Tesla shareholders have reaffirmed chief executive Elon Musk's nearly $56 billion remuneration package, despite its invalidation by a Delaware court in January, leading to mixed reactions from investors and analysts.
While some believe this approval will boost the electric vehicle maker and reduce the risk of Mr Musk leaving the company, others remain sceptical.
Mr Musk has done a “brilliant job” with the EV market, and the whole industry has improved because of his vision, said Naeem Aslam, chief investment officer at Zaye Capital Markets.
“He is a deserving CEO looking at his broader approach that goes beyond EV ambitions,” he told The National.
“We think investors are completely wrong if they associate Tesla only with the EV market … the picture is much bigger, and the pipeline of products that Tesla is working on is extensive.”
Some of Mr Musk's ventures include Tesla, SpaceX, X (formerly known as Twitter), Starlink, Neuralink and his latest AI project, xAI.
While Tesla pioneered the US EV market, SpaceX has launched one of the world's most advanced rockets into space, and Neuralink is working on a brain-implanted microchip that can connect users’ feelings and thoughts to a computer.
Thursday marked the second instance in which shareholders approved the billionaire businessman's huge pay package. It was initially passed in 2018, but was rejected by Judge Kathaleen McCormick of Delaware's Court of Chancery in January.
The judge described the board-approved compensation as an “unfathomable sum” that was not fair to shareholders.
Tesla chairwoman Robyn Denholm said in a previous regulatory filing that the board stands behind the pay package and does not agree with the Delaware court's decision. She said it was a matter of “fundamental fairness and respect” to Mr Musk.
Earlier this year, Mr Musk raised doubts about his future with Tesla through a post on X. He demanded a 25 per cent stake in the company to prevent him from taking his AI development efforts to another company.
In an April regulatory filing, Tesla valued the compensation package at $44.9 billion, down from its original worth of $56 billion. The decline reflects a more than 28 per cent drop in Tesla's shares this year.
Is the $56 billion package justified amid dropping sales?
In April, Tesla reported a nearly 8.5 per cent annual drop in its March quarter deliveries. It produced 433,371 cars last quarter but delivered only 386,810.
It marked the first time Tesla reported a year-on-year decline since the coronavirus pandemic affected deliveries in 2020.
Tesla said that this year, its vehicle volume growth rate may be “notably lower” than that achieved in 2023, as its teams work on the launch of the next generation of vehicles and other products.
If investors view Tesla as merely a car company, falling sales could suggest it is “struggling”, said Vijay Valecha, chief investment officer of Dubai-based Century Financial. However, if they consider Tesla an AI and robotics firm, Mr Musk would be the most interesting person in the room.
According to Mr Musk, Tesla is much more than a car company, with products including autonomous vehicles and robot taxis.
He and many leading analysts believe these innovations could increase the company’s value more than tenfold, Mr Valecha said.
“If successful, Tesla’s product would combine the business models of Uber and Tesla. Customers who buy a Tesla could use the car as a robotaxi to generate returns, like owning a house and renting it out through Airbnb,” Mr Valecha told The National.
“And that could lead to a big jump in Tesla’s valuations which can justify his pay and he might be Tesla’s best bet to take on the titans in the AI world.”
Does Elon Musk deserve the $56 billion pay package?
Tesla's market valuation jumped in 2020, allowing Mr Musk to reach the $650 billion market capitalisation goal in less than three years, ahead of the 10-year target.
EV deliveries have also surged more than five times since the remuneration package was first approved by shareholders in 2018.
“The question is not if Elon Musk is worth $56 billion pay but rather if he will deliver,” Aaron Rafferty, chief executive of AI and machine learning firm Standard, told The National.
“As per his previous agreement, all milestones were hit within deadline, so it is a question of when it should be paid. And arguably it is overdue. Hope Tesla shareholders do not fumble the ball here.”
Mr Musk’s package includes no salary or cash bonus, but he is compensated through stock options based on the company’s market value.
