Back in 2018, in a blog post here, I wrote this about Tesla CEO’s pay package:
While I am not sure if Tesla could ever achieve all the stated performance goals – 10x market cap increase, 21x revenue increase, 15x EBITDA, all within ten years – even if Elon achieves some of these targets, we the shareholders will have plenty to rejoice!
Those were some jaw-dropping milestones to achieve. Musk would’ve got nothing in compensation had he failed to achieve the targets. The package did not provide for any cash compensation. He was getting paid California-required minimal cash salary each year from Tesla but he had never accepted it.
From Tesla DEF-14A Proxy filing:
Mr. Musk’s base salary reflects the current applicable minimum wage requirements under applicable California law, and he is subject to income taxes based on such base salary. Mr. Musk, however, has never accepted and currently does not accept his salary.
To put further light on the radical goals set by the 2018 comp package, consider this: When the package was approved, Tesla’s market cap was just $53 billion. It stayed about the same for the following two years. It was the middle of 2020 when Tesla stock started its meteoric rise and ended up in November 2021 at $1.24 trillion. Today, even though Tesla shares are down by more than 50% from the 2021 high, Tesla is still valued at $550 million—10x larger than in 2018. Since 2018, the number of vehicles produced went up by 7x. Profitability went up to $15 billion from the 2018 loss of $2.2 billion.
By any measure, Tesla, guided by its CEO, had a remarkable uber-achieving ride from 2018 to date.
The New York Times wrote this in January 2018:
If Mr. Musk were somehow to increase the value of Tesla to $650 billion — a figure many experts would contend is laughably impossible and would make Tesla one of the five largest companies in the United States, based on current valuations — his stock award could be worth as much as $55 billion [emphasis added]
He did achieve the laughably impossible. Moreover, this was not the first CEO comp plan that set bold targets for him. In 2012, Tesla board granted him a compensation plan that required 13x increase in Tesla market cap and was also 100% at-risk. From the time of the 2012 award until 2018, Tesla market cap increased from $3.2 billion to more than $50 billion. Besides the CEO, those who kept their shares benefited in equal measure.
It seems only fair to me that Mr. Musk is given his due share of Tesla’s remarkable success. In less than ten years, he achieved what could only be described as over-ambitious performance objectives. And as a result, we the long-term Tesla shareholders are so much better off today.
As for his detractors, shareholder right groups like Glass Lewis and ISS that recommend against the re-approval of the 2018 plan, well they didn’t approve the original plan back in 2018 either. And yet, more than 70% of Tesla shareholders (not including Musk’s own vote) voted to approve the plan then. I hope that the re-vote this month gets similar outcome. I’m not a big fan of these so-called shareholder advisory groups.
I am a long-term Tesla shareholder. I also drive a Tesla since 2014. I love its products. I have written about my Tesla ownership from time to time on this website. See this and this.
In 2014, I sold my Toyota Motor (TM) position and made my first Tesla share purchase. Over the following two years, I made some additional purchases. In 2018 after reviewing the new CEO comp package, I made several more incremental buys. I felt reassured that Musk planned to stay at the helm for foreseeable future.
I didn’t purchase any new shares as Tesla finally became recognized as a viable auto manufacturer and its shares began a steep rise in 2020-21 period. It was not until late 2022 when I added more shares to my portfolio. At the time, Tesla was well off its 2021 peak. See my buy/sell history in this chart:
From the time I opened my Tesla position in 2014 until when its shares hit the all-time high in November 2021, my total annual return was a whopping 89% IRR (including all subsequent buys/sells). My position went up by about 30x invested capital (MOIC).
Even today as Tesla stock is cut by half since its 2021 peak, my annual IRR is still a gravity-defying 44% and my MOIC is close to 15x.
Why I still hold on to my Tesla position? Because I continue to like its prospects. In my 2018 Tesla profile, I listed three factors for my optimism: One, it has a visionary CEO. Two, it makes outstanding products. And three, its business has optionality beyond just EV manufacturing. Those three reasons are still in play today. And I hope that a re-approval of Mr. Musk’s comp plan further incentivizes him to stay on.
Another reason I like investing in Tesla is that I like founder CEOs who are long-tenured and have substantial ownership in their businesses. Even better, if they have excellent capital allocation records. Six years ago, I shared a list of the founder-owner CEOs who I have invested with. See this table. The table is a bit dated today, as some of the listed CEOs have retired or passed away. Note Elon Musk entry in the table is still good. He’s been the CEO of Tesla for 15 years. And counting.
This week I voted all my Tesla shares to ratify the 2018 CEO package. In fact, I followed all of the Tesla board’s recommendations this year except one: I voted against re-electing Kimbal Musk to the board. Kimbal is Elon’s brother and I felt that keeping him on the company board will continue to be a distraction for the company.
I hope Elon Musk stays as CEO for another decade. I want him awarded a new compensation package for the next phase of Tesla’s growth. I also hope it will set equally bold performance targets for him. How about 10x market cap increase? From today’s valuation it would roughly amount to $5 trillion. If anyone could pull it off, it is him.
Tesla’s annual shareholder meeting is on June 13th. We’ll find out then if Mr. Musk’s 2018 pay package was re-ratified by the shareholders or not. For long-term patient investors like me, the best outcome would be a re-approval and Mr. Musk’s pledge to stay with the company.
P.S. Here are two good resources (1, 2) for Tesla shareholders to check out before they vote their shares.
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