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Will Tesla (TSLA) Shareholders Approve Musk's Huge Pay Package?

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Tomorrow will be a significant day for Tesla (TSLA - Free Report) as shareholders will conclude voting on the much-controversial pay package for CEO Elon Musk. The results, set to be released during Tesla's annual shareholder meeting on June 13, will determine the fate of Musk’s compensation deal, initially approved in 2018 but later invalidated by a Delaware court. The stakes are high and the decision is expected to have significant ramifications not only for Musk's compensation but also for Tesla’s future.


Background on TSLA CEO’s Controversial Pay Package

Musk does not draw a salary from Tesla or receive any cash bonus but owns around 13% stake in the company currently. In 2018, he proposed a performance-based pay structure for himself. Around 73% of the independent shareholders voted in favor of the hefty package of around $56 billion in 2018.

Musk’s package consisted of stock options that would vest only if Tesla met a series of ambitious market capitalization and operational goals. The targets included increasing Tesla's market value from $59 billion to $650 billion and hitting revenue milestones of up to $175 billion or an adjusted EBITDA of $14 billion by 2028.

Despite achieving these targets and driving Tesla's market cap to heights once deemed unachievable, the compensation package faced legal challenges. Earlier this year, a Delaware court invalidated the deal, ruling that Tesla's board did not act in the best interest of shareholders when approving such an extravagant package. This ruling not only angered Musk but also set the stage for a fresh shareholder vote and discussions about moving Tesla’s headquarters to Texas.The upcoming vote will also include a decision on the headquarters shift.

To address the judge’s objections to Musk’s pay package, Tesla put the package up for a new vote. Shareholders are deciding whether to reapprove a compensation plan currently valued at approximately $46 billion (based on the current market cap of TSLA). While votes have been coming in for weeks, the outcome remains uncertain.


Why Proponents Believe Musk Deserves the Package

Supporters of Musk’s pay package argue that he has more than earned his compensation. From 2018 through 2023 end, Tesla has seen its market value skyrocket, delivering a total shareholder return of more than 1,000%.

Tesla's board, led by chairperson Robyn Denholm, has emphasized that the company has met all the performance targets set out in the original pay package. In an April proxy statement, Denholm reiterated that Musk’s achievements justify the compensation, arguing that failing to honor the original deal would be unjust.

Proponents, including influential investors like Ron Baron of Baron Capital, assert that Musk’s leadership and vision are indispensable to Tesla's success. In a letter to shareholders, Baron emphasized that Musk is integral to Tesla’s identity and that the CEO has “earned his pay.” He stated, “Shareholders should ask themselves this question: is Tesla better off with or without Elon? Our answer is clear, loud, and unequivocal: Tesla is better with Elon. Tesla is Elon. Without his relentless drive and uncompromising standards, there would be no Tesla.”


Opposition From Proxy Advisors and ISS

Despite strong support from certain quarters, the compensation package faces significant opposition. Proxy advisory firms such as Glass Lewis and Institutional Shareholder Services (ISS) have recommended voting against the reapproval. These firms argue that the deal is excessively generous and potentially undermines shareholder rights.

Moreover, concerns about corporate governance and the concentration of power in Musk’s hands have been raised. Musk already holds a substantial stake in Tesla, valued at approximately $75 billion, which critics argue should be sufficient to ensure his commitment to the company. The worry is that the pay package might further consolidate his control, reducing the board’s ability to check his influence.


The Role of Individual Investors & Musk’s Influence

The outcome of the vote is expected to hinge on the participation of individual investors. While institutional investors hold significant sway, individual shareholders, many of whom are ardent Musk supporters, could tip the balance. Musk has actively campaigned for their support, using social media and attending meetings with large investors to garner votes. Tesla’s board has strongly recommended a “yes” vote, arguing that Musk’s continued leadership is vital for the company’s future.

Notably, Musk himself has made it clear that his commitment to Tesla is conditional on maintaining significant control. In a statement on X (formerly Twitter) in January, he expressed discomfort with growing Tesla’s AI and robotics capabilities without having approximately 25% voting control. This statement has fueled speculation that Musk might shift his focus to his other ventures if the pay package is not reapproved, potentially impacting Tesla’s innovation and growth trajectory.


Final Thoughts

Indeed, Musk and Tesla have become synonymous over the years. Musk has successfully navigated the company through both good and bad times. Against all odds, Tesla and its visionary CEO have not only survived but thrived. The company transitioned from unprofitability to profitability, demonstrating a viable market for EVs.

The upcoming shareholder vote on Elon Musk’s pay package is a critical juncture for the company. Although the pay package is massive and could potentially decrease shareholders’ rights, it would seem unfair to renege on the original deal now that Musk has fulfilled his end of the bargain.

Should the package be approved, it would signal a renewed vote of confidence in Musk's leadership and potentially motivate him to continue driving Tesla's ambitious projects, including advancements in AI and autonomous driving technology. A favorable vote is expected to spark a rally in Tesla shares. Given that the stock is currently at multi-year lows and heavily shorted (TSLA was the most shorted large-cap stock in May), the approval could drive significant upward momentum.However, a rejection could weaken Tesla’s position in its appeal against the Delaware judge's ruling and might impact Musk’s focus on the company, spiraling the stock down. All eyes are on tomorrow's vote results.

TSLA currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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