Tesla CEO Elon Musk is set to unlock the fourth tranche of his performance-based compensation deal with the company. This brings the entrepreneur’s total stock option awards to-date to approximately $11.8 billion.
Elon Musk Compensation Package Background
In March 2018, Tesla shareholders approved to award Musk a compensation package potentially worth $55.8 billion.
The package is divided into 12 tranches of stock options. An option is a contract that gives the investor the right, but not the obligation, to buy or sell stocks.
This means that Musk has the right to buy a fixed number of Tesla shares at a discount to the current stock price.
What are the Conditions that Allow Musk to be Paid?
The CEO’s total payout is contingent upon two criteria. Firstly, Tesla must achieve several operational milestones over the course of ten years. Secondly, the company must exponentially increase its market cap during those ten years.
More specifically, Musk needs to hit 12 market capitalization milestones, 16 operational targets in order to vest the entire package. The operational milestones are divided into two categories: Revenues and Profitability.
Profitability focuses on EBITDA, or earnings before interest, taxes, depreciation and amortization. It is a measure of corporate performance since it is able to show earnings before accounting and financial deductions.
By 2028, Musk must achieve two key objectives: On one hand, enable Tesla to generate a total of $175 billion in revenues. On the other hand, lead the company to a total market cap worth $650 billion.
Throughout that timeline, Musk must also remain either the CEO or executive chairman of Tesla. Additionally, Musk does not receive any other compensation for his work at the company outside this plan.
What were the Criteria Needed to Unlock Musk’s Fourth Tranche of Stock Options?
For the current tranche, Musk was tasked to achieve the following operational goals: Hit a market cap of $250 billion, and register an EBITDA that surpasses the $4,5 billion threshold.
Tesla currently has a market cap estimated at $393 billion, well above the $250 billion mark. The company registered a total of $3.9 billion in EBITDA in 2020 alone.
It is fair to say that Elon Musk passed the test with flying colors.
How Much Elon Musk is Getting Paid for his Work in Tesla?
For the first three milestones, Musk received the option to buy 1.69 million Tesla shares at around $350 per. But following Tesla’s 5-for-1 stock split last August, Musk gets to buy 8.44 million shares priced at $70 per.
Based on Tesla’s current stock price of $426.11, the current tranche would be worth almost $3.6 billion, and would cost him $590.8 million. Assuming that Musk sells those shares, the CEO would pocket more than $3.1 billion in profit.
Elon Musk is definitely interested in making money. That goes without saying. But his entire compensation is performance-based. This means that if Tesla’s stock price tanks, the plan is null and void and Musk would be axed from the company almost the next day.
The entrepreneur’s primary goal is to accelerate the transition to sustainable energy via his work with Tesla. Thankfully, this is exactly what is happening at the moment.