Tesla has announced a new 10-year CEO performance award for Elon Musk that is entirely contingent on achieving market cap and operational milestones that would make Tesla one of the most valuable companies in the world.
In order to fully vest, Tesla’s market cap would have to grow to $650-billion (an increase of almost $600-billion), and important revenue and profitability goals would also have to be achieved.
The award is modelled after his 2012 performance award, which helped bring about a more than 17-fold increase in Tesla’s market cap in the five years after it was put in place.
Musk will receive no guaranteed compensation of any kind – no salary, no cash bonuses, and no equity that vests simply by the passage of time. Instead, his only compensation will be a 100% at-risk performance award, which ensures that he will be compensated only if Tesla and all of its shareholders do extraordinarily well.
Because all Tesla employees are provided equity, this also means that Elon’s compensation is tied to the success of everyone at Tesla.
The performance award consists of a 10-year grant of stock options that vests in 12 tranches. Each of the 12 tranches vests only if a pair of milestones are both met.
* Market cap milestones: To meet the first market cap milestone, Tesla’s current market cap must increase to $100-billion. For each of the remaining 11 milestones, Tesla’s market cap must continue to increase in additional $50-billion increments. Thus, for Musk to fully vest in the award, Tesla’s market cap must increase to $650-billion.
* Operational milestones: To meet the operational milestones, Tesla must meet a set of escalating Revenue and Adjusted EBITDA targets (the only adjustment to EBITDA is for stock-based compensation). These milestones are even more directly aligned with shareholder value creation than those used in Elon’s 2012 performance award. They are designed to ensure that as Tesla’s market cap grows, the company is also executing well on both a top-line and bottom-line basis.
For each of the 12 tranches that is achieved, Elon will vest in stock options that correspond to 1% of Tesla’s current total outstanding shares (1% of that amount is approximately 1.69 million shares). If none of the 12 tranches is achieved, Musk will not receive any compensation.
For vesting to occur when the milestones are met, Musk must remain as Tesla’s CEO or serve as both executive chairman and chief product officer, in each case with all leadership ultimately reporting to him.
This ensures that Musk will continue to lead Tesla’s management over the long-term while also providing the flexibility to bring in another CEO who would report to him at some point in the future.