With an estimated net worth of $200 billion, Elon Musk is the world's richest man. His wealth can mostly be attributed to a stake in Tesla which he amassed both by investing millions of dollars in the early days, as well as three rounds of compensation packages which he received as a company's CEO. His compensation packages were entirely paid in stock, which allowed his ownership stake in the company to increase to a peak of 24% He sold a little less than half of this to pay for his Twitter acquisition. His largest compensation package began in 2018, which could pay out a maximum of $55 billion if the company reaches various market capitalization and operational milestones in 2022.

Tesla Indeed hit all the relevant Milestones unlocking for Musk, the largest payday in the history of the world. In 2019, a Tesla shareholder named Richard Tornetta sued Elon Musk saying the compensation package was excessive and that Tesla misled its investors about how the package was negotiated on January 30th, 2024, a Delaware Court ruled that the process by which Musk secured the pay package was corrupt and therefore Musk had to return the $55 billion worth of Tesla stock he was awarded. Musk was obviously not happy about this. Shortly after the decision he tweeted never incorporate in Delaware Tesla is Incorporated in Delaware which is why the trial was held there.

He then retweeted a vague conspiracy theory implying that the judge presiding over the case is somehow corrupt. The evidence for this is that the judge was appointed by the governor of Delaware who is supposedly a friend of Joe Biden So what's going on? Is this just a case of a corrupt judge jealous of Musk success? Or was the world's largest pay package really obtained through corrupt means? Before we get into today's video, a quick word from today's video sponsor Public: You might know Public.com as the all-in-one investing platform. Now they've launched Options Trading and with it they're doing something no other brokerage has ever done before. Public is sharing 50% of their options trading Revenue directly with you, the customer.

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Full disclosures can be found at Public.com Options Us members only in 2018. Tesla Gave Elon Musk a pay package. It had no fixed salary and no cash. It was only paid in the form of stock options.

Upon Tesla achieving various Milestones Within the next 10 years it was separated into 12 tranches with the Milestones based on the company's market capitalization and financial performance. The final trunch required Tesla to achieve a market cap of $650 billion and Achieve various revenue and profitability. Targets In 2022, all Milestones were met, unlocking 20 million stock options. for Musk.

adjusted for stock splits, This was worth about $55 billion at the time. While this was the largest pay package of all time, there's nothing illegal about the company paying its CEO a large amount of money. During this period, Tesla's stock price skyrocketed with the market cap peaking above $1 trillion. You Could argue that paying Musk $55 billion was a worthwhile investment for how much value he created for shareholders.

Indeed, 73% of Tesla's shareholders voted in favor of the package. However, the lawsuit did not just allege that Musk's compensation was excessive. More importantly, it alleged that Elon Musk stacked the board of directors with his cronies and misled shareholders into approving the compensation. CEO Compensation can be a complex and controversial issue for a normal job.

Your pay is set by your boss. but what if you're the CEO You don't have a boss. so who sets your pay? The board of directors sets up an independent compensation committee who negotiates with the CEO. The compensation committee is supposed to work for the best interest of shareholders.

They are negotiating against the CEO. Their goal is to set the compensation as low as possible while still being attractive enough for The CEO. to take the job and be motivated to work hard. So how is Musk's compensation Decided in 2017.

Musk had satisfied all the conditions for his previous Compensation Plan so it was time to negotiate a new pay package. In April of 2017, he proposed a new package to the board. Under Musk's proposal, he would receive stock options worth 1% of Tesla's shares, outstanding for every $50 billion increase in the company's market valuation. At the time, Tesla's market cap was around $50 billion, so the first trunch would trigger.

At $100 billion, there would be 15 tranches in total. So if Tesla's market cap reached $800 billion, he would be awarded 15% Musk's proposal would have to be approved by the compensation committee. The compensation committee was made up of members of the board of directors. Some members of the board clearly had conflicts of interest.

For example, Elon Musk himself and his brother Kimble Musk were board members. They recused themselves from the process and were not on the compensation committee. But how independent they were is highly debatable. The chair of the compensation committee was Ira Aaron Price with whom Musk had a 15-year personal and professional relationship.

Aaron Price ran a venture capital firm that invested in multiple Mus controlled companies. Aaron Price said that being a member of Tesla's board was a real benefit in fundraising for his Venture Capital company. Basically, prospective investors were more likely to view his Venture Capital firm favorably because he was associated with Tesla Aaron Price is known to be a close friend of Kimble Musk, having attended his wedding, another member of the compensation committee was Antonio Gracias. Gracias was an early investor in Tesla and amassed a personal Fortune of over1 billion from this investment.

