If this column had a vote, which it doesn’t, it would cast it against Elon Musk’s gargantuan pay deal at Tesla’s coming annual general meeting.
Worth $46 billion at the latest share price, the chief executive’s contested 2018 packet is disproportionate in every way. It is almost 300 times as much as what America’s best-paid CEO for 2023 earned ($162 million). It is also more than twice the annual free cash flows Tesla has generated in its entire existence, including expectations for this year ($22.5 billion). And, crucially for shareholders, who would pay for it through the dilution of their holdings, it is about 8% of the company’s market value ($557 billion).
Why would they vote for such an outcome?
One argument is that Musk did a fantastic job and deserves to be compensated for it. As the biggest beneficiary of Tesla’s meteoric stock-market rise in 2020 and 2021, though, he was—so fantastically that he became the world’s richest man for a while. The roughly 505 million shares he already owned at the end of 2017, before the stock-option plan now in question was on the table, increased in value by $171 billion by the time he started selling some in April 2022 to pay for Twitter, since rebranded as X.
A more reasonable point is that the 2018 plan was dependent on Musk hitting market-value milestones that seemed fanciful at the time; denying it after the fact because the crazy bet paid off reflects hindsight bias. This explains why some longtime Tesla shareholders such as Scottish fund manager Baillie Gifford, which voted for the deal back in 2018, have said they will support it again. Agreeing to something you don’t think will happen and then changing your position when it does isn’t a good look.
But getting caught up in the convoluted back story also seems like a trap. Not every shareholder was around in 2018. Since Tesla, responding to a successful legal challenge against the original deal, has asked investors to vote on it again with the benefit of hindsight, it would be insane not to use that hindsight.
Finally, there is the question of keeping Musk motivated. The mercurial CEO tweeted in January that he felt “uncomfortable” growing Tesla “to be a leader in AI & robotics” with less than 25% of the voting rights and threatened to “build products” outside of Tesla. He recently raised $6 billion for his generative AI startup, xAI, at a $24 billion valuation.
However, the threats ring somewhat hollow given that Musk still owns $72 billion worth of Tesla shares. That is a large proportion of his net wealth, even if his stake in SpaceX may now be comparable following the recent decline in Tesla’s stock. Also, Tesla has already invested massively in AI and generates huge amounts of visual data for AI training. Musk couldn’t easily jump ship.
The coming vote is hardly the final word in the matter of the CEO’s pay. It is no more than a tactic Tesla is using to challenge the Delaware court ruling that in January voided the 2018 compensation plan. The legal games will continue whatever the outcome.
Take another step back and the spectacle of Tesla’s board, led by Chairwoman Robyn Denholm, trying to whip up support for Musk’s pay only highlights the corporate-governance problem that led to the deal’s dismissal in court: the domination of Tesla’s board by the CEO it is supposed to oversee. Put another way, Musk runs Tesla like a family business.
This isn’t always a bad thing: Family businesses have impressive stock-market records in developed markets, precisely because they have strong leaders with “skin in the game” like Musk. But corporate governance does exist for a reason, which is to protect minority shareholders from being exploited by powerful insiders. This seems like a case in point: Musk seemingly wants to take money from Tesla’s minorities to fund projects such as X and xAI.
With Tesla’s board under Musk’s thumb, shareholders have nobody to look after their interests but themselves.
Write to Stephen Wilmot at stephen.wilmot@wsj.com