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$56 Billion
Elon Musk just got robbed out of a $56 billion payday. How you ask? Well, an activist shareholder filed a lawsuit against Musk that his compensation plan was excessive and the courts sided with the shareholder.
On the surface, it’s probably extremely difficult to sympathize with Elon. Boo hoo, Elon wasn’t able to add another $56 billion to his already towering fortune. But peeling back the layers, Elon got robbed in broad daylight.
Here’s the thing, you can argue that the compensation plan was excessive all you want, but the size of the plan is completely irrelevant in this situation because the board approved the plan way back in 2018.
Any concerns about it being excessive should have been discussed and addressed before it was approved. And if we’re being honest, the plan was quite excessive, but then why did the board approve the plan you ask? Well, they basically assumed that the plan would never come to fruition.
For Elon to unlock the full compensation package, he needed to 10X the company within a matter of years, not just in terms of stock price but fundamentals as well. This was especially hard to see happening given that Tesla was only weeks away from bankruptcy through much of 2018 when they were trying to scale Model 3 production.
So, the excessive upper limits of Elon’s comp plan were not a big concern. They just assumed, eh we can deal with that if it ever happens. And to everyone’s surprise, it actually happened. Tesla went to the moon. They went from a multi-deca billion company to a trillion-dollar company as they scaled production from hundreds of thousands to over a million. And all of a sudden, Elon was somehow eligible for a massive $56 billion payday.
Ironically, most shareholders were actually indifferent to the package or even supportive, but one man named Richard Tornetta had a different idea. And you know what the kicker is? Richard isn’t even a big Tesla shareholder.
In fact, when he started the lawsuit, he only owned a total of 9 shares. So, this lawsuit was very much a big FU to Elon Musk and other big tech CEOs as opposed to an actual concern about shareholder value.
And you know what’s even funnier, the lawyers who won this case are now demanding that they get paid $5.6 billion given that they saved the company $56 billion. So, here’s how the entire ordeal played out and why Elon Musk more than deserved this massive payday.
THE CASE FOR THE PACKAGE
Before we get into the lawsuit, let’s start with how exactly this massive pay plan was even structured because it was very much stacked against Elon. The foundation of the plan is shown in this simple diagram.
As you can see on the top left, 100% of the pay package was based on performance. Elon would receive no traditional salary, bonus, or time-based equity. In other words, if Tesla didn’t achieve any of these targets, Elon would’ve received absolutely nothing, but I don’t think that would’ve stirred up any controversy.
Anyway, going back to the plan, it consisted of 12 market cap-based tranches and 16 revenue and EBITA-based tranches. These numbers don’t really mean much without context, so let’s add some color.
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This package was approved in early 2018 at which point, Tesla was only worth $59 billion. For Elon to unlock all the market cap-based tranches, he would need to grow Tesla to a $650 billion market cap or 11X the company within 10 years.
But, as we all know, the stock market is often euphoric to the upside and downside, so the plan also came along with operational milestones. At the time, Tesla was pulling in just under $12 billion in revenue.
And for Elon to unlock all the revenue-based milestones, he would need to grow that to $175 billion. Similarly, Tesla was pulling in just $95 million in EBITA. And for Elon to unlock all the EBITA-based milestones, he would need to grow that to $14 billion.
In other words, Elon had to 11X the stock, 15X the revenue, and 21X the EBITA all within 10 years to unlock the full pay package. In retrospect, that probably doesn’t seem too crazy because it happened and hindsight is 20/20, but at the time, this seemed nearly impossible.
Everyone at the company was working over 80 hours a week just to make sure that the company didn’t go bankrupt trying to scale the Model 3. So, saying that Tesla will 10X was pretty much the same as speculating that Bitcoin will reach $500,000 by the end of 2025.
Sure, some moonbois are calling for it, but the vast majority of the population thought that it was impossible, and that’s why the board approved such a large pay package. They just didn’t think it was gonna happen which brings me to our 2nd point which is that the pay package wasn’t even that large to begin with because it wasn’t cash or stock.
The media and YouTubers, myself included, love to call the package a $56 billion payday, but that’s not what it actually was. What do I mean? Well, it’s not like Tesla had to pay Elon $56 billion from their corporate cash reserves if he met these targets.
No, what Elon was actually promised was 12% of the company if he achieved these insane performance metrics. It’s just that 12% of the company works out to an insane number at the company’s current scale. When the plan was approved though, 12% was only worth $7 billion and that was the compensation for 10 years.
So, really, Elon was only being paid $700 million per year in initial stock value. But that doesn’t tell the full story either because Elon wasn’t even paid in stock, he was paid in stock options. Stock options are basically a cheap way to make a super high-risk bet on a stock’s price movement.
If your bet is right, you can hundreds of X or even thousands of X your money, but if you’re wrong, you lose everything, and that’s calculated by this formula. And it turns out that to make the same bet that Elon made in 2018, it would’ve only cost you roughly $60 million.
