Tesla shareholders may be set to award CEO Elon Musk $46 billion in pay. Here’s why.

In the history of corporate salary packages in the US, there have been many massive changes payments is worth almost $1 billion in today’s dollars. But none come close to the $46 billion salary deal that Tesla shareholders appear to be poised to hand over to CEO Elon Musk.

The results of the shareholder vote, which ends today, will be announced on Thursday during Tesla’s annual meeting, which will be broadcast live here at 4:30 pm Eastern. But Musk has already declared victory, writing Wednesday night on its social media platform X that shareholders were voting to approve the pay package by “wide margins.”

The pay package became a lightning rod for executive pay, with some critics calling the package “excessive.” Supporters argue that such a deal is necessary to tie Musk to Tesla and ensure he doesn’t leave to start another business. Along with Tesla, the billionaire currently owns five additional companies, including X (formerly Twitter), Neurolink and SpaceX, the the latter of which he is also CEO.

With Musk trumpeting his apparent victory ahead of the final count, shareholders sent shares up 4% in Thursday morning trading, indicating that many consider the pay package essential to securing Musk’s future at the company.

“It’s a champagne-popping moment for Musk and Tesla shareholders,” noted Wedbush Securities analyst Dan Ives in a Thursday research note on the preliminary voting results. “[L]Ultimately, large shareholders knew that voting would not risk Musk eventually stepping down as CEO.

Ives said he believes Musk will likely commit to remaining CEO of Tesla for another three to five years, given the apparent approval of his pay package.

Why does the salary package need to be voted on?

The vote on Musk’s pay follows a Judicial decision in January, which overturned its previous pay deal worth nearly $56 billion earlier this year. Since then, the value has declined due to a drop in Tesla’s share price.

That package, approved in 2018 by Tesla shareholders, triggered a shareholder lawsuit that accused Musk and Tesla’s board of directors of violating their duties and unfairly enriching the billionaire. A Delaware judge ruled that Musk and his company failed to prove the huge payout was fair.

As the initial payment agreement was voided, Tesla said in April which would again take the issue to its shareholders, asking them to ratify the package again.

How much does Musk earn from Tesla?

Tesla has not paid Musk a base salary since 2019, according to the company’s regulatory filings. Instead, his compensation was paid through stock option “performance bonuses” that are based on Tesla reaching certain milestones, such as vehicle production or increasing the company’s market value.

After the pay package was nullified by the Delaware court, Tesla President Robyn Denholm he wrote to shareholders that they should re-ratify the package, as “Elon has not been paid for any of his work for Tesla over the past six years that has helped generate significant growth and shareholder value.”

Denholm described the situation as “fundamentally unfair and inconsistent with the will of the shareholders who voted in favor.”

However, Musk is hardly without financial resources: he owns almost 13% of Tesla shares, worth $73 billion. He also has stakes in SpaceX, worth $71 billion, and several other businesses, giving him a total net worth of $203 billion. according to to the Bloomberg Billionaires Index. This makes him the third richest person in the world.

Why do some shareholders support the salary package?

According to Ives, some shareholders are concerned that Musk will move to another business or start a rival company if he is not richly rewarded for working at Tesla. This is a threat that Musk himself has issued, stating in an X post in January that he wanted 25% voting control from Tesla or he could leave.

Tesla President Denholm echoed these sentiments, writing in a letter to shareholders in June: “If Tesla wants to retain Elon’s attention and motivate him to continue to dedicate his time, energy, ambition and vision to delivering comparable results ​​In the future, we must maintain our business.”

Are some shareholders voting against the salary agreement?

Yes, some shareholders have spoken publicly against the package, most notably the California State Teachers’ Retirement System.

The large pension fund said on Tuesday it would vote against Musk’s payout “based on its magnitude and because the award would be extremely dilutive to shareholders. We also have concerns about the lack of focus on the company’s profitability.”

Tesla’s five main institutional shareholders – Vanguard, BlackRock, State Street, Geode Capital and Capital Research – said they do not announce their votes or would not comment. They control about 17% of the vote.

How is Elon Musk’s salary package structured?

The payment deal is structured to deliver multiple rounds of stock options that will allow Musk to purchase about 304 million Tesla shares. Musk can receive each round of options after the company reaches certain milestones – such as when Tesla reached a market value of $100 billion, and at each $50 billion mark beyond that. (Tesla’s market cap is currently around $580 billion.)

Based on the current share price, the value of the salary package is around $46 billion.

The package also includes a requirement that Musk hold the shares for five years after exercising the options, according to to regulatory records.

Do large payouts guarantee better CEO performance?

The question underlying the debate over Musk’s pay is whether such large packages actually make a difference to CEO performance. In other words, do CEOs actually perform better when they receive larger-than-normal packages? And if they don’t receive such impressive business, do they underperform?

Generous CEO compensation packages do not guarantee better results, according to a 2017 study from investment research firm MSCI. In fact, the analysis found that companies with the smallest equity incentive awards outperformed those with the heaviest packages by nearly 39% on average over a 10-year period.

— With reporting from the Associated Press