What Does the Compensation Plan Consist Of?
The compensation plan released by the United States Securities and Exchange Commission (SEC) consists of 20.3 million stock option awards fractured into 12 tranches of 1.69 million shares. These options will vest in increments should Tesla reach particular landmarks on market cap, revenue, and adjusted earnings (discounting specific one-time charges like stock compensation).
The moment that the board verifies each landmark, Musk can buy the 1.69 million shares at an extremely reduced price of $350.02 per share — less than a quarter of their original price.
This move is the largest corporate pay deal ever negotiated between a CEO and a board of directors.
What Are the Real-Life Implications?
Established on July 22 share prices of $1,568.36, Musk could sell 1.69 million shares for approximately $2.1 billion. The first tranche was unlocked in May when the board certified the first landmark when Tesla’s average six-month market value surpassed $100 billion, and this first tranche was worth approximately $700 million.
Since then, the company’s shares have more than doubled and is now worth more than Toyota Motor Corp., Volkswagen AG, and Hyundai Motor Co. together. Tesla’s stock has increased more than 500% over the previous year as the company amplified sales of the Model 3 sedan.
In essence, when everything is combined and considered, Musk would hypothetically profit approximately $4.2 billion, based on that share price.
It is important to note that there is a stipulation to this. Musk has to hold, for a minimum five years post-exercise, any shares that he attains upon exercise of the 2018 CEO performance award.
However, Musk hasn’t as of yet exercised any of these options, as noted by the SEC filings. Still, this most recent reward would enhance his fortune to $74 billion, according to the Bloomberg Billionaires Index.
How Did This Come About?
To gain entry into the first tranche of stock options, Tesla’s market value had to extend to a six-month approximate of $100.2 billion as well as either $20 billion in annual revenue or $1.5 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). In order to reach the subsequent landmark, Tesla’s market cap had to grow by another $50 billion in revenue ($3 billion in adjusted EBITDA).
This came about as Tesla reported that it made a non-adjusted net income of $104 million from April to June — a $0.50 per share profit — marking the first time the business has posted a profit for four straight quarters. This was a required target for it to be incorporated into the stock index of the largest US businesses.
Where Does Musk Go From Here?
To be entitled to the third tranche, Tech Crunch reports that Tesla’s market value has to reach a six-month average of $200 billion as well as either $55 billion in revenue ($4.5 billion in adjusted EBITDA). As it stands, Musk is the world’s ninth-richest person with a $71.5 billion fortune, as dictated by the Bloomberg Billionaires Index.
Still, this is a significant achievement for Musk, whose aim of leading the global auto industry into an electric future has often been doubted by investors who questioned the feasibility of Tesla’s business.
About the Author
Luigi Wewege is the Senior Vice President, and Head of Private Banking at Caye International Bank. Outside of the bank, he serves as an Instructor at the FinTech School which provides online training courses on the latest technological and innovation developments within the financial services industry. Luigi is also the published author of: The Digital Banking Revolution.