Elon Musk's $1 Trillion Pay Package: Here's What Investors Need to Know

Elon Musk might be the most closely followed executive in the world. The serial entrepreneur has nearly 230 million followers on X (formerly Twitter) and is best known as the CEO of electric vehicle and energy storage company Tesla (NASDAQ: TSLA).

Most recently, headlines have been focusing on the technology savant over one thing: compensation. Already the richest person in the world, Musk recently won approval for a new payment structure that could be worth up to $1 trillion.

Let's break down the details surrounding the compensation and assess if this is a good deal for shareholders.

Is Elon Musk already a trillionaire?

Generally speaking, highly compensated employees earn most of their wealth through stock awards as opposed to a cash salary. In Musk's case, his new payment structure hinges entirely on the direction of Tesla's share price.

At a high level, the new payment package consists of a combination of operational and market capitalization milestones. If Musk achieves both sets of criteria, he could earn an aggregate of 423.7 million shares of performance-based restricted stock awards. The package is split into 12 equal tranches of 35.3 million shares.

On the operational side of the equation, Tesla must achieve the following:

• 20 million vehicles delivered.
• 10 million active subscriptions for full self-driving.
• 1 million Optimus robots delivered.
• 1 million Robotaxis commercially deployed.

Should the company achieve these performance goals, the board of directors has outlined a path for the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) to grow from $50 billion to $400 billion.

These financial targets should result in considerable valuation expansion for Tesla over time. Specifically, Musk's long-term goal is to see Tesla reach and sustain an $8.5 trillion valuation. The company's current market value is about $1.4 trillion, so Musk needs to create several more trillions in shareholder value in order to earn his maximum payout.

Lastly, he has 10 years to achieve these goals. Should he succeed, he could receive an estimated $1 trillion in gross proceeds under the current conditions and the estimated future value of Tesla stock. So while he is not yet a trillionaire, there is a possibility his net worth could soar to such heights 10 years from now.

Image source: Tesla.

What are the risks in Musk's new compensation structure?

Elon Musk is unapologetically blunt. His rebellious attitude and brutal honesty have earned him his share of fans and critics during his time leading Tesla.

While many financial institutions own Tesla stock, it's important to realize that the EV maker has long been one of the most popular among retail investors, according to data from the online brokerage Robinhood Markets.

This is important to understand because Musk has previously been seen as using his influence within the retail investor community to draw attention to Tesla's stock price.

Against this backdrop, there may be some investors who are concerned that he could try to inspire outsize momentum and meme trading in order to juice Tesla's valuation and earn his compensation.

The verdict: Musk is aligned with shareholders

Even though Tesla does exhibit characteristics of a meme stock from time to time, Musk must also deliver a number of ambitious operational achievements to get paid.

In other words, a rising value in Tesla stock is not enough for him to qualify for the full $1 trillion. Given this structure, in combination with Musk's Twitter buyout fracas with the Securities and Exchange Commission, I think it's highly unlikely that he will resort to any shenanigans.

In addition, bullish Tesla stock buyers must launch a well-coordinated and sustained effort to generate sufficient market momentum to nearly sixfold the company's market value from current levels.

Ultimately, I think Tesla's board is holding a trillion-dollar carrot in front of Musk. Remember, he also divides his attention among a number of businesses that are not publicly traded -- including SpaceX, xAI, The Boring Company, Neuralink, Starlink, and the social media platform X. And from time to time, he even dabbles in politics.

To me, the trillion-dollar pay package is a monumental incentive for him to remain focused on Tesla as the company seeks to evolve from primarily an automaker to a more sophisticated technology business powered by artificial intelligence (AI).

Considering that 77% of shareholders voted to approve Musk's new compensation plan, I believe most view this structure as a means for the CEO to be fully aligned with the shareholders' goals.

Stated differently, if Musk wins, then so do investors. With that in mind, I think the potential $1 trillion award could end up being a good deal for them in the long run.

Adam Spatacco has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.