Musk's $1 Trillion Pay Package: What's at Stake for Tesla Stock

Elon Musk holds a glass of wine. — (Image credit: Getty Images)

Tesla (TSLA) shareholders overwhelmingly approved a new pay package for CEO Elon Musk that could be worth up to $1 trillion.

The compensation comes with some fairly steep hurdles that the electric vehicle maker will need to surpass in order for Musk to collect, which could have big implications for the Magnificent 7 stock.

While Musk's 2018 pay package is currently in litigation, in early September, Tesla's board of directors outlined a new 2025 CEO pay package. The board also specified specific targets that must be hit for Musk to earn the full compensation of 423.7 million shares of Tesla's common stock.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

The shares will be distributed in 12 lots of 35.3 million apiece as certain market cap milestones are met in the next decade — the first being $2 trillion and the last being $8.5 trillion. TSLA closed on November 6 with a $1.5 trillion market capitalization.

There are also 12 operational milestones that need to be reached for Musk to reap his rewards. These include 20 million Tesla vehicles delivered, 1 million robotaxis in operation and four consecutive fiscal quarters of $400 billion in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

In its most recently reported quarter, Tesla delivered just shy of 498,000 vehicles and reported adjusted EBITDA of $4.2 billion.

If Musk meets these milestones, he could own up to 25% of Tesla, up from his current 13% ownership.

"We are, and have always been, a company that thinks bolder, acts faster and strives for a better future," the board wrote. "We believe that Elon's singular vision is vital to navigating this critical inflection point," and "retaining and incentivizing Elon is fundamental to Tesla achieving these goals and becoming the most valuable company in history."

How did Tesla shareholders vote on Musk's pay package?

Musk's new pay package required shareholder approval, and they overwhelmingly voted to support it. Tesla said more than three-quarters of stakeholders voted yes on the measure.

Nancy Tengler, CEO and CIO of Laffer Tengler Investments, says her firm voted for the pay package.

"I like having my incentives aligned with the CEO. If he's going to get shares, his incentive is to increase the value of those shares. That works for me as a shareholder," she says. "What we saw in the last round with his pay package was that he hit some ridiculous goals no one thought he could hit — and he's never been paid for it because it's been tied up in court. That, to me, is just wrong."

But there were some high-profile dissenters. Norway's sovereign fund, which is managed by Norges Bank Investment Management (NBIM) and owns a 1.1% stake in Tesla as of June 30, recently said that it voted against the pay package.

"While we appreciate the significant value created under Mr. Musk's visionary role, we are concerned about the total size of the award, dilution and lack of mitigation of key person risk — consistent with our views on executive compensation," NBIM posted on its website.

What does approval mean for Tesla stock?

Wedbush analyst Daniel Ives expected Musk to get "overwhelming shareholder approval" for the pay package despite opposition from various shareholders. A yes vote "sends a loud and clear message to Elon being 'wartime CEO' during this most important chapter of growth in Tesla's history as the AI revolution is here."

Ives has an Outperform rating on Tesla stock and a Street-high $600 price target, representing implied upside of 35% to current levels. If Tesla reaches the top market cap goal, the stock will top $2,000 based on the current number of shares outstanding.

As a group, Wall Street is split when it comes to the Tesla. Of the 46 analysts covering the stock who are tracked by S&P Global Market Intelligence, 15 say it's a Strong Buy, five have it at Buy, 17 call it a Hold, and 10 rate it a Sell or Strong Sell.

Needham analyst Chris Pierce is one of those with a Hold rating on the consumer discretionary stock.

"TSLA continues to demonstrate operational discipline and long-term leadership across electrification and energy storage, but we see the stock as fairly valued against our already aggressive longer-term full self-driving (FSD) and robotics estimates," wrote Pierce in an October 23 note.

TOPICS

With over a decade of experience writing about the stock market, Karee Venema is the senior investing editor at Kiplinger.com. She joined the publication in April 2021 after 10 years of working as an investing writer and columnist at a local investment research firm. In her previous role, Karee focused primarily on options trading, as well as technical, fundamental and sentiment analysis.