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Tesla promises big payout if Musk achieves huge targets

Jan 25,2018
Elon Musk is known for his bold predictions on electric and self-driving cars. Now his pay could depend on whether those predictions come true. Under a new all-or-nothing pay package, Musk would remain at Tesla for the next decade and see his compensation tied to ambitious growth targets.

The proposal, revealed Tuesday in a regulatory filing, requires that Tesla grow in $50 billion leaps, to a staggering $650 billion market capitalization.

The electric car maker, based in Palo Alto, California, is worth less than $60 billion today. Tesla must hit a series of escalating revenue and adjusted profit targets, only after which Musk would vest stock options worth 1 percent of company shares. He would get no other guaranteed compensation.

The pay package, developed over the last six months by Tesla’s board, still needs the approval of Tesla shareholders, who will vote on it at a special meeting in late March. Musk and his brother Kimbal, who is a Tesla board member, will recuse themselves from the vote.

If the goals are reached, Tesla would be one of the biggest companies in America. The $650 billion benchmark would make Tesla the fourth-most valuable U.S. company, behind only Apple, Alphabet, and Amazon, based on current valuations. It would be larger than Microsoft, and would exceed the current combined valuation of the world’s top eight publicly-traded auto companies.

The pay scheme would also catapult Musk into the ranks of the world’s richest people. Musk’s stock options could be worth up to $55.8 billion if he meets the company’s goals. He also would own a 28 percent stake in Tesla, which would be worth $182 billion. Forbes’ current richest billionaire, Microsoft co-founder Bill Gates, is worth $86 billion.

Musk has long had ambitious plans for Tesla. In a 2015 earnings call with analysts and media, he predicted Tesla could match Apple in total value by 2025.

Musk’s growth plans were laid out in a 2016 blog post he titled “Master Plan, Part Deux.” Tesla plans to expand from electric cars and SUVs to trucks - including a semi due out in 2019 - and buses. It will continue to work on autonomous vehicle technology and plans to enter the car-sharing business, letting Tesla owners share their cars when they’re not using them and running Tesla-owned fleets in cities.

The company, which bought solar panel maker SolarCity in 2016, also plans to expand its solar panel and energy storage businesses. Tesla is making solar panels and roof tiles at its factory in Buffalo, New York, which will help the company blunt any impact from President Donald Trump’s recent 30-percent tariff on imported solar panels and cell modules.

The plans are ambitious, but that’s nothing new for Tesla. Under a 2012 agreement, Musk’s stock options vested only if the Tesla’s market cap continued to rise in $4 billion increments. The company also had to hit matching operational milestones, including vehicle production targets and developmental milestones tied to the Model X and Model 3 programs.

Tesla wound up reaching all of the market cap milestones and nine of the 10 operational milestones, falling short only of its goal to have four consecutive quarters with 30-percent gross margins.

When that pay package was created, the company was worth just $3.2 billion. Its market cap at the end of last year was 17 times that amount. That’s why the new goals may not be that far-fetched, says Michael Ramsey, an analyst with Gartner who follows Tesla.

“To this point, it has been dangerous to predict failure for Tesla or Elon,” he said.

Adam Jonas, an analyst with Morgan Stanley who follows Tesla, thinks plan is partly a marketing tool as the competition for electric and autonomous vehicle talent heats up.

Jonas added that Musk - who owns 21.9 percent of Tesla shares - is already “all-in” on the company, so he sees the incentive package as more for investor confidence than for Musk’s personal benefit. In order to vest shares when milestones are reached, Musk must stay on as CEO or serve as both executive chairman and chief product officer. AP