Tesla's $56 billion gamble: Is Elon Musk worth the price?

Tesla's shareholders have overwhelmingly voted to approve a $56 billion pay package for Elon Musk, despite ongoing debates and legal challenges surrounding the compensation plan.

In 2018, Musk was granted stock options representing up to 12 per cent of Tesla's outstanding shares, contingent upon the company achieving ambitious revenue, profit, and market capitalisation milestones. At the time, these targets seemed nearly unattainable, with Tesla's market cap needing to reach $650 billion. However, Tesla's extraordinary growth saw its market value peak at $1.2 trillion in 2021, before stabilising above the $650 billion mark long enough for Musk to qualify for the full options grant, even though the current market cap has fallen to $555 billion.

Despite initial shareholder approval in 2018, the pay package faced significant legal scrutiny. Earlier this year, a Delaware judge voided the compensation plan, criticising Tesla’s board for being too closely tied to Musk and thus not acting in the best interests of shareholders. The court found that Musk had undue influence over the board members, who were primarily his close associates, thereby questioning the legitimacy of the approval process. Consequently, the pay package was brought to a fresh vote.

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Leading up to the recent vote, Tesla's board, particularly chair Robyn Denholm, vigorously campaigned for shareholder approval. In an open letter, Denholm emphasised the necessity of the package to retain Musk's focus and drive, arguing that his leadership is crucial for Tesla’s continued success. This stance echoed sentiments from key investors like billionaire Ron Baron, who described Musk as irreplaceable due to his relentless drive and visionary leadership.

Despite the strong advocacy, the package faced significant opposition. Proxy advisory firms Glass Lewis and ISS recommended against the package, citing concerns over its excessive size and the potential dilution of existing shareholders’ value. Notably, Norway's $1.7 trillion sovereign wealth fund, Tesla’s seventh-largest shareholder, also opposed the package due to its structure and magnitude.

The reapproval of Musk’s pay package underscores the confidence many shareholders have in his leadership, albeit with some reservations about his divided attention among his various ventures, including SpaceX and X. This decision reflects a broader trend where CEO pay packages continue to rise, with many executives successfully defending their compensation amid increasing shareholder scrutiny.

The Delaware court's decision to void Musk’s package was unprecedented, signalling a potential shift in how CEO compensation is negotiated and approved. Experts believe this could prompt other companies to reassess their executive pay practices to ensure more rigorous independence and due diligence.

However, Tesla's situation might be unique due to Musk’s outsized influence and the company's dependence on his vision. Moving forward, Tesla and its shareholders will need to balance the benefits of Musk’s leadership with the governance challenges posed by his significant control over the company.