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Tesla Stock Pops As Musk's Compensation Plan Awaits Approval

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Shares of Tesla (TSLA - Free Report) rose over 2.5% in morning trading ahead of the company’s vote on a relatively unprecedented compensation package for CEO Elon Musk. But which way do shareholders hope the vote goes? Let’s take a closer look.

The Plan

The proposed plan to pay the outspoken chief executive is tied to Tesla’s future success, but it has become controversial in the lead up to the vote—and could make Musk insanely rich if Tesla transforms into a mega-cap giant on par with the likes of Facebook .

Tesla gave Musk a $2.6 billion stock option award earlier this year. That might not sound like much just yet, but if Musk’s stock options are fully vested over the 10-year plan, it could see him make roughly $55 billion.

Musk’s stock option-based compensation plan jumps incrementally based on Tesla’s ability to successfully climb a ladder of market cap thresholds. The CEO’s first big payday would kick in when the company reaches $100 billion in market value, and it would continue to climb every time the firm adds $50 billion in valuation, with a cap set at $650 billion. 

Tesla’s current market cap is roughly $53.6 billion. This means that Musk has a very long way to go before he would even reach his first major threshold. Also, Musk cannot sell his stock until five years after the deal, which should theoretically dissuade him from artificially inflating Tesla’s stock price in order to cash out quickly.

Furthermore, Musk would be guaranteed zero salary or cash bonuses as part of the proposed plan.

Pros vs. Cons

One of the more outspoken opponents of the proposed plan is the California State Teachers’ Retirement System, which is a major Tesla investor. “Given the size of the award, we believe the potential dilution to shareholders is just too great,” CalSTRS’s Director of Corporate Governance, Anne Sheehan, told Reuters.

“In addition, we have concerns about the lack of focus on profitability for the company, and the one profitability metric that is used excludes the cost of stock-based compensation.”

The basic idea on the other side is that Musk won’t be compensated unless Tesla’s value skyrockets. This, in theory, means that Tesla’s CEO will have to put his money where his mouth is.

Up to this point, Musk has seemed to over promise and under deliver when it comes to production. Tesla sold a total of just 102,807 cars last year, with the more expensive Model S sedan and Model X SUV making up a large portion of sales. Meanwhile, the company has faced continued setbacks on its more affordable Model 3.

Bottom Line

No matter where Tesla investors come down on the plan it seems clear that Musk could not simply talk his way into a $650 billion valuation. Musk and Tesla will have to make good on the promise to mass produce electric vehicles, while also bolstering the firm’s renewable energy and solar panel business.

Tesla shareholders are set to vote on Musk’s compensation plan on Wednesday morning, with a majority approval needed for the proposal to pass. 

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