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A Delaware judge Chancellor Kathaleen McCormick, acting against the interests and wishes of Tesla shareholders, ruled on Monday that Tesla CEO Elon Musk still is not entitled to receive his performance award. Let’s look at the details of the 2018 deal to figure out what is going on.

On January 23, 2018, Tesla announced a new 10-year CEO performance award for Elon Musk that hinged on achieving market cap and operational milestones that would make Tesla one of the most valuable companies in the world.

To fully vest, Tesla’s market cap would have to grow to $650 billion (an increase of almost $600 billion at that time), and important revenue and profitability goals would also have to be achieved. The award is modeled after Elon’s 2012 performance award, which helped bring about a more than 17-fold increase in Tesla’s market cap in the five years after it was put in place.

Elon received no guaranteed compensation of any kind – no salary, no cash bonuses, and no equity that vests simply by the passage of time. Instead, Elon’s only compensation should have been a 100% at-risk performance award, which ensures that he will be compensated only if Tesla does extraordinarily well. At the time, such a package was laughed at by many, as they did not believe that Elon was capable of achieving the established milestones and their skepticism was understandable.

The performance award consisted of a 10-year grant of stock options that vests in 12 tranches. Each of the 12 tranches vests only if a pair of milestones are both met.

Market Cap Milestones: To meet the first market cap milestone, Tesla’s market cap should have grown to $100 billion (from $50 billion at that time). For each of the remaining 11 milestones, Tesla’s market cap should have continued to increase in additional $50 billion increments. Thus, for Elon to fully vest in the award, Tesla’s market cap must increase to $650 billion.

Operational Milestones: To meet the operational milestones, Tesla should have met a set of escalating Revenue and Adjusted EBITDA targets (the only adjustment to EBITDA is for stock-based compensation). These milestones were even more directly aligned with shareholder value creation than those used in Elon’s 2012 performance award. They were designed to ensure that as Tesla’s market cap grows, the company is also executing well on both a top-line and bottom-line basis.

2018 CEO Performance Award

For each of the 12 tranches achieved, Elon should have vest-in stock options that correspond to 1% of Tesla’s then current total outstanding shares (1% of that amount is approximately 1.69 million shares). If none of the 12 tranches is achieved, Elon will not receive any compensation.

Elon has done an amazing job for 10 years, delivering everything and more than the 2018 deal required. The company and its shareholders have experienced unprecedented growth. This was only possible due to the exceptional performance of Elon, who was able to organize the development of the company in such a way as to take it to a completely new level.

In 2018 and 2024, the company’s shareholders voted overwhelmingly in favor of Elon’s pay package. Despite this, Judge McCormick ignored the welfare of the company and its shareholders and still ruled that Elon would not receive his hard-earned over 10 years’ pay.

© 2024, Eva Fox | Verum News. All rights reserved.