Paying Elon Musk $1 Trillion – Making a Difficult Decision

The Tesla board of directors, with majority shareholder support, approved a compensation package for Elon Musk worth $1 Trillion. If you served on the board, what steps would you have taken to make the decision, and how would you have voted?  

Without question, Elon Musk is a historic figure who has transformed several major industries through his creative vision of where technology is going and the power of his personal leadership. He threatened to resign if the Tesla board did not approve a $1 Trillion compensation package. The board could have voted to approve the $1 Trillion or could have decided to take Tesla forward without Musk.

In my book, Create the Future, I outline the five essential decision-making steps each of us as leaders – including boards – should use when making difficult decisions.

1. What is the opportunity?
2. What would success look like?
3. Create realistic options for achieving success.
4. Evaluate the execution barriers?
5. Choose the options best matching your goals, risk preferences, and values.

I don’t know Tesla board’s decision-making process, and I don’t know why they approved the compensation package. But the decision-making challenge they faced is a good example of the tough decisions you must make for your company or any organization. I will take you through the decision-making steps the Tesla board should have used as an example you can use when faced with difficult decisions for where to take your company.

Decision Making – Board Decisions and Individual Decisions  

Boards and Executive Committees make decisions differently than does an individual – a company owner, CEO, division director, or team leader. I will hold off on the differences for another time, but the overall decision-making process remains the same. The special responsibilities of the board of directors and its members must be considered as we put ourselves in the Tesla board’s shoes.

The board has a fiduciary duty to represent and act in the interests of the company’s shareholders. When deciding whether to approve Musk’s compensation proposal, the board must exercise its fiduciary duties and make a careful assessment of the proposal’s economic justification and its alignment with shareholder interests. While Musk has undeniably generated enormous value for Tesla and its investors, the scale of this proposed compensation raises profound issues about proportionality, precedent, and corporate responsibility.

Warren Buffett said that hiring and firing the CEO is the board’s most important responsibility. Picking the CEO is step one. Configuring a compensation package that keep’s the CEO engaged while being realistic for the company is step two. Let’s go through the steps the Tesla board should have used when considering whether to award Elon Musk an incentive package that engages his creativity and force-of-nature leadership.

What Is the Opportunity?  

Tesla is one of the world’s most valuable companies. Under Musk’s leadership, Tesla transformed the automotive and energy generation and storage industries. Robotics and AI are major growth areas for the company. The opportunity before the Tesla board is the possibility that shareholders could get a huge increase in share value if Musk stays engaged with the company.

An alternative opportunity is for Tesla to move to new leadership without Musk and a more traditional corporate growth plan. Many would view this option as a desirable, lower risk path forward for Tesla.

What Would Success Look Like  

Tesla manufactures cars, but the market does not see Tesla as a “car manufacturer.” General Motors has revenue of $190 Billion and a market value of about $65 Billion. Apple has revenues of $416 Billion and a market value of $4 Trillion. Tesla’s revenues are $28 Billion and its valuation is $1.5 Trillion. The market valuation would have to reach $8.5 Trillion within 10 years for Musk to achieve the $1 Trillion compensation – not as cash but as stock in the company. To reach the market valuation target, Tesla’s total value would have to grow 19% each year for ten years.

The compensation proposal before the board segmented Musk’s compensation into 12 chunks, each linked to separate milestones, including EBITDA, cars delivered, robots sold, etc. All 12 goals must be met within ten years for the new shares award to total $1 Trillion. He will not be allowed to sell the new shares for additional years while they vest.

Create Realistic Options for Achieving Success  

The board could say, “Thank you, Mr. Musk. You have done a terrific job getting Tesla to where it is today. We will take it from here.” That is what Apple’s board did in 1985 when it fired Steve Jobs and brought in John Sculley, President of PepsiCo, to “manage” the company’s growth. Apple muddled for several years before Jobs returned to the company and re-launched its growth.

Usually, the board will hire an outside consultant to help them design a compensation package that is motivating to the CEO and within industry norms. I have listened to numerous CEO compensation consultants present surveys of comparable CEO compensation in the company’s industry, and hear the board say that they could not give their CEO a “below average” salary package. CEO salary escalation has been the inevitable result.

Elon Musk receives no, zero, salary from his job as CEO of Tesla.  His compensation in shares is completely incentive performance based. In 2018, Tesla’s board approved a compensation packaged linked to aggressive performance milestones potentially worth $55 Billion. Tesla reached those targets and activist shareholders sued to block the stock awards as being excessive.

