Tesla shareholders vote on Elon Musk's $2.6 billion pay package Wednesday

Key Points
  • Tesla is set to vote on a $2.6 billion stock options grant for Chairman and CEO Elon Musk.
  • The proposed grant would tie his total compensation to performance targets.
Tesla Motors CEO Elon Musk
Brian Snyder | Reuters

Tesla shareholders will vote Wednesday on whether to approve a multibillion-dollar performance-based pay package for Chairman and CEO Elon Musk.

Some shareholders have come out in favor of the new package, but two major advisory firms recommend shareholders reject the proposal. Musk has recused himself from the vote, as has his brother Kimbal, who is also a Tesla board member.

The vote comes at a time when Tesla shares are dropping from an all-time high set in September. Tesla's stock skyrocketed then in anticipation of the Model 3, a mid-priced electric sedan that is cast as the company's leap from a niche luxury car brand to a marque for the masses. But the company has repeatedly missed production targets and there have been reports it is making a high ratio of flawed parts and there are entire cars in need of rework.

The grant will award him $2.6 billion in stock options divided into 12 tranches that Musk can vest as the company hits key performance milestones over 10 years, Tesla said in a recent proxy filing. Musk will receive no other compensation for his work at Tesla.

Tesla's board laid out a few reasons the plan will align Musk's pay with the interests of shareholders. Musk's efforts could still boost the stock price whether or not he meets the milestones, the board said in the filing. The plan will also ensure Tesla holds onto Musk, who divides his time between numerous projects and is still seen as perhaps the most important figure at the company. Third, the award will spur the achievement of the goal Musk enumerated in his "Master Plan, Part Deux."

"If all of these milestones were to be achieved, Tesla will have meaningfully achieved its mission of transitioning the world to sustainable energy and will have become one of the most valuable and successful companies in the world," the board said in the filing. "This is our ambition."

Large institutional investors such as T. Rowe Price have said they support the proposal. T. Rowe owns a 6.4 percent stake in Tesla, according to FactSet.

"Tesla presents a unique challenge in executive compensation due to its ownership structure and the very long-term nature of its business," said T. Rowe Price in a statement. "From our perspective, the board's compensation committee addressed the challenge in the right way, thinking creatively about ways to structure the milestones and conducting outreach to gather investors' perspectives and recommendations. We believe the final plan is well aligned with shareholders' long-term interests."

But shareholder advisory firms Glass Lewis and Institutional Shareholder Services say there are problems with the plan.

Among them, the disclosed dollar value cost of the grant is "staggering" compared with executive compensation among other public companies, and the grant could seriously dilute Tesla's stock, Glass Lewis said in a report.

"The absolute costs to shareholders of this grant if approved and earned are substantial, but the amount of share capital used is even more eye watering on a relative basis," the report said.

The actual value of the package could be even higher than the disclosed amount, said ISS. It valued the grant at $3.7 billion.

Furthermore, Musk could still earn a substantial portion of money even if Tesla doesn't achieve sustained profitability. Tesla has only had two profitable quarters since going public in 2010, and has gone to investors many times seeking new sources of capital.

"Three-quarters of the award may vest even if the company does not meet any of the commensurate adjusted EBITDA hurdles, the only profitability metric included in the plan," the ISS report said.

And while Musk has to be at Tesla while vesting his options, the proposal allows him to take leaves of absence, and allows the compensation committee to decide whether he can resume vesting once he returns. It does not specify what a leave of absence would be.

"As such, it is possible that Musk may take unpaid leave to focus on his other, highly publicized business interests, yet resume vesting of the award upon his return to the company," ISS said.