It’s the eve of the day of reckoning for Elon Musk and Tesla, as the deadline for shareholders to vote for—or against—his court-rejected $56 billion pay package is tomorrow.
Many on the outside are watching the uncertain vote in anticipation with a bucket of popcorn in hand, while Musk, presumably, is singing The Clash’s “Should I Stay Or Should I Go” on Caraoke.
But regardless of the election results, some investors tell InsideEVs that the situation is a “nightmare” where no outcome guarantees the company’s future.
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Tesla's Historic Vote
In 2018, Tesla granted CEO Elon Musk a performance-based compensation package that ended up being worth nearly $56 billion at its peak value. Shareholders brought Tesla and Musk to court, claiming that the Board didn't do its due diligence and was unfairly diluting shareholder values. A judge rejected Musk's pay earlier this year, resulting in Tesla putting it up to shareholders to decide, once again, if Musk deserves the pay. Shareholders will vote on the package this week.
“This is a nightmare for Tesla shareholders,” said Ross Gerber, CEO of Gerber Kawasaki Wealth and Investment Management in a statement to InsideEVs. “A lose-lose situation purely caused [by] a lack of corporate governance from Tesla’s Board of Directors. It's embarrassing the effort being made by Tesla to ‘pay’ Elon, their largest shareholder and richest man in the world."
The CEO’s humongous compensation package is one of the largest in corporate history, and it’s been making waves ever since the company proposed it in 2018. After a Delaware Chancery Court judge fired the “unfathomable” package into the sun earlier this year, Tesla decided to put it up to a second shareholder vote—a method baked into Delaware corporate law that’s meant to fix small “procedural defects.”
That vote will be tallied and announced on Thursday, and it will decide whether Tesla has a path to grant Musk his stock options, or if it will reinforce the court’s denial.
Either outcome will spark controversy. If approved, the decision will almost certainly continue the already drawn-out legal battle brought against Tesla and Musk shortly after the pay package was initially approved in 2018. And if it fails, Tesla risks losing Musk as CEO—or, at least that’s what the company, shareholders and investment firms fear is the most damaging outcome.
You can thank Musk and Tesla’s board for that fear. Musk has made thinly veiled threats that he would prefer to build AI and robotics “outside of Tesla" if he couldn’t gain 25% voting power of the company. To double down, Tesla board chair Robyn Denholm, who has sold over $50 million in Tesla stock so far in 2024, warned shareholders that Musk needed the pay package to “retain Elon's attention and motivate him” in a recent filing with the U.S. Securities and Exchange Commission. She also noted that the pay package was “obviously not about the money” given that Musk is one of the wealthiest people on the planet.
What Experts And Investors Say
The threats may have worked. Some Wall Street analysts believe that Musk’s vote will pass and have the receipts to back up that theory.
“[W]e rather suspect it will pass, albeit with a lesser approval rate than in 2018 and perhaps by a lesser margin than popularly imagined,” wrote J.P. Morgan analysts in a recent note to investors ahead of the pay package vote. Approximately 73% of uninterested parties voted in favor of the compensation package when it passed originally in 2018.
The analysts’ theory relies on Tesla’s high “key man risk,” or the belief that the value between Tesla’s stock and its CEO are “incredibly linked.” Here’s a snippet from the firm’s recent note on the matter:
Investors also largely have grown accustomed to the dilution that has come with the vesting of Mr. Musk’s equity awards, such that there would be little perceived change on their part were the compensation plan reinstated.
By contrast, if the compensation plan were not reinstated, diluted share count may fall upwards of 10%, benefitting shareholders other than Mr. Musk by a corresponding amount, but if this then precipitates Mr. Musk to leave the company, the risk of multiple compression should Tesla be valued even relatively akin to ‘just another automaker’ would in our view (and, we suspect, the views of many investors) far outweigh any benefit from higher proportional ownership.
Investors voting to disapprove the compensation plan would seem to be betting that Mr. Musk would then not leave Tesla (we are uncertain whether he would or would not).
While the J.P. Morgan team’s theory isn’t guaranteed, it’s a relieving, yet potentially frightening reality for investors. On one hand, Musk is likely to remain CEO if the vote passes. On the other, it signals that one person creates so much value in the company that its shareholders fear losing money over that individual’s departure.
Likewise, Dan Ives, an analyst at Wedbush Securities, said in a recent note that he expects the vote to be “overwhelmingly reapproved.” That, the longtime Tesla bull said, should lift a cloud of uncertainty from the stock.
Still, the outcome of the vote is very much up in the air. Toni Sacconaghi, an analyst at Bernstein, told CNBC recently that the package will be “tough” to pass. He said in a Monday note that if the vote fails, Tesla shares would likely fall due to fears of a Musk exit.
If he stays on, some believe that Musk has all but free reign to do as he pleases—as long as the company’s share prices don’t plummet.
Ives noted that Musk needs to show some sort of hard commitment to Tesla regardless. He suggested that Musk commit to housing his AI efforts at Tesla and to staying CEO of Tesla for at least the next 3-5 years.
Ives’ ask is something that many other analysts have brought up in recent months, as Musk has been accused of being an absent and distracted CEO that may have his primary focus set on Tesla. Officially, he holds many titles: CEO of Tesla, CEO of SpaceX, CTO of X, President of the Musk Foundation, founder of The Boring Company, founder of xAI, and co-founder of Neuralink. It isn’t just the titles or lack of time in a day that have investors questioning Musk’s devotion to Tesla, but rather certain actions—like diverting a half-billion dollars worth of GPU shipments from Tesla to X—that have raised eyebrows.
Gerber, a longtime Tesla investor but more recent Musk critic, says that if investors vote to reinstate the compensation package, they might not get everything they think they’re paying for:
“[If] Elon wins, Tesla shareholders pay a huge cost: $50 billion for an absent CEO,” said Gerber, “If they lose, Elon is a spiteful man, so who knows what he’ll do.”
The general consensus among analysts appears to be that the vote to reinstate Musk’s pay package will pass. However, as noted, that doesn’t come without future challenges and uncertainty. And if the vote doesn’t pass, investors expect a sharp drop in share prices and a potential exodus by the CEO.
Still, many investors and observers are clearly losing patience with a perceived fly-by-night focus from Tesla’s leadership. Multiple analysts are now calling for Musk to put his time where his money is—to make Tesla a priority with hard commitments and actionable, achievable goals. It would seem that Tesla needs to rethink its governance strategies to decide just how to push the company into the future. But will giving its CEO more voting power help with that?
“Many see this as a referendum on Elon’s management,” said Gerber. “Maybe he quits. Who knows, but the stock will most likely decline if the vote fails. Fun times ahead for Tesla shareholders as the business continues to be neglected.”
Additional reporting by Tim Levin.
