Tesla (NASDAQ:TSLA) CEO Elon Musk has extremely high expectations for the electric automaker’s performance over the next decade — and if it isn’t reached, he won’t be paid at all.
This week, the company announced that Tesla has implemented a 10-year CEO performance package based entirely on the automaker’s market cap growing from the current level of about $50 billion to more than ten-fold at $650 billion over the next decade.
While performance-based compensation packages are becoming more common in the oil and gas market, and many other global industries, these companies have taken a potentially more stable and wide-sweeping system than what Musk and colleagues have designed.
Musk will receive none of the usual corporate executive compensation methods. There will be no salary, cash bonuses, or equity that vests. Musk will qualify only for an at-risk performance award, requiring that payment will only be made once the company hits the high mark that’s being set. Musk and Tesla shareholders would do remarkably well if all the targets are hit.
It’s based on Musk’s 2012 performance award, which produced about a 17-fold increase in the company’s market cap over the five years since it was put in place. Skyrocketing stock value drove that increase, and went far beyond the company’s revenue and profit performance. Perceptions remained strong, with expectations that high production volumes for the new Tesla Model 3 will turn the company into a larger, more mainstream automaker.
On Thursday, Tesla said it’s on track to achieve its production targets for the Model 3. A few employees would disagree, citing problems such as having to make some of the battery packs by hand at the Gigafactory in Sparks, Nev. Related: Justifying Blockchain’s Energy Usage
Right next to ramping up its factories, Tesla is holding its CEO up the task of escalating revenue and adjusted EBITDA targets. It will be tied into shareholder value creation, much more than Musk’s 2012 performance award. It’s based on 12 tranches being established where Musk will vest in stock options that correspond to 1% of Tesla’s current total outstanding shares; that 1% is based on approximately 1.69 million shares of Tesla stock. If the tranches aren’t achieved, Musk won’t receive any pay.
Oil and gas companies have something different in place. During 2016, Exxon Mobil (NYSE:XOM) CEO Rex Tillerson (who now serves as Donald Trump’s Secretary of State), earned about $26.4 million. About $4.8 million came from base pay and bonuses; about $19.7 million came through shareholder equity from the company’s strong financial performance; and more than $575,000 came from other sources.
A study released this month by consulting firm Alvarez & Marsal found that CEOs and CFOs in the oil and gas exploration and production field are now heavily influenced by incentive compensation, including annual and long-term incentives (LTI). These incentives now make up 85 percent of a CEO’s and 82 percent of a CFO’s total compensation package.
Production growth has been the main issue oil and gas executives face. It’s the most prevalent performance metric in annual incentive plans and is utilized by 81 percent of companies in the industry, according to the study.
Musk is worth over $21 billion now from Tesla and his SpaceX commercial space travel company. If the new production model works over the next decade, that market valuation could more than double to $55 billion — if these lofty expectations are met.
The new model is built on parallel milestones that Musk must achieve. One is based on Tesla’s market value and the other on the company’s revenue and profitability. As each tranche is reached, the market value is expected to go up by another $50 billion.
Tesla says it will go from producing about 100,000 electric vehicles in 2017 to more than 500,000 in 2018. Musk previously said that it will leap up to about one million units produced by 2020. That would include the upcoming Tesla Model Y crossover along with the Model 3 small passenger car.
Some market analysts point out that Tesla has already been taking a great deal of pressure lately for over-inflating its market value based on actual performance and assets. Related: Largest Oil Consumers Not In A Rush To Hedge Crude
One challenge that the company will have to clear up is a second government investigation over the safety of its self-driving vehicle technology. The fatal crash in Florida during 2016 set the company sideways until a federal investigation ruled that the company had operated properly and that the Autopilot semi-autonomous system was not inherently unsafe.
A more recent crash could bring a more serious outcome to the company. The National Highway Traffic Safety Administration is sending investigators to California to evaluate the crash where a Tesla car using Autopilot rammed into a parked fire truck.
The National Transportation Safety Board is also getting involved. The agency announced Tuesday that it was also sending investigators to California to investigate and assess the crash.
In the past, Musk has dealt with investigations over the fatal 2016 crash involving the Autopilot system with a bit of grace and transparency. That will be necessary with this go around, and it illustrates how dependent the company is on how Musk handles things.
By Jon LeSage for Oilprice.com
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