Elon Musk is the World’s Richest Person, and His Compensation Plan is Just Getting Started
Updated: Jul 27, 2022
Earlier this month Elon Musk became the world’s richest person as Tesla stock continued to rise, hitting a record $884 per share. His spot at the number one position on the list wasn’t very long lived, as Jeff Bezos, CEO of Amazon, overtook him after a slight drop in Tesla’s share price.
Since the overall wealth of both Bezos and Musk is tied to the share price of their respective companies, it’s likely that they will trade places on the list numerous times as prices move and their wealth fluctuates in the $180–190 billion range.
Regardless of whether Elon Musk holds the title of the world’s richest person (or is a close second), it’s worth exploring how he reached this lofty position.
Most of Musk’s net worth comes from Tesla stock, of which he owns about 20% of shares outstanding, with a value around $170 billion. In early 2018, Tesla announced Musk’s new compensation plan, which granted him up to an estimated $55 billion in stock options that vest upon achieving the company’s market capitalization, revenue, and EBITDA milestone goals.
Each vesting tranche, equal to approximately 1% of the company’s shares, will be awarded to Mr. Musk if milestone goals are met; the table on the right shows the market cap goals.
At the time of the grant, Tesla’s market cap was roughly $59 billion, and the vesting tranches required a minimum of $100 billion in market cap for the initial portion to vest, so the company value would need to nearly double for any payout to occur.
There are a total of 12 vesting tranches, and subsequent tranches require a $50 billion increase to market cap beyond the initial $100 billion goal. Since the goals use an all-or-nothing approach, when the grant was announced, Musk said: “If all that happens over the next 10 years is that Tesla’s value grows by 80 or 90 percent, then my amount of compensation would be zero.”
Given the staggering increase in share price required to unlock the vesting tranches, it seemed unlikely at the time of the grant that most of the market cap targets would be reached.
However, Tesla’s stock price has increased at an incredible rate, rising roughly 700% in 2020 alone. As of January 12, 2021, Tesla’s market cap is roughly $812 billion. This far exceeds even the loftiest targets outlined in Elon Musk’s compensation plan, which stopped at $650 billion.
The stock price for the past five years is shown below:
Source: Yahoo Finance January 12, 2021
Currently, all market cap goals have been met, but each requires that the market cap
be sustained for a six-month period.
If Tesla’s share price stays near its current level, Mr. Musk has already received a stunning amount of compensation and appears likely to vest in additional stock option tranches, but his compensation plan is still much more friendly to Tesla’s shareholders than typical executive compensation arrangements.
This is due to the fact that Elon Musk does not receive cash compensation as Tesla’s CEO. The company paid him a salary that met the requirements of California minimum wage law, but he never cashed the checks, and subsequently requested that the company stop accruing for his base salary.
In addition, he does not receive any short-term incentive payments in the form of an annual bonus. His compensation is thus entirely in Tesla stock, and the only way for him to receive the stock options granted to him is for the company’s performance level to meet challenging goals.
In essence, Tesla’s shareholders pay nothing to Elon Musk for the services he provides as the CEO, unless he (and the company) perform extraordinarily well. Is there a disparity between CEO pay and company performance? When the chairman of Tesla’s compensation committee, Ira Ehrenpreis, was asked about the pay arrangement, he stated, “It’s heads you win, tails you don’t lose,” referring to the alignment of Musk’s compensation with shareholder interests.
After news broke that Elon Musk was the richest person in the world (at least for a while), he tweeted, “How strange,” and later tweeted, “Well, back to work…” As for what he may do with all of his wealth, Musk has expressed an interest in people someday being able to live on Mars, and has said, “That obviously requires a certain amount of capital.”
- Joe Kager, Managing Consultant at The POE Group. Joe is a Certified Compensation Professional with over twenty-five years of experience in compensation and human resources. Call him at 813-546-8628, or email him directly at firstname.lastname@example.org