The new “replacement” pay package that Tesla unveiled for Elon Musk on Aug. 3 marks a big improvement over its predecessor, for a basic reason. It guarantees what the previous version left open—the very real possibility that if Tesla’s stock takes a giant roundtrip back to the price where they gave Musk that huge slug, shareholders get nothing but dilution for the directors’ largesse. And Musk still holds shares worth billions.
Recall that in 2024, in response to a lawsuit from the EV maker’s shareholders, the Delaware courts invalidated the famous giga-grant approved in January of 2018. Musk and the company appealed the ruling, and the decision is now on appeal. The Tesla board stepped in to ensure that if the Tesla side loses, the CEO will get something similar to the numbers he’d sacrifice. But this time, they’re attaching a series of wise conditions absent the first time around.
Naturally, the deal only applies if Musk and Tesla lose on appeal. If that happens, under the new iteration he’d receive a restricted stock grant of 96 million shares at a strike price of $23.34, equivalent to the figure when he got the gigantic trove at the start of 2018. At Tesla’s current price of roughly $309, those shares would be worth over $27 billion. Here are the restrictions: The shares vest on the second anniversary of the grant, or early August 2027, but only if Musk serves that entire period as either CEO or chief of product development or operations. In addition, he can’t sell any of those vested shares until five years from the date of the award, or Aug. 3, 2030.
The directors’ objective is obviously to keep Musk in charge, enhancing the chances he’ll deliver big-time on his promises for forthcoming, not yet commercial, robotaxis, self-driving software, and humanoid robots. But for Tesla holders who are starting to lose faith as the gauzy pledges come and go unkept, the plan’s structure, to use the cliché so often found in CEO comp plans, “aligns” Musk’s fate to their own far more tightly than did the first program.
The 2018 plan rewarded Musk for hitting huge valuation gains with lofty rhetoric
The landmark original pledged Musk laddered awards of 1% of Tesla stock, each granted as the valuation rose by an additional $50 billion. The starting point was $100 billion—a multiple of its market cap at the time. If Musk reached the max of $650 billion, a number that seemed wildly improbable at the time, he’d amass 12% of Tesla’s stock. The framework resembled the process of opening a safety-deposit box; getting a new 1% required two “keys”: first, hitting the valuation bogey and second, achieving 12 of 18 combined goals for revenues and Ebitda. The top Ebitda target was $14 billion, and the highest sales figure $175 billion.
Within a mere three and half years—by mid-2021—Musk rang the bell. He first surpassed the $650 billion market cap max, and later scored all the Ebitda benchmarks and supplemented that accomplishment by reaching an intermediate sales bogey of $75 billion, good enough overall to satisfy the 12 operating metrics requirement. Hence, Musk got the full windfall.
The concept’s big flaw: Musk kept making big vows for incredibly profitable new products that wowed investors. That helped send the stock skyward, helping him achieve the valuation part. The revenue and Ebitda requirements were relatively easy to hit. So the combination of rhetorically inflating the stock price and not having to deliver fabulous basic profitability numbers won the day.
To be fair, Tesla’s cap at almost $1 trillion is still three times its level when Musk received his average 1% stock grant, and 50% above where he got his last piece at $650 billion. The problem: It’s impossible to get any idea of what Tesla’s really worth in the long run. And if it turns out to be mainly a metal-bending car company, or if the capex requirements needed to build out Musk’s visionary businesses, as well as heavy competition, make them marginally profitable, Tesla’s value could fall back to something like where it stood when Musk captured the then seemingly mission impossible package at the start of 2018, when Tesla shares traded at $23.34.
Under the new deal, if Tesla’s stock tanks big-time, Musk doesn’t get paid
The original plan had a major weakness. Musk got his 12% of the stock upfront. So even if shares dropped all the way back to the original strike price of $23.34, putting Tesla’s market cap at $75 billion, he’d still own $9 billion in shares (12% of $75 billion). And the shareholders would have endured big dilution, and gotten zip for it.
But the new plan ensures that can’t happen. Is it absolutely impossible that Tesla drops that far? Not at all. Just look at its current fundamentals. The original plan only made sense if Tesla reached the operating goals stipulated to trigger the grants, and kept ramping revenues and profits swiftly from there. In other words, the fundamentals had to grow into the valuation. Musk was essentially getting paid for great things to come.
That didn’t happen. In the first two quarters of this year, Tesla’s sales ran at an annual rate of $84 billion, just above the bogey of $75 billion Musk hit a few years back. In the same six months, its Ebitda was stuck at $12 billion on a yearly basis, below the $14 billion number that unlocked the payout.
I recently wrote a piece on the “Musk Magic Premium” that calculated what Tesla is worth based on its current products, and the extra value awarded for Musk’s visionary pledges—that’s the premium. To get the core, repeatable earnings number for today’s EVs and batteries, I remove accounting gains or losses on its Bitcoin holdings, and subtract sales of regulatory credits that will probably now die owing to Trump’s recent pulling of penalties for the automakers who stop buying them.
For the past four quarters, that “hardcore” number is $3.3 billion. Imagine that Musk raises that figure at a decent 8% a year, so that net earnings reach $5.4 billion in 2030, the year Musk is free to sell shares under the new program (if it happens). Let’s also assume that since it’s a low-growth manufacturer, Tesla warrants a P/E that’s well above the auto industry average at 14. Then it would be worth $75 billion five years hence.
That result would put the shares right back near Musk’s strike price of $23.34. His big grant would be worthless, while under the old one, he’d still have stock worth $9 billion. Even if Tesla’s shares drop to around $50 and its cap stands at roughly $150 billion, Musk would make a lot less, around $2.5 billion. Yes, it’s a good thing that the Tesla board is forcing Musk to wait a long time to get paid. Five years from now, we’ll be able to see what all those promises are really worth. If they’re exhaust from a tailpipe, shareholders will suffer big-time. But Elon Musk will suffer along with them.
