Tesla's Denholm on Musk's Pay Package and His Future at Company

Key Concepts

• 2018 Pay Package: A performance-based compensation plan for Elon Musk, valued at up to $1 trillion, which is currently under legal challenge in Delaware.
• Shareholder Vote: An upcoming vote on the 2018 pay package and other proposals at Tesla's annual shareholder meeting.
• Voting Influence: Elon Musk's stated primary motivation for the pay package is to retain voting influence in future shareholder meetings, rather than the economic value of the shares.
• Performance Milestones: The pay package is contingent on Musk achieving ambitious performance targets set by the board.
• Succession Planning: The board has incorporated an orderly succession plan into the performance plan, with the last two tranches unlocked by a robust succession plan.
• Plan B: The board acknowledges the risk of Musk leaving if the vote is "no" but asserts that there is no direct replacement for his unique skillset.
• Energy Products: While not a specific line item in the performance criteria, energy products are implicitly embedded in the EBITA goals and are crucial for achieving the overall financial targets.
• Interim Award: An interim award was granted to Musk to compensate for the 2018 plan, with a two-year vesting period, which is forfeited if the company wins its appeal in Delaware.
• Share Pool Increase: A proposal to increase the employee share pool, which could also be used to compensate Musk for the 2018 plan if necessary.
• Voting vs. Economic Rights: The plan aims to bifurcate voting rights from economic rights, with voting rights earned first and economic rights vesting later.
• AI and Technology Risks: Musk's unique skillset in manufacturing and AI is cited as a reason for his continued leadership and influence, particularly in navigating emerging technology risks.
• Delaware Situation: The ongoing legal challenge in Delaware regarding the 2018 pay package is acknowledged as disruptive but not strategically detrimental.

Summary

Shareholder Engagement and the 2018 Pay Package

Robin Denholm, Chairperson of the Tesla board, discusses the ongoing engagement with Tesla's top institutional and retail investors regarding the upcoming shareholder vote, particularly concerning Elon Musk's 2018 pay package. The initial feedback has been mixed, with some expressing optimism and others, like ISS and Glass Lewis, disagreeing with the package's structure. The primary concern raised by these entities is the substantial monetary value Elon Musk could receive if all performance milestones are achieved.

Performance-Based Compensation and Voting Influence

Denholm emphasizes that the 2018 pay package is fundamentally a performance package, meaning Musk receives nothing if he fails to meet the "audacious milestones" set by the board. She frames it not as compensation but as a mechanism to align with ambitious company goals. A key point of discussion with investors is the distinction between economic interest and voting influence. Musk has publicly stated that the primary driver for him is the voting influence he would gain in future shareholder meetings, rather than the economic benefit of the shares.

Contingency Planning and Succession

The board acknowledges the "very real risk" that Elon Musk might leave Tesla if the shareholder vote on the pay package is "no." When questioned about a "Plan B," Denholm states that while succession planning is an ongoing discussion and a critical fiduciary responsibility, "there is no other person that is Elon." She asserts that Musk is the right leader for the company over the next decade to deliver on its plans and opportunities. Notably, the last two tranches of the performance plan are contingent on the existence of a robust succession plan, indicating that an orderly succession is integrated into the package itself.

Investor Sentiment and Vote Probability

Denholm notes that it is too early to predict the outcome of the vote, as most investors wait until the last minute to cast their ballots. She is currently in New York meeting with institutional investors to gather more insights. While some institutions are more public with their voting intentions (e.g., the pension fund in Florida), others remain private. The probability of a "no" vote leading to Musk's departure is presented as a significant concern, with Musk himself having been public about the implications of a negative vote on his leadership.

Inclusion of Energy Products in Performance Goals

Regarding the exclusion of energy products as a specific line item in Musk's performance goals, Denholm explains that energy is an "important part of the Tesla product lineup" and is "embedded in the plan." She argues that achieving the ambitious EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) goals of $400 billion is impossible without a strong performance from the energy division. The significant contribution of energy to recent earnings is highlighted, and while not a discrete metric, it is implicitly crucial for reaching the overall financial targets and fulfilling the "master plan" for sustainable abundance.

Interim Awards and Share Pool Expansion

The board has not ruled out the use of interim awards in the event of a "no" vote. A separate proposal on the board seeks to increase the share pool for employees, acknowledging the current "talent war." This expanded pool could also be used to compensate Musk for the 2018 plan if necessary. An interim award was already granted in August with a two-year vesting period, which is forfeited if Tesla wins its appeal in Delaware regarding the 2018 compensation program.

Bifurcating Voting Rights and Economic Value

The discussion addresses the concern that the pay package is solely about monetary value and potential dilution to other shareholders. Denholm clarifies that the board explored various instruments to award equity with voting rights separate from economic value. However, due to Tesla's public company status and the absence of dual-class shares at its IPO, introducing a special class of voting shares was not feasible. The 2018 plan was designed to bifurcate voting rights from economic rights, with voting rights earned first and economic rights vesting significantly later (seven and a half to ten years). This structure, according to Denholm, prioritizes voting rights over immediate economic gain.

Elon Musk's Unique Skillset and AI Risks

Denholm strongly defends Musk's continued leadership and influence, citing his unparalleled skillset in both manufacturing processes and Artificial Intelligence (AI). She believes this confluence of technological expertise makes him uniquely qualified to capitalize on future opportunities and mitigate the potential pitfalls of emerging technologies. The board's role in governance and oversight of technology risks is also acknowledged, alongside the CEO's primary responsibility in safeguarding the company and its staff.

Impact of the Delaware Situation

The Delaware legal situation concerning the 2018 pay package is acknowledged as disruptive. However, Denholm asserts that it has not hindered the board's ability to work through strategy and consider future alternatives for the company. The board and management team remain focused on the long-term evolution of Tesla.