Tesla didn’t look like the juggernaut its enthusiasts claim it is in the first quarter. The world’s largest EV-maker actually lost money selling cars, batteries, and software upgrades. Only a big jump in revenues from regulatory credits, and a windfall from its famed wager on Bitcoin, tilted its pretax income from red to black.
The mediocre results disheartened investors. Since Tesla released its results after the market close on April 26, its shares have dropped 8.2% to $677, shedding $58 billion in market cap.
Tesla’s lackluster fortunes didn’t extend to CEO Elon Musk. He scored a gigantic payday in the March quarter, probably clinching the biggest quarterly bonanza in the annals of capitalism. By this writer’s math, Musk secured over $10 billion in Tesla stock, as a Brobdingnagian slug of options vested over the opening three months of 2021.
Musk’s bounty flowed from the company’s “2018 CEO Performance Award.” The plan gave Musk 101.3 million options at a strike price of $70.01, the level at the time of the grant, divided into 12 equal tranches of 8.44 million. The plan established two overlapping sets of goals that trigger vesting: one for market cap and one for performance. The valuation targets comprise 12 laddered steps running from $50 billion to $650 billion. Tesla’s market cap must equal or exceed those levels, on average, both for the trailing six months, and for the previous 30 days. One of the dozen batches of 8.44 million options can only vest when Tesla’s stock hits the next valuation bogey.
The system recalls the two-key requirement for safety-deposit boxes. Think of the program as a vault containing 12 boxes, each holding 8.44 million options. Hitting the value metrics hands Musk one key. Winning the other depends on achieving a second set of requirements based on Tesla’s results. To unlock an award, Musk must attain a new benchmark for market cap––key one, and also achieve one of 16 operating milestones, that’s key two. Eight of the performance measures are revenue planes ascending from $20 billion to $175 billion, and eight are Ebitda plateaus rising from $1.5 billion to $14 billion. They’re measured as total sales or Ebitda over any span of four quarters.
Put simply, reaching a new valuation mark, or one already achieved, and securing any one of the 16 performance marks hands Musk both keys to one of the 12, option-rich boxes in the vault. Keep in mind that the performance metrics outnumber the valuation hurdles 16 to 12. So Musk can empty all of the boxes if he passes all the valuation numbers and rings the bell on not all, but three-quarters, of the operational bars.
It’s remarkable that through the first quarter of last year, Musk hadn’t pocketed a single award. But in 2020, as Tesla’s stock soared, and sales and profits jumped, the CEO kept winning new keys and unlocking boxes. He bagged one award in Q2, followed by two in the September quarter. In Q4, he grabbed a fourth award by exceeding the $250 billion mark for market cap––the fifth of 12 flights––and delivering Ebitda of $4.5 billion.
Tesla’s stock started its moonshot in mid-2020. By early February of 2021, its market cap sailed past $800 billion. Since the valuation metric is gauged to trailing a six-month average, Tesla leapfrogged higher and higher landmarks in the March quarter. By the close of Q1, it had reached 11 of the 12 ascending valuation rungs, leaving only the highest, $650 billion summit unscaled.
In first quarter, Musk also snagged second keys by notching two operational goals: scoring $35 billion in annualized sales, and $6.0 billion in Ebitda. Those “feats” released grants five and six. So in Q1 (officially on the filing of the 10-Q a bit later), 16.88 million options vested, meaning that Musk now can purchase a corresponding number of shares for under 10% of their current price. The total value of the options that vested in Q1, at today’s price of $677: $11.43 billion. Subtract the $70.01 per share strike price, and Musk’s take comes to $10.25 billion.
It’s safe to say that Elon Musk just landed the largest equity grant of all time secured in a single quarter. The only competitor seems to be his double award in Q3 of last year. Since Tesla’s price at the time was one-third lower, this one’s a lot bigger measured in current value.
Consider that Musk has already harvested five of the eight awards in a program established for just two and a half years, and intended as a super-long-term incentive. The plan has so far worked brilliantly. Though Musk’s haul will reach $60 billion even if Tesla’s stock only inches ahead from here, his rewards are a sliver of the hundreds of billions in gains amassed by shareholders. It’s also reassuring that Musk can’t sell any of the stock obtained from exercising the vested options for five years after buying each bucket of shares.
If anything, the plan may have worked too well. The market cap destinations are almost all in the rearview mirror. Musk now must mainly hit operational metrics to get the six second keys he’ll need to pocket the remaining awards. The danger is that to collect the final trophies, he’ll lavish capital to boosting production even at low margins. That would swell sales and Ebitda, enabling Musk to sweep the table. But it would arrest or reverse the stock’s fabulous run.
In fact, Tesla’s valuation has far outstripped the yardsticks in his pay plan. The eighth and top target for Ebitda is $14 billion. To richly reward investors, Tesla must reach a cap of around $1 trillion in five years. Even at a big multiple, it would need to deliver Ebitda twice that size to touch anything like those heights.
Musk’s pay plan was visionary. But he’s beating bogeys and collecting grants a lot earlier than the directors who designed it ever imagined. Investors have hiked Tesla’s valuation so high, so fast, based on great expectations, that to boost the stock from here, Musk must score numbers far exceeding those in the package. Only a dazzling run of new models and exploding profits will fulfill arguably the highest hopes that shareholders have ever lavished on a great corporate leader.
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