NEW YORK, Sept 5 (Reuters Breakingviews) — Elon Musk really does do things no one else has. Chief among them: squeeze unprecedented paychecks from electric-car maker Tesla (TSLA.O), opens new tab. On Friday, the company’s board proposed to award, opens new tab its CEO up to $1 trillion in stock. Becoming the world’s first trillionaire requires hitting goals that range from eyebrow-raising to eyeball-popping. It’s also an example of Tesla’s bizarre governance.
This package aims to decisively refocus Musk after he joined and then left the White House, promised to start a political party, and threatened to go elsewhere if he didn’t get bumped up to 25% voting control. That last part is key. Despite tumbling sales and profitability, the company’s valuation stays afloat on promises of robotic humanoids and self-driving taxis.
Tesla’s bargain is that Musk gets what he wants, but only if he sticks around to keep the magic going. Like a mere $56 billion pay package in 2018 – which a judge nixed for being preposterously huge – this one is entirely contingent on benchmarks. For Musk to see a cent, Tesla’s market value must double while hitting either a goal related to product sales or profitability. The milestones increase steadily, unlocking up to 12 tranches of awards as each pair is surpassed. To win it all, Tesla must reach an $8.5 trillion market valuation, eightfold from where it is now, and notch $400 billion in EBITDA by 2035.
It’s a huge leap from this year’s expected $12 billion of such profit, according to Visible Alpha. The only slight acknowledgement of reality is that the twin goals imply an enterprise valuation of roughly 21 times EBITDA. Sure, Meta Platforms (META.O), opens new tab trades at only 17 times. But Tesla’s current multiple stands at nearly 83.
Other milestones seem fuzzier. A goal to deliver 20 million vehicles in total compares to Musk’s long-since-dropped target to sell that many cars annually. Meanwhile, a criterion of one million robotaxis seems disappointing after Musk pledged that every car Tesla ever sold would become a rentable, automated chauffeur.
To boot, the awards are oddly structured. The entire unearned pool of restricted stock that Musk can receive effectively gains voting power immediately, before the CEO hits a single goal. Until he does achieve an objective, though, the associated shares vote in proportion with everyone else – so he can’t swing a board election, say, against other investors. Nonetheless, this arrangement does allow him to control how these shares vote as soon as he wins a tranche of stock, long before it vests.
Combined with a recent bylaw change preventing lawsuits from investors owning less than 3% of Tesla, Musk is looking to insulate his control, the exact kind of governance madness that earned a judge’s ire in the past. At the very least, shareholders stand to be rewarded for tolerating the insanity.