Why Elon Musk's $1 Trillion Pay Package Is Actually Great for Tesla Investors
Key Points
Elon Musk's new pay package sounds egregious, but a big payday is not coming anytime soon.
In order for the Tesla CEO to get the full compensation, the company will need to hit many growth-related targets.
If Musk is successful, he'll end up owning approximately 25% of the business.
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Tesla (NASDAQ: TSLA) shareholders have approved what some people see as a controversial pay package for the company's CEO, Elon Musk. Musk has been the face behind Tesla for years, helping build and grow the business, turning it into one of the most valuable companies in the world.
The stock has soared around 2,800% over the past decade, as it has evolved into a profitable and sustainable business. Musk, however, has been a controversial figure and has often split his time with other companies and initiatives.
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Recently, shareholders rewarded him with an incredible pay package, potentially worth $1 trillion. And while that might seem outlandish and egregious, it's actually a move that can benefit Tesla investors in the long run.
Image source: Getty Images.
Musk isn't getting a big payday anytime soon
You might have thought that with a $1 trillion pay package, Musk's annual salary would skyrocket. But he isn't getting a big payout anytime soon. That's because the deal is linked to stock options that he'll earn over time. Ultimately, he could end up with a 25% stake in the business (currently he owns around 13%).
But there are many ambitious goals that will need to be met in order for Musk to get the full pay package. They include the following:
- Selling 1 million robots
- Having 1 million robotaxis up and running
- Delivering 20 million cars
- Securing 10 million full self-driving subscriptions
- Generating up to $400 billion in adjusted profit per year
- Growing Tesla's market cap to $8.5 trillion
These are some lofty targets, to say the least. Tesla is still in the early innings of its robotaxi business and it's in even earlier stages of developing robots. The most daunting goal may be getting the stock's market cap to $8.5 trillion, however, which is more than 6 times its current valuation of $1.4 trillion.
For investors, this is a great package because it ensures if the company is doing well and the stock rises in value, Musk is rewarded. It aligns the goals of investors with the CEO, to ensure that management is focused on targets that are important to shareholders. It becomes a win-win situation for all parties.
The most important feature of the pay package is keeping Musk motivated
There were concerns that if the pay package wasn't approved, Musk may not stay with the company. With the package approved and the targets firmly in place, it can ensure that everyone is on the same page, with the goal being to grow all the facets of Tesla's business, along with pursuing opportunities in artificial intelligence (AI).
Having a strong CEO with an ambitious vision is what has made Tesla a hot stock for retail investors to own in recent years. The company has evolved from a car company into a diversified AI business. While it's still early on in its AI growth, it's that potential that enables the stock to trade at a whopping 290 times its trailing earnings -- investors are sold on the growth story, with Musk being one of the best storytellers out there, able to convince investors of his vision and likelihood of success.
With Musk at the helm, Tesla investors know that the company will continue to focus on cutting-edge technologies and growth opportunities in the years ahead.
Tesla's stock is exciting, but investors should exercise caution
Although Musk's pay package wasn't bad news for investors, it's still important to be careful with a stock like this, where so much of its valuation is based on future growth. If reality doesn't line up with sky-high expectations, it's not only Musk's potential pay that will suffer, but investors' returns as well.
Tesla's core business remains automobiles. And that's been a concern of late with competition intensifying from China and Tesla's margins shrinking, chipping away at its bottom line. There is some risk with the stock and I wouldn't rush to buy it at its current valuation.
If Musk is able to hit the aggressive targets in his pay package, he and all Tesla shareholders will be big winners in the end. But it's by no means a certainty that he'll get there. A healthy dose of skepticism is warranted, especially with a stock that's this highly valued, which is why I'd take a wait-and-see approach.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
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