Musk's compensation plan vote imminent, Tesla, Inc. (TSLA.US) enters high-risk moment

With Tesla, Inc. (TSLA.US) board of directors putting all their chips on Elon Musk, investors are about to decide whether to support the company's biggest gamble ever. Tesla, Inc. will hold its annual shareholder meeting on November 6th. At that time, shareholders will vote on the board's proposal, either supporting giving Musk a potential $1 trillion compensation package or risking his possible departure which could lead to a significant drop in the company's stock price. Some experts say that this decision essentially amounts to a referendum on whether traditional corporate governance rules are applicable to the world's richest man. Vote on Musk's sky-high compensation package imminent! Strong divisions among parties The compensation plan proposed by Tesla, Inc. in September shows that if Musk achieves a series of performance targets, he could receive a stock reward of up to $1 trillion. These targets include: Tesla, Inc. reaching a $8.5 trillion market value, selling 12 million cars, delivering 1 million humanoid Siasun Robot & Automation, deploying 1 million self-driving robotaxis (Robotaxi), and increasing adjusted profits from $16.6 billion in 2024 to $400 billion. If approved, this would be the largest compensation package in corporate history. Additionally, if this compensation package is approved, Musk's stake in Tesla, Inc. would increase from 13% to nearly 29%, giving him greater control. If Musk achieves all the performance targets outlined in the compensation plan within ten years, Tesla, Inc.'s market value would rise to $8.5 trillion, and Musk would own about a quarter of that. This reward would far surpass any other CEO's compensation. And even if Musk misses most of the targets, he could still receive a record-breaking compensation in the hundreds of billions of dollars. The Tesla, Inc. board is trying to ensure Musk's long-term leadership of the company through terms like stock vesting periods. Krishna Palepu, a Harvard Business School professor focusing on corporate governance, stated that the plan links Musk's compensation to the significant growth in the stock value and requires him to hold the received stock for five years, which is in shareholders' interests. He added that Musk has a track record of achieving extraordinary stock price growth, and he would only receive the maximum compensation if he does so again, "the numbers are huge because the goals are huge." However, many investors are not concerned about these staggering amounts. Nancy Tengler, CEO and Chief Investment Officer of Laffer Tengler Investments, a Tesla, Inc. investor, stated, "If Tesla, Inc.'s stock price can increase sixfold as required in the compensation package, then I'll make a lot of money too. If he can achieve transformation and vision, why should I care how much he earns?" Tesla, Inc. Chairman Robyn Denholm also warned shareholders in a letter at the end of October that if Musk's $1 trillion compensation package is not approved, the CEO may leave Tesla, Inc. Denholm pointed out that as Tesla, Inc. strives to become a leader in global artificial intelligence (AI) and autonomous driving technology, Musk's role is crucial. She added that Musk's leadership is "critical" to Tesla, Inc.'s success and warned that without a plan that effectively motivates Musk, the company could lose his "time, talent, and vision." During negotiations, Musk informed board members that he may prioritize his other numerous ventures, including SpaceX, an AI startup called xAI, and a brain-machine interface company called Neuralink, if an agreement is not reached. However, this compensation proposal has faced criticism from proxy advisory firms like ISS. ISS is urging investors to vote against the proposal, citing its excessive scale and lack of effective constraints. Norway's sovereign wealth fund, which is Tesla, Inc.'s ninth-largest shareholder, voted against the compensation plan earlier this week. The fund stated on its official website, "While we recognize that Musk has created significant value for the company with his vision and insight, we are concerned about the overall size of this award plan, the dilution effect, and the lack of key person risk mitigations." Other major shareholders and executive compensation experts have warned that this compensation plan poses a significant risk to investors. They argue that this plan blatantly violates corporate governance principles, not just because of its massive scale, but also because the board is so clearly placing Tesla, Inc.'s future in the hands of one leader, who has multiple conflicts of interest and may consolidate his unchecked power within the company. They believe that responsible governance requires the board to always remain open and be prepared to find the best CEO candidates in a competitive market. Charles Elson, the founding director of the Weinberg Center for Corporate Governance at the University of Delaware, bluntly stated that