Something interesting recently happened at Tesla, the American electric car company. Well, interesting for onlookers – unimaginably exciting for Tesla and its CEO, Elon Musk.
Tesla’s board granted approval for the first tranche of Musk’s pay package to vest. Normally, an event like this wouldn’t be particularly newsworthy. But Musk’s pay package is far from normal.
Here at Global Shares, we see a lot of vesting events and large, complex plans. But even we had to take a moment to process the details.
Why has Elon Musk never taken a salary from Tesla?
For some background, Musk has never taken a salary from Tesla. Instead, he opted for equity-based compensation plans. He’s clearly a big believer in both his company and in equity compensation, but it’s also great for his company. Musk has the potential to make astronomical money, as long as he and the company meet the goals set by the board. For example, in order to unlock all 12 of the tranches in his current pay package, Tesla’s market cap needs to reach $650 billion.
The recent tranche was approved to vest by the board because Tesla’s market value hit a six-month average of $100.2 billion, as well as either $20 billion in annual revenue or $1.5 billion in adjusted EBITDA. Those are signs of phenomenal success. What’s more, they’re signs of a very specific success, one that is clearly important to Tesla’s board. The goals are all based on market value, rather than profitability. It’s easy to see this arrangement works well for Tesla and the board. But what about Musk?
The first tranche vesting allows Musk to purchase 1.69 million shares at $350.02 per share, as opposed to their current market value: $805.81 per share. This means that Musk receives $775 million of shares, at a fraction of the price. A truly staggering number, but even more so when you realize that this is just the first of 12 tranches, all made up of 1.69 million shares.
The effectiveness of equity compensation
Obviously, anything that Elon Musk does is going to be out of the ordinary. This is by no means a normal amount of money. But it does illustrate the effectiveness of equity compensation. Musk could command a tremendous salary if he wanted, but he clearly understands that he has more to gain from equity than from salary. And as Musk hits his targets, and Tesla’s share price grows, he will gain more and more.
What’s most remarkable is the way that the board uses its goals to illustrate its exact definition of success, not just to its CEO, but to the rest of the company. They make sure the company moves in the direction they want simply by putting the goalposts in that direction.
How equity can be of benefit to all companies
Many people associate equity compensation as a means to an end for startups – a way to get talent on board without necessarily having the funds to pay them a competitive salary. But Tesla clearly shows that equity compensation is a tool that can see a company through from its very foundation right up to being a multi-billion dollar entity. Tesla is now a major company, but it still benefits greatly from targeted use of equity.
With Global Shares on your team, we can’t promise that you’ll have returns like Tesla, but we can promise you that your equity compensation plans will be as effective and beneficial as possible.
Contact us for a free demo today.