How Tesla CEO Elon Musk just got even richer with a US$55 billion payday

Tesla has hit a pretty remarkable milestone: the company’s average value on the stock market for the past six months is now above US$100 billion for the first time. That six-month run of a 12-figure market cap could be important to Tesla’s CEO, Elon Musk: a sustained US$100 billion valuation over a six-month period unlocks the first part of Musk’s massive 2018 compensation package with the company.

That agreement was valued at more than US$2 billion in a company filing with the Securities and Exchange Commission, but Musk has actually realised no value from it yet, providing an excellent example of how complicated CEO pay has become. In Tesla’s own stated estimate in the proxy statement laying out the plan, the total package could end up being worth as much as US$55.8 billion to Musk.

The compensation agreement between Musk and Tesla is structured around 12 “tranches” of stock options, each equivalent to roughly 1 per cent of the total number of outstanding shares at the time of the agreement. Each tranche – basically, a financial treasure chest that will be unlocked should certain conditions be met – vests and becomes available to Musk once a certain number of operational milestones and stock market capitalisation goals have been achieved.

In other words, Tesla has to massively increase its sales and profits, while also becoming one of the most valuable corporations in the US stock market, for Musk to get paid. The operational goals are based on the company dramatically improving sales and profits and are tied to increasing levels of top-line revenue and bottom line earnings before interest, taxes and depreciation.

Here are those revenue and earnings milestones, per the agreement. According to the company’s most recent quarterly filing with the SEC, as of March 31, Tesla had achieved the first of the revenue and EBITDA (earnings before interest, taxes, depreciation and amortisation) goals, meaning that two operational milestones have been achieved.

Each of the 12 tranches of stock options vests and becomes available for Musk to use when both of the above operating milestones and one of the market-capitalisation milestones have been achieved. Below, we walk through how the market-cap milestones work and what each tranche could be worth to Musk.

The latter milestones start at a market capitalisation, or the value of all outstanding Tesla shares combined, of US$100 billion and increase by US$50 billion for each additional tranche. As mentioned earlier, that valuation needs to be maintained for six months before Musk’s options vest. So far, two of the operating goals have been met, while, until this week, none of the market-cap goals had been hit.