He was a close friend of Musk, having vacationed with him multiple times to the Bahamas in Africa Another compensation Committee Member James Murdoch was a close friend of Musk, having vacationed with him multiple times to Israel Mexico and the Bahamas James Murdoch is best known for being the son of Media Mogul Rupert Murdoch and was at the time a senior executive at his father's company. but he also owns a private Equity company which in 2019 invested $50 million into Musk's private space company. SpaceX We'll get into why this investment is relevant later in the video. The final person we need to take note of is Tesla's General Counsel Todd Marin as general counsel.

He effectively served as a liaison between Musk and the compensation committee during their negotiations. Prior to becoming Tesla's general counsel, Marin was Musk's Private divorce attorney. Of all the people you could choose to be the general counsel of a multi-billion dollar company, What's the chance that the most qualified person just so happens to be your divorce attorney? Long story short, Musk loaded the board of directors and Senior ranks of Tesla with his friends and cronies. With that being said, there was some push back.

when Musk first proposed his Compensation Plan Tesla's CFO DPAC AOA suggested that they should also add operational Milestones around Revenue growth and profitability. The reason that thata wanted the operational Milestones was not because they were important in themselves. it was purely for accounting reasons under Gap accounting rules, if the grant is based purely on market cap, Tesla has to recognize this as stock-based compensation expense on the day the compensation plan is approved. This would cause a massive net loss in the quarter and further draw attention to how massive the pay package is.

but if the award has operational conditions, the expenses first recorded when the probability of achievement exceeds 70% Thus, by adding Operational Milestones, the expense can be spread out over a longer period of time. Throughout 2017, Tesla was going through what must called production hell as they tried to ramp up Model 3 production. By his own admission, at some points they were within single-digit weeks of bankruptcy, Musk was fully consumed working on the Model 3 production line and didn't have time to think about his pay package. So the process with the compensation committee was effectively put on hold for the next few months.

By October of 2017, Musk was much more optimistic about Tesla's prospects. Many of the problems with Model 3 production had been resolved. He sent a quarterly update to the board saying quote production rate will soon enter the Steep portion of the manufacturing scurve and create nonlinear production growth. unquote.

Now, he finally had time to think about his pay package again. While the compensation committee had not yet given him a formal response on his original request, he proactively sent them a revised proposal. He told them: quote I think the amount should be reduced to a 10% increment to my Tesla ownership if I can get us to a $550 billion valuation, but that should be fully diluted 10% Factoring in that dilutes me too. So if it hypothetically was awarded to me now and I own 20% fully diluted, then I would have 30% So why was Musk giving a new proposal that was less generous than his previous proposal? If you do the math, the new proposal would actually give him more new shares.

Let's say for the sake of Simplicity that Tesla had 100 shares outstanding. As of 2017, Musk owned 19 shares or 19% with all other investors owning 81 shares. If Musk is given 10% of Tesla's shares, he'll get 10 new shares, bringing his total up to 29. but the total number of shares outstanding also increases to 110.

So his 29 new shares is only 26% In Musk's new proposal, he wanted to account for this dilution and make it such that his ownership percentage increases from 19% to 29% To achieve a 29% stake in Tesla, he would need to be awarded 14 new shares. But it's actually even worse than that. In the new proposal, He wanted the percentage to be calculated based on the fully diluted share count, which includes things like unvested Employee Stock compensation Etc Because of this, the new proposal actually represented 17% of the undiluted share count. So, contrary to Musk's claim that this new proposal was a reduction, it would actually give him more shares.

Someone on Tesla's accounting team pointed this out to Musk. so Musk watered down his proposal to just 10% of the current share count. This episode tells us either one of two things. Firstly, it could be the case that Musk is extremely bad at math and truly believed that his second proposal was a reduction.

Alternatively, he may have been trying to trick the board into thinking it was a reduction when it actually was an increase, but when the accountant found out what he was doing, he abandoned the stevious plan. In December, the compensation committee held a meeting where they reviewed Musk's new proposal and decided whether to accept or counter it. The board decided to make some slight changes. Instead of having 10 tranches of 1% they would have 12 tranches.

The tranches were still in increments of $50 billion, so the market cap required to achieve the full package increased to $650 billion each. Trunch would give Musk a number of shares equal to 1% of Tesla's undiluted share count. In the trial, Musk tried to claim that this was evidence of a fair negotiation process. He wanted it to be calculated based on the higher, fully diluted number, but the board insisted on using the lower undiluted share count.

