Tesla board to shareholders: Pay Musk or else

Highlights:

• CEO Musk might quit if investors vote down $878 billion pay package this week, board says
• Many shareholders believe only Musk can deliver on promises of robotaxis, robots
• Some investors, experts warn of risks in staking Tesla's future on one leader

Tesla's board of directors has pushed in all its chips on Elon Musk. Now investors must decide whether to back the biggest bet in company history.

Shareholders will vote Thursday on the stark choice presented by the board: pay Musk up to $878 billion in company stock or take the risk he will leave – potentially driving down the company's stock. The decision, experts say, amounts to a referendum on whether traditional corporate-governance rules apply to the world's richest man.

The board and many investors argue that only Musk can deliver on his promises to transform Tesla into an artificial-intelligence juggernaut delivering millions of self-driving robotaxis and humanoid robots. If Musk hits all the board's performance goals within a decade, Tesla's market value will have grown to $8.5 trillion – with Musk owning about a quarter of the stock.

That is exponentially more compensation than any other CEO, and Musk would still collect record payouts – tens of billions – if he misses most performance goals. Many investors are not blinking at the eye-watering sums.

"If the stock is going to go up sixfold – and that's a requirement here – then I'm going to make a lot of money," said Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, a Tesla investor. "Why do I care what kind of money he makes if he's effecting the change and the vision?"

Other major shareholders and executive-pay experts warn that the proposal represents an enormous risk to investors. The package, experts said, flouts governance principles not only because of its size but because the board is so explicitly staking Tesla's future on one leader, with myriad conflicts of interest, who stands to consolidate unchecked power over the company. Responsible governance, they argue, requires boards to remain open to a competitive market for the best available CEO at any given time.

Musk did not respond to requests for comment. A spokesperson for Tesla's board declined to comment.

Musk told board members during negotiations that he might prioritize his many other ventures – including rocket firm SpaceX, artificial-intelligence startup xAI and brain-implant firm Neuralink – unless they came to terms. And board chair Robyn Denholm has repeatedly emphasized the risk of losing Musk in selling shareholders on his compensation.

Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, said Tesla's board is being "held over the barrel by a 'superstar CEO.'"

"To me the appropriate answer is to say, 'Have a good day,'" Elson said.

Major shareholders including the biggest US public pension fund, the California Public Employees' Retirement System (CalPERS), and Norway's sovereign wealth fund echoed those concerns in publicly opposing Musk's compensation. Norges Bank Investment Management said on 25 October the pay proposal could dilute shareholder value and failed to mitigate the "key person risk" in staking Tesla's future on Musk.

The board sought to ensure Musk's longevity in company leadership with provisions including stock vesting periods.

Krishna Palepu, a professor at Harvard Business School focusing on corporate governance, said the proposal aligns with shareholders' interests by tying Musk's compensation to large stock-value increases and requiring him to hold the shares he earns for five years.

Musk, he said, has a track record of achieving extraordinary stock-price growth and would receive the largest payouts only if he does it again.

"The numbers are big because the goals are big," Palepu said.

The leverage of bold promises

Musk's leverage over the board and shareholders lies largely in Tesla's current stock-market value, which far exceeds the current financial fundamentals of its declining electric-car business. Tesla's $1.5 trillion market capitalization, rather, rests almost entirely on Musk's longstanding promises that Tesla will dominate the future of self-driving vehicles and humanoid robots.

The threat of Musk leaving now, causing a collapse in Tesla's stock, gives him enormous power to make unprecedented compensation demands, some corporate governance experts say. Board chair Denholm suggested as much in a 27 October letter to shareholders: "Without Elon, Tesla could lose significant value, as our company may no longer be valued for what we aim to become."

From a purely economic standpoint, the board's position on retaining Musk is understandable, said David Larcker, director of the Corporate Governance Research Initiative at Stanford University's business school.

"If you think that Musk would potentially leave and the Tesla stock would crater, that's not something you want to have happen on your watch," he said.

Gautam Mukunda, a lecturer at Yale School of Management, said Musk already owns enough Tesla stock to make him the world's first trillionaire if he meets the board's performance goals and hardly needs the incentive of a "second trillion" from company investors. The board, he said, should not be cowed by threats to leave from the person with the most to lose if Tesla's stock falls - its biggest shareholder.

"This is a guy who's holding a gun to his own head, saying: 'Give me a trillion dollars,'" Mukunda said. "It's not the job of the board of directors to just nod like a bobblehead doll when the CEO asks them for something."

Votes in hand

Musk faces Thursday's vote with a potentially decisive voting bloc in hand – his own 15% stake.

Musk did not vote his shares in previous pay packages, when Tesla was incorporated in Delaware. But the board said in its current pay proposal that the CEO could do so under the law in Texas, where Tesla reincorporated after Musk's last pay package was tossed by a judge in response to a shareholder lawsuit.

The Delaware judge called Musk's 2018 compensation package – originally valued at $56 billion and worth $128 billion now – an "unfathomable sum" resulting from negotiations with directors conflicted by their close ties to Musk and their own excessive compensation.

Tesla has appealed, and agreed to give Musk stock currently worth $40 billion as a "first step" toward honoring the 2018 package. That award would be forfeited if Delaware courts reinstate the pay plan.

Texas law makes it harder for shareholders to sue under a provision passed in May that allows companies to require investors suing directors or executives to have a collective 3% stake, which Tesla has done.

The bigger threat to Tesla's board comes from Musk himself – the threat to leave the company. Charles Whitehead, a Cornell University business law professor, said Tesla's board faces a "classic holdup." The burning question the board has not addressed, he said, is "who is on the bench to backstop this CEO if he walks away or, God forbid, if something happens to him."