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The road ahead for Tesla: Elon Musk’s ten-year gambit for company unveiled

Vishal Krishna
27th Jan 2018
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The bet is to take no salary and take compensation only if the market cap becomes $650 million and achieves operational efficiencies.

Recently, Tesla announced a ‘Long Term Performance Award’, which ensures that founder Elon Musk remains as the CEO of Tesla for the next decade. Musk has set himself a series of goals, which will make Tesla be valued at $650 billion, making him the richest man on the planet then. The compensation is tied to market capitalisation and operational milestones, a move Indian entrepreneurs should sit up and take notice of.

In a statement released by Tesla, the team says in order to fully vest, Tesla's market cap would have to grow to $650 billion (an increase of almost $600 billion), and important revenue and profitability goals would also have to be achieved. The award is modeled after Musk's 2012 performance award, which helped bring about a more-than-17-fold increase in Tesla's market cap in the five years after it was put in place.

Image : Tech Insider

Musk will receive no guaranteed compensation of any kind - no salary, no cash bonuses, and no equity that vests simply by the passage of time. Instead, Musk's only compensation will be a 100-percent at-risk performance award, which ensures that he will be compensated only if Tesla and all of its shareholders do extraordinarily well. Since all Tesla employees are provided equity, this would also mean that Musk's compensation is tied to everyone’s success at Tesla. Here are the details of the performance matrix.

CEO Performance award details

The performance award consists of a 10-year grant, of stock options, which will vest in 12 tranches. Each of the 12 tranches vest only if the pair of milestones are both met.

  • Market cap milestones: To meet the first market cap milestone, Tesla's current market cap must increase to $100 billion. For each of the remaining 11 milestones, Tesla's market cap must continue to increase in additional $50 billion increments. Thus, for Musk to fully vest in the award, Tesla's market cap must increase to $650 billion.
  • Operational milestones: To meet the operational milestones, Tesla must meet a set of escalating revenue and adjusted EBITDA targets (the only adjustment to EBITDA is for stock-based compensation). These milestones are even more directly aligned with shareholder value creation than those used in Musk's 2012 performance award. They are designed to ensure that as Tesla's market cap grows, the company is also executing well on both a top-line and bottom-line basis.

For each of the 12 tranches that is achieved, Musk will vest in stock options that correspond to one percent of Tesla's current total outstanding shares (one percent of that amount is approximately 1.69 million shares). If none of the 12 tranches is achieved, Musk will go without any compensation.

Leading Tesla through its next phase of growth

For vesting to occur when the milestones are met, Musk must remain as Tesla's CEO or serve as both Executive Chairman and Chief Product Officer, in each case with all leadership ultimately reporting to him. This is a move to ensure that Musk will continue to lead Tesla's management over the long term while also providing the flexibility to bring in another CEO who would report to him at some point in the future. This move is patterned after 2012 performance award

This new performance award is similar to the structure of Elon's last compensation award, which was put in place in 2012. Under that plan, Musk was awarded stock options that vested only if the company's market cap continued to increase in $4-billion increments, and if it achieved matching operational milestones, including vehicle production targets and developmental milestones relating to the Model X and Model 3 programmes. While these milestones were viewed at the time as very difficult to achieve, all of the market cap milestones and nine of the 10 operational milestones have been achieved. That plan was instrumental in helping Tesla complete the roadmap laid out in its original Master Plan, and in ensuring that Musk only received compensation based on the enormous success of the company, its employees, and all its other shareholders.

As with the 2012 plan and Tesla's original Master Plan, the new performance award has been designed so that Tesla and Musk remain tightly aligned with shareholder interests as they now execute on Master Plan, Part Deux - continuing to build what is the world's first vertically-integrated sustainable energy company, from generation to storage to consumption. The next phase of Tesla's development, the company maintains, will include expanding solar energy generation through solar roof and other solar products and seamlessly integrating them with battery storage, building out the company's vehicle product line to cover all major forms of terrestrial transport, continuing to advance autonomous technology to create a fully-self driving future, and enabling sharing.

 

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