I assume Musk designed the compensation proposal. It reflects his vision for where the company could go and how Tesla should compensate him if the ambitious goals are achieved. If the board approves the compensation proposal, Musk will accept it. If the board puts a standard CEO compensation proposal on the table, he will not accept it. There is only one option on the table for keeping Musk on as CEO.

Evaluate the Execution Barriers  

The two realistic options before the board are: accept an aggressive performance plan with a big stock payout for Musk, or move to new leadership for the company.

Stick with Musk  

At one level, there is no financial risk to accepting Musk’s compensation proposal. He gets nothing if the milestones are not achieved. From the board’s perspective, the question of paying Elon Musk $1 trillion is not simply a performance and compensation issue. Many inside and outside Tesla will ask about the board’s governance and stewardship responsibilities. While Musk’s contributions to technology, energy, and space exploration are unparalleled, no normal corporate framework can justify compensating a CEO at that level. The risks to Tesla’s corporate reputation and the board’s governance integrity are real.

Move to New Leadership  

Hiring new leadership to take the company from a foundation and early growth stage to a managed growth stage is normal and expected. If Tesla’s future is growing its core business units, Musk is not the right leader and bringing on a traditional CEO with skills to do that work would be the right choice for the board.

Musk is challenging the board to see Tesla as a cutting-edge technology company that will create huge new value from AI and robotics and not simply a car company. To accept Musk’s compensation proposal, the board must also accept Musk’s vision for the company and where it could go.

Choose the Option Best Matching Your Goals, Risk Preferences, and Values  

The board could simply say, “Why not?” If the targets are not achieved, Musk gets nothing. If the targets are achieved, Tesla becomes a much more valuable company and shareholders are well rewarded.

Start by defining the decisions the board must make.

• Do we agree with Musk’s vision of Tesla’s future potential?
• Do we want to keep Elon Musk on as CEO?
• Do we believe the proposed compensation package will motivate Musk to stay engaged with Tesla?
• If we believe in Musk’s vision and that the compensation will keep him engaged, are we willing to accept the inevitable criticism and possible legal challenges?

I don’t know what I would do with $1 Billion. What would I do with $1 Trillion? Is $1 Trillion more motivating than $1 Billion – even if your net worth is already $500 Billion? Will the compensation proposal motivate Elon Musk to stay engaged with Tesla for ten years and drive the technology and the company to what today seems like stratospheric heights? These are questions board members asked themselves.

Musk and I are both physics grads from the University of Pennsylvania. He made $500 million, and I didn’t! A friend of mine lived with Musk in a group house on campus when they were at Penn. On Saturday night, while everyone was partying, Musk would be in his room by himself playing video games. My guess is that money does not motivate or interest Elon Musk. He probably sees money as a way of keeping score in the game he is playing.

After the board’s vote, Board Chair Robyn Denholm said, “What motivates him (Musk) is doing things that others can’t do or haven’t been able to do.”

Goals  

Start by getting clear what game you are playing. Are you in a steady growth, harvest, or moonshot game? Moving to new leadership to manage growth means you will be playing the game of “manage for shareholder expectations.” Sticking with Musk puts you in the moonshot game. You have to choose what game you want to play and choose goals appropriate for that game.

Risk Preferences  

Musk and Tesla have strong records for managing technology risks. Being in the moonshot business means failure is a real possibility. Agreeing to a compensation plan that many will see as outrageous and irresponsible is a significant reputation risk. Board members must decide where the company should be on the risk/reward scale.

Values  

What values do we want our decisions to express for the company and for ourselves as board members and leaders of our organization? Will the board say that the company is on the technology frontier with big risks and big potential rewards? Or, does the board want the company to be seen as a responsible corporation that plays within established corporate norms?

Tesla’s board asked the shareholders for a non-binding vote on whether to accept Musk’s compensation proposal. Institutional Shareholder Services, a major proxy advisor to institutional investors, recommended a No vote. Other institutional investors like Schwab voted Yes. The final shareholder vote was 75% in favor. The board then voted to accept the Musk compensation proposal. If you were on the board, how would you have voted?

My recommendation is that when you have a difficult decision to make, step back and take the time to go through these five steps. With a better understanding of your goals and options, you will make a decision that better matches your goals, risk preferences, and values.

Written by Rick Williams.