On September 5, the Tesla board introduced a groundbreaking long-term compensation package for CEO Elon Musk, featuring unprecedented figures in the realm of CEO pay. If Musk successfully meets all outlined targets, he stands to gain a staggering total payout of $1 trillion between mid-2030 and 2035. This ambitious plan has been hailed by business analysts and the press as exceptionally beneficial for shareholders, who could see substantial rewards reminiscent of Tesla's previous high-flying days.
Investors look back fondly on Musk's last pay agreement from 2018, where he achieved seemingly impossible goals that propelled the stock price to new heights, resulting in tens of billions of dollars in Tesla stock for him. Many hope for a similar success story with this new compensation structure. Following the announcement, Tesla's shares surged approximately 5% in early trading on September 5, leading some to dub the new plan "Fantasyland."
Despite the excitement, the targets set in this new plan are monumental. Given Tesla's current performance issues and declining prospects, the likelihood of Musk achieving even the most basic objectives seems slim, while the chances of hitting the loftiest goals appear virtually non-existent. The stock price has been buoyed by Musk's ambitious claims regarding highly profitable products, including Full Self-Driving (FSD) software, robotaxis, and humanoid robots, all of which have faced significant delays and have yet to reach consumers.
Moving forward, the critical factors will be Tesla's net earnings and cash flows from its core automotive business, along with the uncertain outcomes of new ventures. The ambitious metrics outlined in Musk's new pay package may ultimately prove more demoralizing than motivating, creating a situation where achieving targets feels increasingly out of reach.
This innovative compensation program was detailed in Tesla's annual proxy statement filed on September 5. A "special committee," led by Chairwoman Robyn Denholm and HR executive Kathleen Wilson-Thompson, crafted the package. The proposal conveys an underlying message to Musk: "You've demanded significant voting power and promised extraordinary results; now, it's time to deliver!"
Understanding Musk's previous compensation plans is crucial. A Delaware court invalidated the successful 2018 contract in 2024, and both Tesla and Musk are appealing this decision. In early August, Tesla introduced a contingency plan that would activate only if the appeal fails, potentially granting Musk shares valued at around $31 billion if he remains in leadership for the next two years, with a selling restriction until mid-2030. This new long-term award would supplement the existing "makeup" arrangement valued at over $30 billion.
The goals outlined in the new plan are strikingly ambitious. Denholm and Wilson-Thompson describe their aim as creating "the most valuable company in history," stating that the aspirations are "even more ambitious" than the previous plan. They note, "In 2018, Elon had to grow Tesla by billions; in 2025, he must grow Tesla by trillions." During a CNBC interview, Denholm acknowledged that some might see these challenges as unrealistic, describing the initiative as "shooting for the moon."
Similar to the 2018 arrangement, the new plan requires Musk to achieve a series of market cap and operational targets. The initial market cap goal starts at $2 trillion, approximately 75% above Tesla’s current valuation, and escalates by $50 billion increments up to an astonishing $8.5 trillion. Additionally, Musk must meet 12 operational metrics, including deploying 1 million robotaxis and selling 10 million FSD subscriptions, to unlock the grants. Achieving a market cap target combined with any operational metric would reward Musk with an additional 1% of Tesla’s shares.
Despite the lofty ambitions, the new plan faces significant hurdles. Tesla's current performance is not robust enough to support the kind of growth required for Musk to acquire more ownership and control over the company. The so-called Musk Magic Premium—the portion of Tesla’s valuation attributed to Musk's visionary promises rather than existing earnings—places immense pressure on the company to deliver results.
To even achieve the first tranche of 1%, valued at around $20 billion, Musk must reach cumulative EV sales of 2 million. However, the lowest market cap target of $2 trillion by early 2033 hinges on substantial earnings growth. Assuming a P/E ratio of 30, Tesla would need to generate earnings of $67 billion, translating to an approximately 50% annual growth from its current profits of around $3.7 billion, a figure that may overstate Tesla's sustainable earnings as they continue to decline.
In the past two quarters, Tesla has generated zero free cash flow after accounting for regulatory credit sales, casting doubt on the feasibility of achieving the ambitious targets outlined in the new compensation package. The board's confidence in Musk's ability to drive significant stock price increases appears overly optimistic, essentially challenging him to elevate the company's valuation to justify his desired ownership stake.
While Musk has demonstrated remarkable capabilities in the past, the prevailing sentiment remains cautious. As the saying goes, “past performance is no guarantee of future results,” and the challenges ahead may prove to be a significant test for Musk and Tesla alike.
