent enough. She also believes the pay package to be excessive and higher than any CEO compensation. What’s different is that in the Elon Musk package, he gets $0, if the performance milestones is not met. Most other CEO compensation is normally guaranteed.
Judge Kathleen McCormick made these conclusion using today’s value when 2018 to 2024 has already unfolded and there is no mystery or risk. She had not put in context of what 2018 was like at Tesla when the plan was created.
Let’s recap what the Performance Award is. The 2024 proxy proposal stated:
https://www.sec.gov/Archives/edgar/data/1318605/000110465924053333/tm2326076d14_def14a.pdf
“For each tranche in which both milestones were achieved under the 2018 CEO Performance Award, Mr. Musk would vest in a number of stock options that corresponded to approximately 1% of Tesla’s total outstanding shares of common stock, based on the shares of Tesla’s common stock outstanding at the time of the approval of the 2018 CEO Performance Award.”
For each additional $50 Billion market capitalization added to the company and revenue and adjusted EBITA performance is achieved, Elon Musk gets additional stock options worth 1% of Tesla’ outstanding shares. This repeats for 12 times. To achieve all milestones, the market cap would need to hit $650 Billion, with revenue at $175 Billion or 15x 2017 levels and adjusted EBITA of $14 Billion or 21x 2017 levels. For each tranche to vest, the market cap milestone also need to be paired with an operational milestone from either revenue or adjusted EBITA. Market cap need to be above target for 6 trailing month average AND 30 day trailing average and not just a on day hit. For the week of Jun 8th 2024 at time of this writing, Tesla market cap is $566 Billion, revenue is $94.745B. If all targets are met, Elon Musk would acquire 12% of Tesla. The price he pays is the faire market value (FMV) of grant date January 21, 2018. The last trading day prior to grant date is January 19, 2018. On that day, price was $350.02/share pre split or equivalent to $23.34/share adjusted for stock split.
At time of award, the value is 20,264,042 shares or 303,960,630 share post split. Each tranche is equivalent to 1% of 168,867,016 total outstanding. 12% of total number of outstanding at grant date is equivalent to 9.5% of 3,188,965,775 shares outstanding as of March 31, 2024. 9.5% of $566 billion is $54 billion.
The terms of the CEO performance award is for ten years. Elon still has 4 more years to achieve the highest target.
After exercise of options, Elon Musk is required to hold the shares for 5 years. This ensures that Tesla continues to perform well after he has acquired the shares.
A key detail is that at the time the plan was set, Tesla market capitalization was only $59 Billion. The value of the pay plan at the time in 2018 valuation and Black-Scholes valuation model is $2.3 billion. It only ballooned to $56 billion because of value creation in the business through a lot of hard work. Cathie Wood has YouTube video published June 7 2024 provided perspective on Tesla’s $2.3 billion compensation package in terms of advertising budget of other auto manufacturers. She says Ford and GM each spends about $4 billion annually on advertising. Relative to that, $2.3 billion for TEN years does not sound too much. https://www.youtube.com/watch?v=VYupUkzYndc
The package has to be evaluated in the context of what the company was worth back then in 2018 when it was planned and agreed on by 78% of voters. In that lense, the compensation package given that Elon Musk bears all the risk if things don’t work out and shareholders and Elon Musk BOTH stand to gain handsomely if he delivers those performance targets is reasonable.
The judge’s conclusion and those of mutual funds that are voting no is evaluation what the compensation is worth in today’s value of $56 billion. What they are missing is that today Tesla is valued at $566 billion. At the time the plan was created, Tesla still has a lot of risk and is worth $59. Success was not guaranteed. In fact in 2018, Tesla nearly died while trying to ramp Model 3 production. If it was so easy to convert a $59 billion company to a $566 billion company, why didn’t VM, BMW, Mercedes, Honda, Hundai, BYD, Ford or GM attempt and able to achieve this 10x value creation feat? I wonder if this plan was offered to other CEO, would they have taken it. CEO Elon Musk deserve credit for creating the culture of excellence, winning attitude, smart risk taking, engineering, and vision that created best selling most efficient, safest, AI enabled electric cars and energy storage systems. In the pipeline Tesla has humanoid robots.
If the plan is not ratified and a new equivalent plan is created there would be new accounting charges. The new stock option awards for the purchase of 303.95 million shares would be in excess of $25 billion.
The design of the compensation plan aligns shareholder incentive with the CEO’s incentive for long term gain and sustained benefit.