On Wednesday, Tesla Motors investors approved a compensation plan for CEO Elon Musk that may be the largest such deal in history—despite its lack of a proper salary, cash bonuses, or guaranteed stock awards.
The pay plan ensures Musk will stay at Tesla until 2028. But that doesn’t mean he’ll stay on as CEO. The deal requires Musk, who also serves as CEO of SpaceX and has his hand in several other side businesses, remain at Tesla in one of three roles: CEO, executive chairman, or chief product officer.
The newly approved plan does solidify a strategy at Tesla that Musk has used for years: fund growth by aggressively raising capital. It also encourages Tesla to become a very large publicly traded company with a high market value, but not necessarily a profitable one.
The compensation plan consists of 20.3 million stock option awards—each broken up into 12 tranches of 1.69 million shares, or 1% of Tesla’s outstanding shares. These options will vest in 12 increments if certain financial goals on market cap, revenue, and adjusted earnings (excluding certain charges) are met. For Musk to truly cash in to a tune of $50 billion, Tesla’s market value must reach $650 billion. Tesla’s market cap is nearly $53 billion.
That first tranche of about $535 million in stock options will vest if Tesla hits a $100 billion market cap and either $20 billion in annual revenue or $1.5 billion in adjusted EBITDA.
The upshot? An emphasis on market cap and revenue not profitability. As Tesla’s market cap rises, the company will be able to access larger amounts of capital to fund its Musk-sized (that’s massive for the unfamiliar) ambitions of becoming an energy sustainability company that makes and sells electric vehicles, heavy duty trucks, energy storage products, and solar.
The pay plan isn’t new for Musk. Tesla investors gave Musk stock options worth about $78 million in 2012 that vested only when the company hit production and market value milestones. And Musk met those goals.
But there are drawbacks to such a path. While it ensures Musk will be tied to the company for another decade, the plan doesn’t tie success to other metrics that many other companies and investors would deem necessary, namely to have a profitable fiscal year.
The positive EBITDA milestone is important because, as The Street also notes, hitting a positive adjusted EBITDA is not the same from achieving positive free cash flow or GAAP profits. EBITDA excludes items such as depreciation expenses on capital investments and interest expenses on debt payments. Tesla already has $10.4 billion in debt and capital leases.