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Elon Musk’s net worth (over $30 billion) is peanuts next to his incentive package at Tesla. What gives?
TESLA (TICKER: TSLA) founder and CEO Elon Musk is tantalizingly close to securing the largest executive paycheck ever. If shares of the electric automaker can go six months with average prices valuing the company at $100 billion, Musk will take in options worth $346 million.
Given the fact that even the most well-rewarded CEO in the S&P 500 “only” took home $129.4 million in 2018, this would almost certainly make Musk the highest-paid CEO in the U.S.
But in the grand scheme of things, this insane payday is nothing compared to Elon Musk’s net worth and pales in comparison to how much money Musk could make in the coming years.
The Elon Musk salary: no cash, all contingent.
In 2018, Tesla and Musk agreed to a wild, record-setting CEO pay package. Yet, for some reason, the performance plan never received much press. Which is funny, because Musk’s total compensation under the agreement, if all the milestones were eventually hit, totaled $55 billion.
Compared to numbers like that, $346 million is nothing. It’s a paltry 0.6% of the Renaissance man’s potential compensation.
Here’s how it works:
The 2018 agreement is entirely performance-based, and spans 10 years. At the time it was struck, Tesla was worth about $59 billion. Musk gets nothing unless Tesla itself does well; the first opportunity for a payday comes if Musk guides the Palo Alto, California-based automakerto a valuation of $100 billion (and maintains it for at least six months).
Even then, Tesla also needs to hit certain operational metrics, based on either revenue or adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), for Musk to collect. Then, the enigmatic CEO gets paid in the form of Tesla stock options controlling 1.7 million Tesla shares.
To get the full $50 billion-plus payday, Musk would have to guide the company to a $650 billion valuation by 2028. In the meantime, he’ll earn options for another 1.7 million shares at every $50 billion milestone in between, as long as Tesla hits increasingly demanding operational metrics along the way.
Does Elon Musk need a $50 billion incentive to guide Tesla well?
For John Engle, president of the investment firm Almington Capital, the answer is simple: no. It’s “certainly hard to find any justification” for rewards of that magnitude, Engle says, emphasizing the fact that “there’s no precedent for the kind of payout Musk has been handed by his board.”SPONSORED Speak with the Right Financial Advisor For YouFinding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with top fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is legally bound to act in your best interests. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.Engle says that you need to put things in context “to understand just how obscene Musk’s pay package is.” To do this, Engle recounts the compensation agreement for arguably the greatest CEO of all time: Steve Jobs.
“When [Steve Jobs] came back to Apple (AAPL) in 1997, the company had just posted a $1 billion annual loss. By the time he left in 2011, Apple’s annual profit was close to $26 billion. Jobs was compensated in stock, receiving 5.5 million shares over the course of his tenure, worth about $2 billion when he stepped down,” Engle says.
What’s even more mind-boggling than Elon Musk’s ability to earn 25 times what Jobs walked away with is the fact that Musk could do it without even turning Tesla profitable. [
Remember, the metrics the billionaire’s company needs to hit in order for Musk to max out his pay package have absolutely nothing to do with real, honest-to-God profits. That’s unfortunate for shareholders, since stock prices, over the long-run, tend to follow real profits.
That said, not everyone agrees profitability needs to be at the forefront of payment plans like this.
“Tesla isn’t a traditional company,” says Hatem Dhiab, a managing partner at Gerber Kawasaki Wealth and Investment Management. It has “outsize goals and aspirations and its comp structure is reflective of this.”
He adds, “All of these incentives are in line with what shareholders would want the company to accomplish for it to constitute a great investment.”
And while it’s true that a $50 billion-plus payday for Musk would require an 11-fold increase in the company’s valuation over 10 years, the fact of the matter is that Musk didn’t need a $50 billion incentive to want to make this happen.
In fact, the Silicon Valley icon already owns about 20% of Tesla’s outstanding stock today – he’s already incredibly motivated to drive share prices as high as he possibly can. He’s got $20 billion riding on it.
“If Tesla and SpaceX go bankrupt, so will I,” Musk tweeted recently. “As it should be.”