Let me say that again, to experience $56 billion worth of upside, you only had to buy $60 million worth of stock options in 2018. So, really, Elon wasn’t paid $56 billion. Rather, he was given $60 million worth of Roulette bets and Elon went on to have the winning streak of a lifetime.
And given that the pay package was for 10 years, Elon was really only being paid $6 million per year, and if he didn’t achieve his targets, that would’ve gone down to $0. But if he did achieve his targets, that pay tranche would’ve been 1000xed in the process which is exactly what happened bringing us into the lawsuit.
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THE CASE AGAINST THE PACKAGE
One place I do want to give credit to Richard in The Case Against The Package Tornetta is when he filed the lawsuit. He filed the lawsuit immediately after the pay package was approved in 2018.
It just took several years to actually get a decision on the matter, so it’s not like the lawsuit was an afterthought. Richard has been consistently against the pay package since day 1 and his arguments boil down to 4 points.
#1, Tesla’s shareholders were not informed how easily Tesla would achieve these targets. This is not really a valid point simply because they weren’t easy targets.
To this day, the 2nd largest automaker, Toyota is only worth a little more than $300 billion, meaning that Elon had to over double the size of Toyota with Tesla within 10 years. I think you’d agree that that was by no means an easy target. Moving onto
#2, Richard’s lawyer argued that Elon did not need further incentives given that he already owned 411 million shares of Tesla. Unlike Richard’s first point, this point is absolutely true. People like Elon aren’t motivated by money in the first place.
They’re much more concerned about notoriety and being the one to elicit change. And Elon has on multiple occurrences said that Tesla and SpaceX are like children to him. So, it’s highly likely that things at Tesla would’ve played out the exact same whether or not Elon was given that massive pay package.
But, just because Elon didn’t need more compensation doesn’t mean that he didn’t have the right to ask for more anyway.
#3, Richard’s lawyer argued that the board did not disclose that Musk had designed the pay package himself. To be honest, I’m not really sure how this is a shocking revelation. It would be much more shocking if a founder CEO didn’t have strong input into his or her compensation package.
#4, And that brings us to Richard’s last argument which is that the board did not disclose how close Tesla’s payment committee members were to Elon. And again, I’m not really sure how this is a shocking revelation either. It would be a much bigger red flag if a founder didn’t have a good relationship with their board members.
I guess the root of what I’m trying to get at is that the real question in this lawsuit should have been whether or not Elon and the board broke any laws or procedures or didn’t disclose something when approving the pay package.
But, instead, it just became one big case of whether CEOs and founders deserve to get paid so much. And given that sentiment has largely shifted against Elon over the past few years due to his Twitter antics and political statements, it was easy to paint him as the greedy billionaire which maybe he is, but again, that’s not relevant.
But, the media decided to make it relevant. As this case was ongoing, we saw plenty of articles about increasing wealth gaps, excessive compensation, the rich getting richer, the middle class disappearing, and so on. For the record, I’m not suggesting that any of that isn’t happening.
In fact, I can easily see how you could use that as moral grounds to reject Elon’s pay package. But, moral grounds are not the same as legal grounds, and in a lawsuit, legal grounds are what actually matter.
And frankly, I think it’s quite likely that the pay package would’ve been approved even if it was disclosed that Elon created the pay plan or that he was close to the board, or that he didn’t need the money. But, what really shows that this whole case was just a bunch of baloney is how much the lawyers want as compensation.
WHAT HAPPENS NOW
As we touched on at the beginning, the lawyers What Happens Now want $5.6 billion. The irony in this is beyond belief. They’re basically looking for excessive compensation for winning a case against excessive compensation.
In fact, I would argue that what the lawyers are seeking is far more excessive than what Elon was seeking. Elon wanted $56 billion in return for creating a trillion dollars worth of shareholder value, shipping millions of cars, and single-handedly electrifying the global automotive industry.
The lawyers, on the other hand, want $5.6 billion to win a lawsuit. Yeah, I don’t think the lawyers really believed anything that they were arguing. Before, they were getting paid to argue against excessive compensation so they did.
Now, they’re getting paid to argue for excessive compensation so they are. And honestly, you can’t even blame them. They know how the game works and they’re not emotionally attached to either side. And I think that’s really the takeaway from all of this: to not get attached to either side.
Wrapping Up
Zooming out, what we’re really looking at here is whether or not a multi-centi billionaire should get another $56 billion or not. Honestly, it’s truly quite a trivial matter in the grand scheme of things.
It’s not like receiving the paycheck would’ve changed anything in Elon’s life, and it’s not like Elon not receiving the paycheck is suddenly gonna close the wealth gap or support the middle class. With that being said though, it is an extremely interesting story to follow because I mean how often do we talk about a $56 billion paycheck.
Considering Elon’s reaction to all of this, it seems that he’s gonna appeal and fight this case till the very end as he should. I mean, wouldn’t you? So, we’ll have to see how things play out, but in the meantime, that's how Elon Musk got robbed of a $56 billion payday.
