Elon Musk Needs Tesla to Reach a $8.5 Trillion Market Cap to Cash In. Here's How Tesla Can Reach That Valuation.

Last year, Elon Musk secured a $1 trillion pay package for being CEO of Tesla (NASDAQ: TSLA). That pay package, however, won't be paid out all at once. Instead, Musk will have to hit certain incentive milestones to unlock his payday.

"Musk ... must drastically raise the electric car firm's market value over 10 years," notes the BBC. "If he does this and meets various targets, he will be rewarded with hundreds of millions of new shares." These new shares would be Musk's only compensation -- apart from the appreciation of his current ownership stake -- as he has elected to not take a salary.

What, exactly, are the targets Musk needs to meet? The list includes:

• The sale of 20 million Tesla vehicles
• The sale of 1 million robots
• Reaching 10 million subscriptions to Tesla's self-driving software
• Launching 1 million robotaxis
• Generating $400 billion in profit
• Pushing Tesla's market cap above $8.5 trillion

These targets are ambitious. But there's one key driver that, while likely not sufficient on its own to get Tesla's market cap to $8.5 trillion, should prove most valuable in the journey to reach that figure.

Here's how Tesla can reach a $8.5 trillion valuation

If Musk is unable to scale Tesla's robotaxi division, it seems very unlikely that an $8.5 trillion valuation will ever be attainable. It's not hard to see why that's the case, given how interrelated robotaxis are to the rest of Tesla's business.

First off, the robotaxi market is expected to be large in the long term. Some experts believe an $8 trillion to $10 trillion market could eventually form globally. That gives Tesla plenty of potential growth runway for its robotaxi division.

Nearly all of Tesla's vehicle models should be capable of participating in Tesla's robotaxi service. Tesla is hoping third parties will buy large blocks of vehicles to operate fleets of autonomous taxis. Tesla would presumedly take a cut of every ride as a service fee. Especially following the launch of its Cybercab -- a vehicle with no steering wheel or pedals, designed specifically to operate as a robotaxi -- Tesla's vehicle sales will increasingly be dominated by purchases intended to supply its robotaxi network.

Image source: The White House.

Scaling robotaxis would therefore help Tesla not only hit its target of selling 1 million robotaxis but also meaningfully contribute to its broader target of reaching 20 million vehicle sales in total. Robotaxis should also have a higher margin than vehicle manufacturing, making the service critical for reaching Tesla's $400 billion profit target. And because all of these robotaxis will be subscribed to Tesla's self-driving software platform, they will also contribute meaningfully to the company's target of reaching 10 million self-driving subscriptions.

In all, the importance of robotaxis to Tesla's long-term growth cannot be overstated. Robotaxis, therefore, will also be critical for Musk to reach the incentives of his massive pay package.

I am very bullish on Tesla's ability to compete in the robotaxi market, though I do believe this market will mature later than many investors hope. Tesla's vertical integration should prove invaluable in scaling its service faster than the competition and at a lower cost. But expect most of this opportunity to spread itself over the next decade, not just the next couple of years, as Musk would like investors to believe.

Ryan Vanzo 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.