Elon Musk just hit a key milestone on his path to a $55 billion payday — here's how his elaborate Tesla compensation plan works
- The average value of Tesla's stock over the last six months hit $100 billion after Monday's market close.
- That means CEO Elon Musk could soon receive the first tier of a potentially massive payday.
- According to the company's 2018 compensation agreement with Musk, hitting this milestone will unlock stock options that could net him $700 million.
- That payout would be just the first of 12 "tranches" of stock options that could be worth billions if the company's hyper-ambitious goals are achieved in the next few years.
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That six-month run of a 12-figure market cap could be extremely important to its CEO, Elon Musk: A sustained $100 billion valuation over a six-month period unlocks the first part of Musk's massive 2018 compensation package with the company.
That agreement was valued at more than $2 billion in a company filing with the Securities and Exchange Commission, but Musk has actually realized no value from it yet, providing an excellent example of how CEO pay has become extremely complicated.
In Tesla's own stated estimate in the proxy statement laying out the plan, the total package could end up being worth as much as $55.8 billion to Musk.
The compensation agreement between Musk and Tesla is structured around 12 "tranches" of stock options, each equivalent to roughly 1% of the total number of outstanding shares at the time of the agreement. Each tranche — basically, a financial treasure chest that will be unlocked should certain conditions be met — vests and becomes available to Musk once a certain number of operational milestones and stock market capitalization goals have been achieved.
In other words, that means Tesla has to massively increase its sales and profits, while also becoming one of the most valuable corporations in the entire US stock market, in order for Musk to get paid.
The operational goals are based on the company dramatically improving sales and profits, and are tied to increasing levels of top-line revenue and bottom-line earnings before interest, taxes, and depreciation (EBITDA).
Here are those revenue and earnings milestones, per the agreement. According to the company's most recent quarterly filing with the SEC, as of March 31, 2020, Tesla had achieved the first of the revenue and EBITDA goals, meaning that two operational milestones have been achieved.
Each of the 12 tranches of stock options vests and becomes available for Musk to use when both of the above operating milestones and one of the market capitalization milestones have been achieved. Below, we walk through how the market cap milestones work, and what each tranche could be worth to Musk.
The latter milestones start at a market capitalization, or the total value of all outstanding Tesla shares combined, of $100 billion, and increase by $50 billion for each additional tranche. As mentioned earlier, that valuation needs to be maintained for six months before Musk's options vest.
So far, two of the operating goals have been met, while until this week, none of the market cap goals have been hit. That means none of the tranches have vested yet.
However, Monday's closing price put Tesla's six-month average market cap over $100 billion for the first time, meaning that Musk could soon unlock the first set of options, subject to approval of the milestone by Tesla's board.
According to Yahoo Finance, Tesla has about 180.37 million outstanding stock shares. Based on that, Tesla has a market capitalization of at least $100 billion once the stock price is above $539.46 per share, since market capitalization is just the number of shares times the per-share price. Tesla's recent bull run has kept it at a high enough level to push the average market cap over the last six months over the threshold.
Each tranche of options, once vested, entitle Musk to buy up to 1,688,670 shares of Tesla stock at a price of $350.02 per share, or the closing price at the time of the agreement. So, if Tesla's stock is trading right at the $539.46 level needed to hit a $100 billion valuation, he'd essentially net a profit of $189.44 per share, making the overall first tranche worth just shy of $320 million.
At Tesla's closing price Tuesday of $768.21 per share, the total potential value of the first tranche would be around $706 million.
Following a similar logic, here's the value of each of the 12 tranches at the stock price needed at the current number of outstanding shares to hit each market cap milestone.
It's worth noting that the above table is a very rough and simplified estimate of what Musk could make as a result of the compensation agreement. As an example of one caveat, the filing describing the agreement pointed out that the company regularly compensates other employees with stock or options, meaning that there is likely to be some dilution in the value of Musk's potential shares, with somewhat lower stock prices triggering additional market capitalization milestones as new shares are created and issued.
Still, that agreement estimates that the full package could be worth as much as $55.8 billion should all 12 tranches vest. That would vault Musk from being an already extremely wealthy person into the very top tier of billionaires.
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