Tesla Shareholders to Vote on Elon Musk's Pay Package

Tesla Shareholders to Vote on Musk's Massive Pay Package Amid Controversies

by Faruk Imamovic
Tesla Shareholders to Vote on Elon Musk's Pay Package
© Getty Images/Apu Gomes

Elon Musk, Tesla's CEO, is at the center of a significant shareholder vote this week, where decisions will be made about his vast compensation package and the potential relocation of Tesla’s state of incorporation.

Background of the Controversy

Five months ago, a Delaware judge annulled the largest pay package in history, originally valued at over $50 billion, which Tesla's board awarded Musk in 2018. Now, Musk and the board are requesting Tesla shareholders to reapprove these stock options and consider moving Tesla's state of incorporation from Delaware to Texas. The board has cautioned that failing to approve these measures could result in a lack of Musk’s attention, which they argue is crucial for steering the company through its current challenges.

Since its peak as a trillion-dollar company in late 2021, Tesla's stock price has more than halved. The company has also missed sales forecasts and seen its profits squeezed by a global price war for electric vehicles (EVs) that Tesla initiated.

The shareholders' decisions will be revealed on Thursday during Tesla's annual meeting, where votes on two key proposals will be announced. One proposal seeks to reapprove the package of 303 million split-adjusted stock options, now worth $46.9 billion. This is a slight decrease from the $51 billion valuation at the time of the court's decision.

In 2018, shareholders overwhelmingly supported Musk’s compensation package, with 73% voting in favor. However, Delaware Chancery Court Chancellor Kathaleen McCormick ruled in January that the board failed to demonstrate the plan's fairness, criticizing the board for being too close to Musk to adequately represent shareholders' interests.

Arguments from Tesla's Board

Musk and Tesla have responded by appealing the ruling and asking shareholders to move the company's incorporation to Texas, where Tesla’s headquarters are located. Many major companies incorporate in Delaware due to its business-friendly reputation. It was Tesla’s incorporation in Delaware that allowed McCormick to rule on the pay package’s fairness.

Despite the previous strong support for Musk’s pay package, Tesla’s board is now making vigorous efforts to secure approval in the upcoming vote. The board has submitted more than two dozen communications to the SEC, encouraging shareholders to vote in favor of the proposal. Additionally, they have created a lottery offering the winning shareholder a tour of Tesla’s Texas factory, personally conducted by Musk.

Robyn Denholm, Tesla Chair, wrote to shareholders emphasizing that retaining the pay package is crucial to keep Musk focused on Tesla amidst his numerous ventures. “This is obviously not about the money,” Denholm stated. “We all know Elon is one of the wealthiest people on the planet, and he would remain so even if Tesla were to renege on the commitment we made in 2018. Elon is not a typical executive, and Tesla is not a typical company.”

Elon Musk
Elon Musk© Getty Images/Apu Gomes

Musk's Divided Focus

However, gaining shareholder support may be more challenging now due to Musk’s increased controversies and divided focus. Since 2018, Musk’s public profile has become more contentious, particularly after his $44 billion purchase of Twitter (now rebranded as X). Musk sold $22.9 billion of his Tesla shares to help fund this purchase, which has drawn criticism. Allegations of antisemitism on the platform, along with Musk’s endorsement of antisemitic tweets, have driven away many advertisers and caused significant financial losses.

Tesla shareholders are also concerned about the company's current performance. Despite a meteoric rise in stock value from 2018 to its peak in 2021, Tesla’s stock has since lost over half its value. This year alone, the stock has dropped 30%. Tesla has had to cut prices to stimulate demand in the face of increasing competition from other automakers.

Dan Ives, a tech analyst with Wedbush Securities, believes the shareholder vote comes at a precarious time for Musk. “After Tesla went through a Cinderella ride, it’s become a horror show. There’s a group of shareholders who are frustrated. And this is a shot across the bow for them to show they’re not satisfied.”

Despite the problems and controversies surrounding Musk, many shareholders still believe his presence is vital for Tesla’s future. Musk himself has stated that he would not aim to grow Tesla into a leader in artificial intelligence and robotics without a compensation plan that would grant him ownership of around 25% of the company’s stock, roughly doubling his current stake.

Support and Opposition

Several high-profile shareholders have voiced support for Musk. Ron Baron, CEO of Baron Capital, which holds a substantial stake in Tesla, defended Musk’s compensation, emphasizing the aggressive performance metrics Musk had to meet to earn the package. “Elon’s compensation contract contained aggressive performance metrics that few in 2018 believed could be achieved. If these aggressive performance metrics had not been achieved, Elon would have received nothing,” Baron stated.

Conversely, influential advisory firms Institutional Shareholder Services (ISS) and Glass Lewis recommend voting against Musk’s compensation package. ISS labeled the award as outsized from the start, suggesting that the concerns raised in 2018 remain unresolved. McCormick, in her ruling, dismissed the argument that Musk would go uncompensated without the package, noting that his existing equity stake was already worth tens of billions.

Tesla Elon Musk