Is Tesla Pioneering a New Age of Compensation Plans for Executives?

Elon Musk, co-founder and chief executive officer of Tesla Motors Inc., attends a key delivery ceremony of the company's premium electric sedan Model S vehicles to customers in Tokyo, Japan, on Monday, Sept. 8, 2014. Tesla may partner with Toyota Motor Corp. again in the future, Musk said. Photographer: Yuriko Nakao/Bloomberg via Getty Images

Elon Musk has always been a dreamer. He has been a visionary in space travel in the 21st century with his company SpaceX while also revolutionizing the automobile industry through his company Tesla. He is considered one of the most powerful people in the world by many standards. However, his new contract as CEO of Tesla could result in him not making a single penny from the company in the next ten years.

On January 23, Tesla announced that Elon Musk would stay on as CEO for the next ten years. During this span of time, Musk will not receive any guaranteed compensation. For Musk to receive any compensation for his work, he must reach certain performance objectives that Tesla has set for the company. Tesla has broken the objectives down into two separate categories: market cap milestones and operational milestones. Each category consists of 12 tranches, or levels, that Musk much reach in order to gain more compensation. Both the market cap milestones and operational milestones must be met in order for Musk to move up a tranche. Upon completion of each tranche, Musk will receive “stock options that correspond to 1% of Tesla’s current total outstanding shares.” With 1.69 million outstanding shares, Musk has the potential to gain approximately.

Tesla CEO Performance Award-2The market cap milestones are based on Tesla’s market valuation. The first tranche is completed once the company is worth $100 billion. Each subsequent tranche is completed for every $50 billion added to Tesla’s value, topping off at $650 billion. Musk is optimistic about his ability: “I actually see the potential for Tesla to become a trillion-dollar company within a 10-year period.”

The operational milestones Musk must meet are slightly different than the market cap milestones. For these, Musk only needs to reach 12 of the 16 levels to reap the full benefits of the payment plan. The 16 levels are divided into two categories, revenue and Adjusted EBITDA, of 8 levels each. The revenue path is simple; when Tesla’s revenue reaches each level, it will have been completed and can be used to move up a tranche, granted that the market cap milestone has already been met for that level. Adjusted EBITDA is Tesla’s earnings before interest, taxes, depreciation, and amortization. This essentially measures a firm’s profitability; if Musk can increase the profits of Tesla then these levels should gradually be completed over the next ten years.

The new payment plan for Musk comes at a time of concern for the company. Musk has been ambiguous in the past about continuing as the CEO of Tesla. However, this new deal ensures that he will stay on for the next ten years, either as CEO or as the Executive Chairman and CPO of Tesla. Regardless, Tesla has just locked down one of the most innovative minds in the world for ten years, something shareholders should be very content with. This news also comes just weeks after Tesla delayed releasing the production targets again for the Model 3. Tesla has been on fire lately, but Musk must continue directing the company towards new heights if he wishes to be compensated for all of his time and effort.

With Tesla being one of the leaders in the automobile industry lately, Musk’s new payment plan may spark similar plans from other companies. In regard to the effect of the new compensation plan on Tesla shareholders, compensation committee chairman Ira Ehrenpreis stated, “It’s heads you win, tails you don’t lose.” If Musk reaches all tranches of the plan, then he would have increased Tesla’s valuation by almost 11 times its current amount, a feat that is almost unthinkable in a ten-year span. This would be fantastic for shareholders as their shares would correspondingly increase in value. If Musk fails to meet even one tranche, then the shareholders do not need to pay the CEO that failed to do anything for them. This plan puts the majority of the responsibility for the company on Musk and it is up to him to move this company forward if he wishes to be compensated for his work.

Other companies should develop similar compensation plans to shift more accountability to the leaders of companies. If all executives in companies are not given guaranteed salaries but rather compensated based on performance of the company, then these executives will ostensibly put much more effort into their work and moving their companies forward. Shareholders will no longer have to worry about paying the salary of a CEO who fails to do anything for the company. By increasing accountability, top executives will strive to make their companies better, which can only mean good things for the average consumer. Elon Musk has the confidence in himself to achieve the goals set forth by his company, but do other Fortune 500 executives have the same faith in their own abilities? Only time will tell, but Musk’s new plan may be the start of a new age in compensation for executives.


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