Why Tesla just threw US$1 trillion at Elon Musk

Tesla and SpaceX chief executive officer Elon Musk listens to a question as he speaks at the SATELLITE Conference and Exhibition in Washington, March 9, 2020. (AP Photo/Susan Walsh, File)

What do you give a man who already can buy anything? How about US$1 trillion?

That’s what the Tesla board of directors have decided to offer CEO Elon Musk. They unveiled a new pay package Friday for shareholders to consider that could give Musk up to 423.7 million additional shares of Tesla stock in the next decade.

Those potential shares might “only” be worth $148.7 billion as of Friday’s closing price. But if Tesla shares appreciate as much as the pay package forecasts, they would be worth close to $1 trillion once Tesla hits certain milestones: He gets all of those shares only if Tesla becomes worth $8.5 trillion, about eight times as much as it is today, and twice as much as any company on the planet has ever been worth.

The company’s board says in its filing to shareholders that it needs to offer Musk a historic pay package or risk losing the leader who has become synonymous – for better or worse – with the Tesla brand.

The board said that during the negotiations on the pay package, “Musk also raised the possibility that he may pursue other interests that may afford him greater influence if he did not receive such assurances.”

The board said it “believes that Mr. Musk singularly possesses the leadership characteristics necessary to transform Tesla and realize its long-term mission at an unparalleled level.”

But it’s also been clear that the company was not pleased that Musk has been viewing his Tesla gig as a part-time job. He has focused much of his attention on some of his other privately held companies, such rocket company SpaceX and its satellite internet offering Starlink and his artificial intelligence firm xAI, which now owns his platform X, formerly known as Twitter, which Musk bought for $44 billion of his own money in 2022. And Musk has become more involved in politics, including plans to start a third party.

Earlier this year, when Musk was still leading the Department of Government Efficiency, or DOGE, the board began a search for a possible successor for Musk, according to the Wall Street Journal. Both board chair Robyn Denholm and Musk denied the report. Soon after the reported search began, Musk announced he would be leaving DOGE to spend most of his time again running Tesla.

“The simple message the board is sending to Elon: ‘We want your attention on Tesla,’” wrote Gene Munster, managing partner at Deepwater Asset Management in a note Friday. “Implicit in that message is the promise that he’ll have the control he’s been seeking (a 25% stake) and that it will be worth his time.”

Musk demands control

Musk has made clear control of Tesla is vitally important to him. He said in a post on X in January 2024 that he needs to control at least 25 per cent of Tesla shares.

“I am uncomfortable growing Tesla to be a leader in AI & robotics without having ~25% voting control. Enough to be influential, but not so much that I can’t be overturned,” Musk wrote in a post on X. “Unless that is the case, I would prefer to build products outside of Tesla.”

That need for control is what’s behind this pay package, said Ross Gerber, CEO of Gerber Kawasaki, an investment firm and one of the early investors in Tesla.

“This is all about Musk being scared about being kicked out of Tesla because he only owns 13 per cent,” said Gerber, who has sold almost his entire stake in Tesla.

Munster and other Tesla bulls believe he’s right that AI, autonomous vehicles, robotaxis and humanoid robots are the future that will lift Tesla to the $8.5 billion target price, and adjusted operating profits of $400 billion that would be 20 times greater than Tesla’s previous record profit.

“We are still just scratching the surface of physical AI: current use cases are almost comical, limited to nascent robotaxi trials by Waymo and Tesla,” Munster wrote Friday. “Eventually, physical AI will impact anything that moves, representing a market potential that’s hard for me to fathom.”

Ambitious targets

But critics of Musk and Tesla predict that Musk will fail to deliver on that potential, just as he failed to meet many previous target dates for the company to produce full self-driving vehicles and robotaxis. They say that Musk’s real value to Tesla is his ability to convince Wall Street of the bright future that lays ahead, despite a trail of broken promises.

“Elon Musk has been saying since 2014 ‘we will have a fully autonomous car next year.’ It hasn’t happened, but that promise has been valued in the billions by Wall Street,” said analyst Gordon Johnson, one of the harsher critics of Tesla. “Elon Musk is a master manipulator. He’s been able to keep the stock elevated. The reason the board is paying him is he’s willing to say things that other CEOs aren’t willing to say or get away with.”

Despite that track record, there’s a good chance that Tesla investors will approve the potentially massive pay package. They have regularly approved his pay packages in the past, even reconfirming a pay package in 2024 that a Delaware judge had thrown out as being unfair to shareholders and the company.

They will see that Musk won’t get anything from this new package unless the company, and their own holdings, greatly increase in value. The first target that Musk and Tesla will have to hit before he sees any shares will be $2 trillion, or nearly twice its current value.

“They’ll think ‘I kind of having nothing to lose,’” Gerber said. He said their thinking will be along the lines of: “The goals are so high that if he makes them, I’ll make a lot of money. So who cares if he gets $1 trillion.”

“But if you actually think about it, it’s absurd,” he said.

Chris Isidore, CNN