the Tesla, Inc. board is being held hostage by a "superstar CEO." However, there are also many supporters. ARK Invest, led by Cathie Wood, considers Musk the "most efficient person on Earth" and crucial for Tesla, Inc.'s future as a "AI giant." The Florida State Board of Administration and Baron Capital also share this view, and well-known Tesla, Inc. bulls like Dan Ives are also rooting for Musk. Michael Dell, Chairman and CEO of Dell Technologies, Inc. Class C, wrote on Twitter, "Only when he achieves extremely ambitious market value and operational milestones will he receive this compensation. If he succeeds, shareholders will benefit enormously from unprecedented value creation, and he will gain even more voting power to continue driving Tesla, Inc.'s long-term vision." Chips on the table with bold promises Musk's influence over the Tesla, Inc. board of directors and shareholders primarily stems from the fact that the company's current stock market value far exceeds the financial fundamentals of its faltering electric vehicle business. Instead, Tesla, Inc.'s $1.5 trillion market value is almost entirely dependent on Musk's long-standing commitment that the company will lead the future of autonomous driving cars and humanoid Siasun Robot & Automation. Some corporate governance experts suggest that the threat of Musk leaving Tesla, Inc., which could lead to a collapse in the company's stock price, gives him significant power to make unprecedented compensation demands. Tesla, Inc. board chairman Denholm hinted at this in a letter to shareholders at the end of October, saying, "Without Elon, Tesla, Inc. could lose significant value as our company may not be valued for the goals we are pursuing." David Larcker, the director of the Corporate Governance Research Initiative at the Stanford Graduate School of Business, stated that from a purely economic standpoint, it is understandable for the Tesla, Inc. board to take a stance in favor of keeping Musk. He said, "If you think Elon might leave and the stock price could collapse, you certainly don't want that to happen on your watch." Gautam Mukunda, a lecturer at the Yale School of Management, expressed that if Musk achieves the board's performance targets, he already holds enough Tesla, Inc. shares to become the first trillionaire in the world, and he doesn't almost need the company to provide a "second trillion" as an incentive. He opined that the board should not be intimidated by the leaving threat of "the person who would lose the most if Tesla, Inc.'s stock price drops its largest shareholder." Gautam Mukunda said, "This is a person holding a gun to his own head and saying 'give me a trillion dollars.' When CEOs make demands like this to them, the board's duty is not to just agree with it like bobbleheads." Musk holds the voting power Musk holds a potentially decisive tool in Thursday's vote his own 15% stake. When Tesla, Inc. was registered in Delaware, Musk did not exercise his voting rights in previous compensation package votes. However, the Tesla, Inc. board stated in the current compensation proposal that, under Texas law after their re-registration, the CEO could do so. Furthermore, about 40% of the company's shares are held by retail investors who have been loyal to him over the years, while the remaining 45% is owned by institutional investors such as Vanguard Group, BlackRock, Inc., and State Street Corporation. This ownership structure should be sufficient to secure approval at the shareholder meeting, where other matters will also be decided, such as strategic investments in Musk's AI company xAI. It is worth noting that Musk's 2018 compensation plan is still facing legal challenges, with the Delaware Supreme Court reviewing it. The 2018 compensation plan was rejected by a Delaware judge due to shareholder lawsuits. The judge described Musk's 2018 compensation plan initially valued at $56 billion and now worth $128 billion as an "astronomical number" that resulted from negotiations with directors who had conflicts of interest due to their close ties to Musk and their excessive compensation. Tesla, Inc. has filed an appeal and agreed to grant Musk currently valued at $40 billion in stocks as a first step to fulfill the 2018 compensation plan. If the Delaware Supreme Court reinstates the 2018 compensation plan, this award will be revoked. Meanwhile, a clause passed in May makes it harder for shareholders to file lawsuits under Texas law. This clause allows the company to demand that investors holding a total of 3% of shares to sue directors or executives, and Tesla, Inc. has done so. For the Tesla, Inc. board, the bigger threat comes from Musk himself his threat to leave the company. Charles Whitehead, a professor of corporate law at Cornell University, said the Tesla, Inc. board is facing a "classic hostage situation." He stated that a key issue the board hasn't resolved is, "who is the backup candidate to replace him if this CEO were to leave, or hopefully not if something were to happen to him."