A Little History First
- Tesla was founded in July 2003 by Martin Eberhard and Marc Tarpenning as Tesla Motors.
- In February 2004, Elon Musk joined as the company's largest shareholder, and in 2008, he was named CEO.
- On June 29, 2010, Tesla went public via an IPO on the NASDAQ.
- In 2018, a class-action lawsuit was filed against Musk and Tesla's board, alleging breaches of fiduciary duties for approving Musk's stock-based compensation plan.
From the 2023 10-K:
Litigation Relating to 2018 CEO Performance Award
On June 4, 2018, a purported Tesla stockholder filed a putative class and derivative action in the Delaware Court of Chancery against Elon Musk and the members of Tesla’s board of directors as then constituted, alleging corporate waste, unjust enrichment and that such board members breached their fiduciary duties by approving the stock-based compensation plan awarded to Elon Musk in 2018. Trial was held November 14-18, 2022. Post-trial briefing and argument are now complete.
The Compensation Plan: Improbable Goals
At the time, there was broad skepticism in the financial community about the package. The consensus was that the milestones were nearly unattainable, and Musk might receive a few of the 12 tranches. Bankruptcy or a sale for parts also loomed as real possibilities.
The Lawsuit Resurfaces
Tesla was incorporated in Delaware, and in January 2024, a Delaware judge ruled against the compensation package. Musk moved Tesla’s headquarters to Texas in direct response. Tesla then tried to reauthorize the plan through a shareholder vote in June 2024. However, on December 2, 2024, the judge refused to revise her decision, stating in a 103-page opinion:
Fatal Flaws in the Defendants' Motion
- First: The defendants have no procedural ground for flipping the outcome of an adverse post-trial decision based on evidence they created after trial.
- Second: Common-law ratification is an affirmative defense that must be timely raised, which means that, at a minimum, it cannot be raised for the first time after the post-trial opinion.
- Third: What the defendants call “common law ratification” has no basis in the common law—a stockholder vote standing alone cannot ratify a conflicted-controller transaction.
- Fourth: Even if a stockholder vote could have a ratifying effect, it could not do so here due to multiple, material misstatements in the proxy statement.
The judge also awarded $345 million in attorney fees, far less than the $5.6 billion originally requested by the plaintiffs. Tesla is expected to appeal to the Delaware Supreme Court.
Side Note: Musk vs. Twitter
Interestingly, the same judge presided when Elon attempted to back out of the $44 billion acquisition. Combined, these decisions have cost Musk upwards of $100 billion, though he has partially recouped Twitter's value through ventures like xAI, which was valued at $24 billion earlier this year, and is rumored to be valued at $40 billion in a new funding round.
The 2018 Pay Package
From Tesla’s 2018 10-K:
2018 CEO Performance Award
In March 2018, our stockholders approved the Board of Directors’ grant of 20,264,042 stock option awards to our CEO (the “2018 CEO Performance Award”). The 2018 CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational milestones (performance conditions) and market conditions, assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date.
Each of the 12 vesting tranches of the 2018 CEO Performance Award will vest upon certification by the Board of Directors that both:
- The market capitalization milestone for such tranche, which begins at $100 billion for the first tranche and increases by increments of $50 billion thereafter.
- Any one of the following operational milestones focused on revenue or eight operational milestones focused on Adjusted EBITDA.
| Total Annualized Revenue (in billions) | Annualized Adjusted EBITDA (in billions) |
|---|---|
| $20.0 | $1.5 |
| $35.0 | $3.0 |
| $55.0 | $4.5 |
| $75.0 | $6.0 |
| $100.0 | $8.0 |
| $125.0 | $10.0 |
| $150.0 | $12.0 |
| $175.0 | $14.0 |
As of December 31, 2018, the following operational milestones were considered probable of achievement:
- Total revenue of $20.0 billion.
- Adjusted EBITDA of $1.5 billion.
- Adjusted EBITDA of $3.0 billion.
Comparing Value Creation to Compensation
- Tesla Market Cap 2018: $57,44B
- Tesla Market Cap 2023: $789,89B
- Market Cap Increase: $732,45B
- Market Cap Increase: 1'275%
- Annualized Rate of Return: 69%
- Musk's Pay Package: $56B
- Pay as % of Value Created: 7,7%
- Elon's Annualized Pay: $11,2B
Perspective
Elon Musk’s pay accounts for 7.7% of the value created, a fraction of what other CEOs in easier industries have captured for less ambitious goals. While the 2018 package seemed “impossible,” Tesla’s growth has exceeded expectations by an order of magnitude or two.
That paypackage would be worth around $100 billion today after the recent rise in stock price.
Sources:
2018 10-k
Judges' Opinion
2023 10-k
Vote for my witness: @blue-witness