Tesla investors are lobbying to scrap the largest compensation plan in history.
A group that includes New York City pension funds filed a notice Monday urging others to vote against Tesla CEO Elon Musk’s $46 billion stock option package at the company’s shareholder meeting on June 13. New York City Comptroller Brad Lander, who serves as investment adviser to the city fund with assets of $260 billion, is leading the charge.
According to the letter he signed, the Tesla board is “overly committed” to Musk and didn’t bother to intervene when Musk ignored Tesla in favor of his roles at the Boring Company, Neuralink, SpaceX, X and other companies to concentrate. Investors complained that Musk divided his time between companies by focusing on one company per day. “The board still needs to ensure Tesla has a full-time CEO,” investors said.
Meanwhile, he is depriving Tesla of important talent. “More recently, Musk has begun poaching top engineers from Tesla’s AI and autonomy team for his new company xAI, including Ethan Knight, who was head of computer vision at Tesla,” the investor letter said.
The announcement has the makings of a showdown next month between some of Tesla’s pension fund investors who believe they are paying too much for a part-time CEO and the electric vehicle maker’s base of individual retail investors who see Musk as a visionary leader who must stick around Tesla at any price. At stake is a shareholder vote to ratify Musk’s pay plan, now worth about $46 billion after it was overturned by a judge in January. Tesla proposed the compensation plan a second time in the spring and supported the proposal.
Musk has rallied support from the retail base with tweets thanking him for voting and Tesla’s own ads promoting a vote in favor of Musk’s pay plan. Since April 29, Tesla has notified investors 11 times that Musk tweeted about the meeting or that it updated its website dedicated to the vote, titled “Protecting Your Investment and Tesla’s Future.”
According to the dissident investors, which include Amalgamated Bank, AcademicPension and SOC Investment Group, Musk poses a material risk to stock value because he has pledged part of his 20 percent stake in Tesla as collateral for loans. “If Musk were ever forced to sell his pledged shares, it could result in a massive decline in the stock price to the detriment of shareholders,” the investor letter said.
In addition, the board’s reluctance means that Musk is treating Tesla “as a cash register” for himself and his other companies, the investors argue. Musk admitted to blaming Tesla engineers for troubleshooting problems. These “distractions” have played a significant role in Tesla’s underperformance compared to the S&P 500, General Motors and Ford, investors said.
However, the Tesla board sees it differently. The website Tesla set up to support its vote on salary negotiations includes voting instructions and other information about the shareholder meeting, including a video with Independent Chief Executive Officer Robyn Denholm. In it, Denholm said Musk’s compensation plan was set up a decade ago with goals that were “so far-fetched and so extraordinarily ambitious that skeptics found them laughably impossible.”
“If he failed, Elon was entitled to receive no salary, no cash bonuses and no equity,” Denholm said. “But if Elon could do it, you and all other shareholders would benefit. The award worked.” In half the time, Musk grew revenue from $11.8 billion to $96.8 billion and turned profitability around from $2.2 billion in the red to a profit of 15 Billion dollars, said Denholm.
In fact, one of the main reasons the vote to ratify Musk’s moonshot pay plan in 2018 was successful was that the stakes were significantly different than those of other CEOs. The Tesla board was willing to pay Musk $0 if he didn’t meet targets, rather than using the so-called “board discretion principle,” in which company boards still pay CEOs who didn’t meet financial targets.
Boards often tell investors that they do not want to hold CEOs or executives responsible for economic headwinds or other factors beyond their control that have caused them to fail to meet their established financial goals or objectives. However, boards must balance the need for discretion with the need to retain executives and CEOs in their positions. Only in extreme cases would a CEO take home no compensation for a long-term bonus—in addition to no salary, cash bonus, or time-based stock—because the risk of losing the executive and destabilizing the company would be too high.
What makes Musk’s pay plan complicated is that investors are likely anticipating problems for Tesla, while the board seems focused on paying Musk for the goals he has achieved in the past. Moreover, the size of his salary and the fact that Tesla’s performance has slipped this year have added to the complexity. The company announced it would lay off 10% of its employees and even cut its summer internship program, while simultaneously devoting resources to getting Musk’s moon landing back on track. Musk himself famously ignores the norms most CEOs of publicly traded companies adhere to, and appears to act – and tweet – impulsively and without consulting the independent directors on the board, which hardly reassures investors.
In addition to ratifying its pay plan, Tesla is seeking investors’ approval to move from its Delaware office to Texas, a change apparently motivated by the Delaware judge’s ruling on Musk’s salary. According to the voting website: “The Delaware court has shown that it will ignore the will of our shareholders. We believe in the rights of shareholders. We believe the courts in Texas will respect these rights.”
In addition to calling on other investors to vote against Musk’s salary, the dissident group is also urging shareholders not to support Musk’s brother Kimbal Musk and former 21st Century Fox CEO James Murdoch. Kimbal has been on the board for 20 years and Murdoch is Musk’s friend. Neither is truly independent, investors said.