The package required Mr Musk to deliver “transformative and unprecedented” growth and Tesla said he has met all targets associated with it in the past.
In 2018, when the compensation package was approved, Tesla incurred a loss of $1 billion on revenue of a little more than $21 billion. However, last year, Tesla made a profit of $15 billion on revenue of $96 billion, with $13 billion of that being cash flow, said Vijay Marolia, money manager and managing partner at the wealth management firm, Regal Point Capital.
“This highlights the significant improvement in Tesla's financial health over the years,” he explained.
“The stock is also up over 1,000 per cent over the last over five years, and even with the recent slowdown in sales, Tesla’s ROE [return on common equity] is still over 24 per cent over the last 12 months … at this rate, the equity doubles in three years.”
Are Elon Musk and Tesla separable?
Industry analysts said in the larger picture environment, Mr Musk’s payout is small when compared to the potential of innovation in the EV and technology space.
The compensation package was agreed upon when the company was worth much less – so, in this sense, the payout size represents the enormous success he has brought to the company from 2018 until now, said Thomas Monteiro, senior analyst at Investing.com.
“I think a much more significant headwind for Tesla would be operating without Elon Musk … it remains impossible to separate the two and given the mounting competition from both China and legacy car makers, his innovative mentality plays an indispensable role.”
Why does the $56bn pay package come with legal uncertainty?
The Tesla chief could still face a long legal fight to convince the Delaware judge, who said that as Mr Musk controlled the board, he was not entitled to the landmark payment.
“The amount agreed is absolutely obscene … a combination of weak corporate governance, broken promises … where are roadster and robotaxi … lies [there is no real full self-driving technology yet] and showmanship rather than an executive leadership all make a mockery of the board, the award and the situation,” Neil Campling, founding partner at Chameleon Global Capital Management, told The National.
“There is a lack of innovation, hence the losing share and being overtaken by the Chinese, and questionable accounting. The judge still has to approve this pay deal and I can’t see that happening.”
Former Tesla supporter Steve Westly said keeping Mr Musk is not a necessity.
“Elon is a unique visionary … but I don’t know if that means he’s essential to be running any or all of those companies today,” he told the BBC earlier this year.
“No one stays on top forever, especially when you are trying to lead seven companies at once.”
However, Mr Musk has ample support within the company, analysts said.
“Numbers like these are hard to beat, and I would consider it very hard to see Musk's win being reversed at this point,” Mr Monteiro said.
To overturn Mr Musk’s pay package, shareholders would need to challenge it in court again, Katie Charleston, former prosecutor and founding member of Katie Charleston Law, told The National.
However, this is unlikely because, given the huge potential cost, shareholders are unlikely to pursue another legal challenge, she added.
One of the worst performers in the S&P index
Tesla's stock is one of the worst performers in the S&P 500 index, which has jumped nearly 14.5 per cent since the start of the year.
Its stock dropped 2.4 per cent to trade at $178.01 a share at market close on Friday, giving the company a market value of $557.79 billion.
The company's shares have dropped nearly 28.3 per cent since the start of the year and almost 31 per cent in past 12 months.
Industry experts are not bullish about the company’s growth prospects, prompting them to adjust its future stock price range downwards.
In April, Philippe Houchois, an analyst at capital markets firm Jefferies, reduced his price target for Tesla stock from $185 to $165, while Piper Sandler analyst Alexander Potter adjusted the firm's target down to $205 from $225.
What do Mr Musk's close ties with Donald Trump mean for Tesla?
Mr Musk's increasing alignment with US presidential hopeful Donald Trump, who aims to dismantle President Joe Biden’s EV policies, also raises questions about the broader strategy for Tesla.
Mr Biden has described himself as the most pro-union president ever, while Mr Musk has been vocal about his opposition to unions in Tesla factories, and so his endorsement of Mr Trump in the US presidential race is not surprising, Mr Valecha said.
“However, it remains to be seen whether Musk's association with Trump will benefit Tesla, as the Republican Party is known for favouring big oil over climate-friendly policies.”
