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June 19, 2024 • 28min
Why is everyone talking about Musk's money?
Planet Money
This episode of Planet Money dives into the remarkable corporate drama unfolding at Tesla, centered around CEO Elon Musk's unprecedented $56 billion compensation package. The story has all the elements of a juicy HBO drama - a visionary CEO, a high-stakes shareholder vote, and a judge's dramatic ruling that threatened to strip away Musk's massive payout.
Why is everyone talking about Musk's money?
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Key Takeaways
- Elon Musk's unprecedented $56 billion compensation package at Tesla was meant to hyper-focus him on turning the company around, but it also raised questions about whether he was too distracted by other ventures
- A judge later ruled the compensation package was "unfathomable" and "deeply flawed", setting up a high-stakes shareholder vote to decide whether to keep the package
- Shareholders had to weigh Musk's importance to Tesla's success against concerns about his distractions and capriciousness as CEO
- The vote passed with 72% approval, as major institutional investors like Vanguard flipped their stance, seeing Musk's retention as critical even with his outside projects
- This saga highlights the challenge of incentivizing unique, high-impact CEOs like Musk and the "key man risk" when a company becomes so intertwined with its leader
Introduction
This episode of Planet Money dives into the remarkable corporate drama unfolding at Tesla, centered around CEO Elon Musk's unprecedented $56 billion compensation package. The story has all the elements of a juicy HBO drama - a visionary CEO, a high-stakes shareholder vote, and a judge's dramatic ruling that threatened to strip away Musk's massive payout.
As reporter Dana Hull explains, this is not just another wild Elon Musk tale, but a lesson in how to properly motivate and incentivize the leaders of the companies that are shaping our world. It's a classic economics problem with a very 2024 twist.
Topics Discussed
Tesla's "Production H**l" and Musk's Singular Focus (5:01)
- In 2017, Tesla was struggling to ramp up production of its more affordable Model 3 car, with Musk sleeping on the factory floor to fix problems
- Tesla's board wanted to find a way to hyper-focus Musk on turning the company around, so they proposed an unprecedented compensation package
The Moonshot Compensation Plan (7:23)
- The package was worth up to $56 billion in stock options, but Musk would only earn them by hitting a series of extremely ambitious performance milestones
- The first milestone required nearly doubling Tesla's value, with each subsequent target becoming less likely
- Most thought the plan was "crazy" at the time, but shareholders overwhelmingly approved it in 2018
Musk Hits the Milestones, Becomes World's Richest Person (11:18)
- To everyone's surprise, Musk ended up hitting all 12 milestones as Tesla's valuation skyrocketed to over $1 trillion
- This turned Musk into the world's richest person, thanks to the massive stock option payout
The Judge's Dramatic Ruling (13:34)
- A Tesla shareholder sued, arguing the compensation package was "unfathomable" and "deeply flawed"
- The Delaware judge agreed, ruling the approval process was "rife with conflicts of interest"
- The judge's 200-page ruling used dramatic language, referencing Shakespeare and Star Trek
The High-Stakes Shareholder Redo Vote (17:50)
- Tesla and Musk announced a new shareholder vote on the compensation package, giving investors another chance to weigh in
- Some shareholders, like Joshua Walters, felt misled by the original vote and planned to vote against it this time
- Others, like the Tesla board chair, argued it was about "fairness" to Musk and retaining him as CEO
The Shareholder Vote Results (25:32)
- The shareholder vote passed with 72% approval, a decisive victory for Musk
- Major institutional investors like Vanguard, who had previously opposed the package, now voted in favor
- Vanguard cited Musk's importance to Tesla and the need to align his economic interests with shareholders
The "Key Man Risk" of Elon Musk (28:27)
- Shareholders seem willing to give Musk latitude despite his distractions, as he is so intertwined with Tesla's success
- There is a major "key man risk" - the company is highly dependent on Musk, so losing him could be catastrophic
- The massive compensation package is seen as critical to retaining Musk and aligning his interests with shareholders
Conclusion
The saga of Elon Musk's Tesla compensation package is a remarkable corporate drama that highlights the challenges of incentivizing and retaining unique, high-impact CEOs. While the judge's ruling initially threatened to strip away Musk's massive payout, shareholders ultimately voted to approve the package, recognizing Musk's importance to Tesla's success despite his many distractions.
This episode underscores the "key man risk" that can arise when a company becomes so intertwined with its leader. Shareholders were willing to grant Musk an unprecedented level of compensation to ensure he remains engaged and aligned with their interests, even as he pursues other ambitious projects outside of Tesla.
The Planet Money team frames this as a classic economics problem with a modern twist - how do you properly motivate the people running the biggest companies that are shaping our world? The Tesla case study provides valuable lessons on the delicate balance between CEO autonomy, shareholder control, and aligning incentives in an era of larger-than-life business leaders.