However, the board also increased the package to 12% As it turned out, 12% of the undiluted share count was almost exactly the same as 10% of the fully diluted share count. so they basically gave Musk everything he asked for. The only difference was Spr reading it out over 12 tranches instead of 10. This did make the package slightly less favorable to Musk, as the full payout is more difficult to achieve, but this was not the committee's rationale for making the counter proposal instead.

The only reason they proposed this change was because they preferred using the undiluted share count as this was simpler to calculate. It was purely for simplicity's sake. It was not meant to change the economic substance of the compensation. The next piece is the operational milestones.

In December of 2017, Tesla's CFO Deac Auua made internal projections for the company's revenue and adjusted Iida for the next 3 years. These projections reviewed and approved by Elon Musk. The board also viewed these projections prior to approving the compensation. The projections showed that in 2020, Tesla was expected to make about 70 billion of Revenue and $4.4 billion of adjusted ebit.

Do. this would be enough to satisfy 11 of the 16 operational Milestones. Only one operational Milestone is required to unlock each trunch. So Based on Tesla's own internal forecast, In just 3 years, Musk would have enough operational Milestones to unlock 11 out of the 12 tranches.

Keep in mind that the compensation package had a duration of 10 years. If you believe Tesla's own internal forecasts, they basically gave Mus the operational milestones for free. This is consistent with the idea that they were only included for accounting reasons. they were not meant to make the tranches more difficult to unlock.

Both Musk and the board of directors agreed to this package, and in January of 2018, it was put up for a shareholder vote excluding votes from Elon Musk and his brother, 73% of shareholders voted in favor of the deal. This set Musk up for a $55 billion payday, which he would ultimately achieve in 2022. So was this compensation package? Fair. Musk and his supporters say this compensation was fair given the fact that it was performance-based and the fact that it was approved by shareholders, but the story is a little bit more complicated.

According to the judge, the compensation package was well in excess of what was required to motivate Musk, and the compensation committee had more than enough information at the time to know this first. Musk made it clear to the board at the outset that he had no intention of leaving Tesla. In the trial, Musk testified that he would have remained at Tesla even if shareholders rejected the 2018 Compensation Plan. He was heavily invested in Tesla both financially and emotionally and viewed Tesla as part of his family.

Secondly, Musk's pre-existing 19% stake in Tesla should already have been enough to motivate him the market cap Milestones were in $50 billion increments. Even without any compensation plan, his net worth would increased by 1010 billion for each. Milestone Just based on his existing stake, this should have already been enough motivation. Imagine: if you could receive a $1 million price for completing a marathon, you'll probably do everything in your power to complete the marathon.

If I come to you and offer you another $500,000 award, This won't increase your chances of completing the marathon at all because you're already exerting maximum effort. Thus, the additional $500,000 award is just a waste of money. Of course, there's a bit of a problem with this logic given the fact that Musk already said he had no intention of leaving Tesla and he is already motivated with his large Equity stake. The Logical Conclusion: Seems that he should be paid nothing.

This sounds absurd on his face. How can the CEO of a multi-billion dollar company be paid nothing? However, this is a straw man argument. Let's say you're applying for a job and negotiating your compensation. Obviously, you're not going to tell them you'll work there no matter what.

This would all but guarantee they'll give you a low offer. So why did Musk tell the board that he had no intention of leaving at the outset of the process? It's because this was never a real negotiation. He knew the compensation committee was full of his cronies who' give him a good deal so he had no need to come up with a negotiating strategy. Another issue is a shareholder vote.

In January of 2018, Tesla released a proxy statement which informed shareholders about the compensation plan and encouraged them to vote in favor of it. In the statement, they said the pay package was negotiated by members of the compensation committee, all of whom are independent directors. They did not disclose that multiple of these so-called independent directors had close personal and financial relationships with Musk. They refer to the Milestones as stretch goals and the compensation is commensurate with the difficulty of achieving them.

Each of the requirements underlying the performance Milestones was selected to be very difficult to achieve. It's hard to square these statements with the fact that Tesla's own internal forecasts which were not disclosed to shareholders showed the company reaching 11 of the operational Milestones within 3 years. There are companies that analyze CEO compensation and advise institutional investors whether to vote for or against. The two biggest of these firms are ISS and Glass Lewis.

Both of them recommended voting against the package saying the value was exorbitant. Furthermore, they argued that the lower tiers were not that difficult to achieve. The stock market as a whole increases by about 10% per year. the Milestones expire after 10 years.

Even if Tesla's stock price only performs in line with the market, you'd expect its market cap to increase to about $130 billion after 10 years or even greater if they do dilutive Equity raises. So Musk could receive the first one or even two tranches of stock options, even if Tesla just performs in line with the market. Ted Moren Tesla's general counsel and Mus former divorce attorney was carefully monitoring public reaction to the package. He saw the unfavorable statements from ISS and Glass Lewis and started to get nervous.

