Is this for real?
Investors fondly recall that it was indeed the last pay deal from 2018 where Musk famously delivered on seemingly “mission impossible” goals that sent the stock on a moonshot and handed him tens of billions of dollars in Tesla stock. They’re clearly hoping for something resembling a repeat. The news lifted Tesla’s shares at the start of trading on Sept. 5 by around 5%.
An apt nickname for the fresh plan: Fantasyland. For the most part, the targets are so gigantic that given Tesla’s currently poor results and declining prospects, the chances that Musk will achieve even the lowest bogeys look highly unlikely, and the probability he’ll capture the elevated ones virtually zilch. What’s still inflating Tesla’s stock price are Musk’s extravagant claims for hugely profitable products, from FSD (Full Self-Driving) software to robotaxis to humanoid robots, that are constantly getting delayed, and none of which are yet reaching customers. What will matter going forward are the net earnings and cash flows that Tesla’s bedrock auto franchise generate and uncertain new ventures, and the comp construct’s stretch numbers are so mind-bogglingly elastic that it wouldn’t be surprising if they’re more demoralizing than inspiring for Elon Musk.
This all-new long-term award would come on top of that $30 billion–plus “makeup” arrangement. In the proxy, it’s characterized in effusive terms, of a type seldom seen in these usually dry documents. The proposal will now go a vote of Tesla shareholders. Denholm and Wilson-Thompson characterize the objective as creating “the most valuable company in history” and laud the standards as “even more aspirational” than the 2018 plan, a claim that’s astounding since that cliff-scaler would seem impossible to top. “In 2018, Elon had to grow Tesla by billions; in 2025, he has to grow Tesla by trillions,” write Denholm and Wilson-Thompson. In a CNBC interview, Denholm acknowledged that some might view the challenges as too great to be taken seriously, and stated that the initiative amounts to “shooting for the moon.”
In the proxy, the board stresses that Musk is seeking a far greater ownership stake and that the best way to motivate the maverick is providing him a path to achieving that aim. The directors’ view: “We believe Elon is the only person capable of leading Tesla at this critical inflection point.” They cite the “public statements that voting influence is critically important to him if he is tasked with developing AI products for Tesla,” adding that the carrot of a big jump in ownership should rally Musk into “achieving extraordinary performance milestones while remaining at Tesla.”
Matching a market share target with any one operational metric would award Musk an additional 1% of Tesla’s shares. Scaling the $8.5 trillion market cap summit and clinching all dozen product objectives would bring that $1 trillion windfall. Right now, Musk owns around 13% of Tesla’s shares, and he’s said publicly he craves getting to 25%. Ringing the 24 combined market cap plus operational bells, worth 1% each, would lift Musk to his cherished 25% prize. The grants come in the form of restricted shares; the shares gained by hitting the twin targets would all vest at once after seven and a half years, and Musk would only pocket them if he stays on as either CEO or head of product development over that span. He could get a longer vesting runway if he stays on for 10 years.
Under the new pay package, look at what Musk must achieve just to grab the first tranche of 1%. And that 1% would be worth plenty, around $20 billion. One key should be relatively easy to turn: achieving a cumulative 2 million in EV sales. But what about notching the lowest market-cap target of $2 trillion by early 2033?
It goes back to the earnings needed to get there. Once again, let’s give Tesla a P/E of 30 seven and a half years from now. Do the math, and you get to mandated earnings of $67 billion. That means multiplying today’s core profits of $3.7 billion by 18, or roughly 50% a year. And $3.7 billion probably overstates Tesla’s sustainable earnings, since they’re dropping quarter by quarter. The cash flow outlook is bad as well. After subtracting sales of regulatory credits that will soon fade, Tesla generated zero free cash flow in the past two quarters.
The Tesla board is dreaming if it believes this pay deal will uncork another wonder like its predecessor of 2018. The directors are practically taunting Musk by saying, “You want that huge new chunk of the company? Boost the share price enough to deserve it.” Elon Musk did it once. But as the saying goes, even for Elon Musk, past performance is no guarantee of future results.
