Elon Musk Brings Executive Pay Further Into the Limelight

Naturally, the issue of Executive Pay has been a consistent focus for Financial Regulation Matters, with a number of posts discussing the elements that make up such a complex issue. News recently from the automotive/technology industries concerning Elon Musk has brought the issue to the fore once more, and in this post the focus will be on the record-setting pay-deal that was recently announced by Tesla, and then what may be the effects of this for the wider issue of executive pay across the financial sectors.

Yesterday, the headlines where Musk was concerned were almost writing themselves, with The Guardian’s ‘Elon Musk wins approval for “staggering” pay deal with potential $55bn bonus’ headline perhaps being representative of the response to the news from Tesla. However, the deal is a complex one with a number of conditions attached, which result in the reality of the situation being somewhat different. Essentially, Tesla has decided to grant its Billionaire founder a $2.6 billion ‘stock option grant’, which will be paid in 12 tranches (slices) over the next years, providing the company hits certain metric markers, like massive increases in revenue and market capitalisation etc. Tied to these milestones are bonuses which, if Musk is absolutely successful, will total more than $50 billion, but the markers are somewhat remarkable; in terms of revenue, Tesla’s revenues must rise to $175 billion, which when compared to the fact that General Motors is recording revenues of $145 billion and Ford, another stalwart of the American (and global) industry is recording $156 billion is remarkably ambitious; at the end of 2017, the firm announced its total revenue to be $11.7 billion. If we factor that the firm has recently been suffering losses, despite increased sales of its products, then the potential of Tesla actually meeting those targets becomes even more remote. CNBC reported that, currently, the company’s market capitalisation stands at $52 billion, with Musk needing it to rise to $650 billion to receive all of his pay award; furthermore, the deal ties Musk to Tesla indefinitely, and he will earn no other compensation for his work with Tesla outside of this pay deal.

There has been, rather predictably, criticism levelled at this pay deal, and from a number of angles. Glass Lewis, a corporate governance group, remarked that ‘the cost of the grant is staggering relative to executive compensation levels among public companies worldwide’, whilst the Institutional Shareholder Services stated that the deal ‘locks in unprecedented high-pay opportunities for the next decade’. Additionally, it came to light today that Norway’s $1 trillion Sovereign wealth fund actually voted against the pay deal, which signals the concerns at the highest levels of finance over the nature of the deal. A piece in Bloomberg today argued that underneath all of the bluster that accompanies the company, its manufacturing processes are ‘taking automotive manufacturing back to the dark ages’, which relates to a number of reports of problems with the company’s ‘Model 3’, upon which it many of its hopes hinge; the sentiment is that with outdated manufacturing processes, the company cannot reach its projected targets. In addition, analysts have raised the question as to why Musk has to be so heavily incentivised to remain with Tesla, on the basis that he is already well invested. Yet, there are views that support the deal, and they potentially make a lot of sense.

It is clear that this deal is an absolute win-win for the parties involved; if Musk reaches the targets set, the shareholders will certainly not begrudge paying $55 billion, and if he does not, then they do not have to pay. Furthermore, opinion offered today suggests that the deal represents the realisation that Musk is, essentially, a brand that Tesla is buying into which, when we consider the rapid elevation of Musk is hard to counter. Also, Musk is having successes with his SpaceX company, with successful launches and landings, and the company acquiring more and more contracts ahead of its competition (relatively speaking); the argument being put forward is that this pay deal incentives Musk to provide more attention to Tesla, rather than SpaceX. There are, indeed, a number of benefits to this deal, but there is one potential issue that may result from this deal, and that is contagion.

It is fully acknowledged here that the chances of Musk ever achieving these milestones is extraordinarily small; the deal almost presupposes that the market will move fundamentally towards electric vehicles (which it inherently will), but that Tesla will be at the forefront; we know here in Financial Regulation Matters that far more established car manufacturers are, themselves, making concerted moves into the electric car market, and recent news from China suggests that the entire Chinese market is rapidly moving towards that particular marketplace. However, whilst the chances of Musk achieving the particular milestones are low, the sentiment that the deal produces are potentially worrying. It is no way a certainty, but there is a very slight potential that other large firms will figure that they should also incentivise their Executives in such a manner; Tesla’s shareholders have produced a deal where they fundamentally cannot lose, and it is not beyond the realm of possibility that other shareholder groups will come to the same conclusion. Whilst the situation at Tesla is rather unique, as is Elon Musk, it is very important that this news does not become somewhat of a benchmark; it is unlikely, but what happens if it does? Whilst such remarkable pay deals are unlikely to have a massive societal effect at Tesla, could the same be said for Goldman Sachs and the other massive banking companies? The push to meet targets in that particular sector has proven to be a recipe for disaster, and something that regulation is seeking to curb – today’s news goes against that sentiment. Yes it is a far-fetched possibility that Musk will reach the goals and that other companies will follow suit, but the point still stands that making today’s deal a bench-mark will be a particularly regressive step.


Keywords – Elon Musk, Tesla, SpaceX, Executive Pay, Investment, Shareholders, Business, @finregmatters

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