He called up Tesla's largest shareholders to see how they were planning to vote. Two of them indicated that they would vote against the package. When Musk found out about this, he was Furious. He ordered Marin to tell one of these shareholders that he was very offended by their actions.

He then told Marin to set up a call with the other shareholders so that Mus could quote convince them to divest from Tesla and all my other companies. They're not welcome. Unquote. We don't know who these shareholders were or how they ultimately voted.

As a publicly traded company, anyone can buy shares of Tesla, But for his private companies like SpaceX and Neuralink, Musk can decide who he lets invest. Some of Musk's private companies, especially SpaceX are highly sought after by institutional investors. Musk can threatened to exclude investors if they ever step out of line one year later in 2019, James Murdoch invested $50 million into SpaceX Murdoch was a member of Tesla's board in 2018 and voted in favor of Musk compensation. We can see how his loyalty to Musk was repaid.

Other members of Tesla's board can currently ran Venture Capital funds and actively advertise their connection to Tesla while fundraising. Obviously, they didn't want to do anything to jeopardize this relationship, so none of them stepped out of line in court. Tesla's board argued that the Compensation Plan was all upside for Tesla's shareholders. As Musk only gets paid of Tesla the stock price goes up.

If the share price does go up, the Compensation Plan given to Musk is only a small percentage of the total value created. While this is technically true, it's a fallacious argument. Let's say hypothetically that Tesla's share price starts at $100 5 years from now, there are two equally likely possibilities. Firstly, Tesla could go bankrupt and the stock price goes to zero.

In the second scenario, Tesla's share price doubles to $200 If the two scenarios are equally likely, the expected value is $100 Now, now, let's say that in the upside scenario, Musk gets new shares as compensation. After accounting for this dilution, the share price is only worth $190 The expected value decreases to $95 So Musk's compensation is a real cost to shareholders as their upside is reduced while they still shoulder all the downside risk. One final thing to consider is that while the market cap targets were indeed ambitious as CEO Musk had far more information than the general public, he could see the progress being made on the production line. Based on his internal community iations, we know that by late 2017, he was becoming increasingly optimistic.

Many investors were skeptical about the model 3 production ramp causing Tesla's stock price to be undervalued. Musk may have known the stock was undervalued, which could explain why he was so Keen to set apparently aggressive Milestones. So what was Musk's motivation? In 2018, Musk was already one of the richest men in the world with an estimated net worth of $2 billion. This is such a large amount of money that it's hard for most people to even comprehend.

No matter matter how many Yachts or Mansions you buy, it would be almost impossible to spend this much money in one lifetime. So why did he want even more money? While the board was discussing the compensation plan in 2017, Musk emailed Todd Marin He said quote the comp is just so that I can put as much as possible towards minimizing existential Risk by putting the money towards Mars If I'm successful in leading Tesla to be one of the world's most valuable companies, this is kind of crazy. but it is true. Unquote: Elon Musk thinks that he's on a Messianic journey to save Humanity by occup Ying Mars Looting Tesla out of $55 billion is surely a small price to pay for such a noble mission.

After all, Musk is literally saving Humanity Wouldn't it be immoral to allow pesky things like corporate governance Securities laws and treating minority investors fairly get in the way of this? It can't help but remind me of Sam Bankman Freed He said his effective altruism would save the world and thereby save trillions of people in future. Generations If he has to steal a few billion dollars in the short term, that's a small price to pay. The judge ruled that Musk's pay package needs to be rescinded. This basically means that the options that Musk was awarded will be voided according to Bloomberg Musk has not yet exercised these options.

This is mostly a technical distinction. Musk owns options which allow him to buy the shares at a tiny fraction of their market value, and Musk can exercise these options whenever he chooses. Owning the options is economically almost equivalent to owning the share themselves. Musk has not yet exercised them, perhaps due to tax considerations.

Because the options have not yet been exercised, it would be easy to Avid them basically just delete them. This would reduce Tesla's fully diluted share count, which will benefit all other shareholders. Surprisingly, Tesla's share price actually decreased slightly following the ruling. If the options are cancel, each share of Tesla will represent a larger ownership staken than company, so you would expect the share price to increase.

Perhaps investors believe the decision will be successfully appealed. Alternatively, they may fear that Musk could step down a CEO or sabotage Tesla from the inside as an act of Revenge. All right guys, that wraps it up for this video. What do you think about Elon Musk's pay package? Let us know in the comments section below.

As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.