A Trillion-Dollar Incentive: Elon Musk's New Tesla Pay Package

Photo by Mariia Shalabaieva on Unsplash

The Compensation Plan 

Earlier this month, Tesla shareholders approved a new compensation plan for CEO Elon Musk that could make him the world’s first trillionaire. The package, worth up to a trillion dollars, demonstrates Tesla’s lofty goals for the near future. However, like many executive pay packages in the tech world, the headline figure does not tell the whole story. Compensation plans often hinge on the share price and the executive’s ability to lead the company to achieve specific growth objectives. 

  The package is broken up into 12 equal tranches of 35.3 million shares of performance-based restricted Tesla stock. Starting from a $2 trillion market capitalization for Tesla, Musk will receive one tranche of stock for each of the next nine $500-billion increases and each of the subsequent two $1-trillion increases in market capitalization, reaching a target market capitalization of $8.5 trillion. In addition, the compensation plan includes a number of operational goals, including 20 million vehicle deliveries, 10 million active subscriptions for full self-driving, 1 million Optimus robot deliveries, and 1 million commercially deployed Robotaxis. Undoubtedly, if Tesla were to achieve these ambitious goals, shareholders would benefit tremendously from considerable long-term value creation. Still, the plan has drawn criticism regarding performance-based output and board independence. 

Aligning Incentives 

From an economic perspective, a massive performance-based equity award seeks to align Musk’s compensation with Tesla’s long-term growth objectives. Because Elon Musk is a CEO with dominant ownership and a personal brand that is largely tied to the company, these incentives may help retain Musk’s commitment to Tesla. In other words, the plan attempts to draw Musk’s attention away from his other ventures and focus on Tesla. 

But $1 trillion is a hefty price to pay for the CEO’s undivided attention, especially when he’s already the richest person on Earth. If the goal is to motivate Musk, offering to pay him more may only have a marginal effect. In addition, disproportionately paying the CEO relative to other officers could create internal cultural issues, something Tesla has struggled with in the past.   Moreover, the enormous size of the plan may distort Tesla's priorities by causing it to focus on market-cap growth and stock price at the expense of other important metrics. For example, shareholders recently voted against measures that would integrate sustainability metrics into executive compensation and require child labor audits. Even if Tesla channels all its energy into raising its share price, the sheer scale of the package could draw more skepticism from investors who are wary of a compensation package worth 10 times more than the salaries of every Fortune 500 CEO combined. 

New Precedent 

This isn’t the first time Musk’s compensation has garnered criticism. Last year, the Delaware Court of Chancery invalidated Musk’s 2018 compensation plan, which would have paid him roughly $55 billion. The Court noted concerns that the board was beholden to Musk and that shareholders were not fully informed of the compensation plan. However, the new compensation plan promises to consolidate Musk’s power more than the 2018 proposal by granting Musk restricted stock instead of stock options, giving him voting rights that would not have been attached under the 2018 plan. How can a compensation plan giving Musk even more control proceed? 

Traditionally, corporations like Tesla incorporate in Delaware due to perceptions that Delaware law granted corporations the widest latitude in corporate governance. For example, the Business Judgment Rule (BJR) dictates that courts will defer to a board’s discretion regarding a questionable business decision if the directors made the decision in good faith and with no conflicts of interest. This principle, and many other core tenets of Delaware corporate law, rely on independent boards of directors that have a fiduciary duty to act in the best interests of the corporation and shareholders when conflicts between officers and shareholders arise. In transactions involving controlling shareholders or executives (as is often the case with founder-CEOs), independent directors are required to review and approve the transaction so it can survive entire-fairness standard scrutiny by a reviewing court. In short, maintaining independence or at least an appearance of independence among directors grants a corporation credibility when making consequential decisions that will affect shareholder value. 

Thus, the Delaware Court struck down Tesla’s 2018 compensation plan because the board did not make a good-faith decision that would benefit shareholders when it agreed to compensate Musk $55 billion. Put another way, the Court intervened to preserve public trust in Tesla. 

Following the Court’s intervention in the 2018 compensation plan, Musk publicly voiced concerns about the Chancery Court’s integrity, calling the Court’s chief judge an “activist” and stating, “Never incorporate your company in the state of Delaware ”. In 2024, Tesla reincorporated in Texas, signalling it believed that Texas offered a more favorable corporate governance regime. This, in part, precipitated a trend of corporations incorporating in states like Texas and Nevada, which are rapidly developing business courts to rival Delaware. In Texas, Senate Bill 29, Senate Bill 1057, and Senate Bill 241 have comprehensively changed the Texas Business Organizations Code. Notably, Texas codified the BJR, giving corporations even more freedom to resolve major decision issues internally. In addition, companies domiciled in Texas may now adopt a 3% ownership threshold for derivative suits, shrinking the pool of potential plaintiffs.

Recent changes to state business law have not only attracted companies like Tesla, but they have also emboldened companies to test the boundaries of corporate law norms. Musk’s latest compensation plan is an illustrative example of how corporate law is shifting away from director independence and allowing founder-CEOs to exert more control over their companies. Whether this shift reflects healthy regulatory competition or a race to the bottom depends on one’s view of how power should be distributed within a company. Regardless, corporate governance is entering a period of experimentation, the long-term consequences of which remain to be seen. As more firms consider following Tesla’s lead, courts, investors, and lawmakers will soon confront this new paradigm.

*The views expressed in this article do not represent the views of Santa Clara University.