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Yeah, so okay.
We're here to talk about, I mean, is it overstating it to say like the most expensive,
highest-stakes vote in like, I don't know, publicly traded company history or something?
I think that's fair.
I mean, this is a really unusual situation.
This is reporter Dana Hall.
She has been covering the Tesla company for more than a decade, works at Bloomberg now,
regular voice on their Elon Inc podcast.
Yeah, we wanted to talk to Dana because Tesla and Elon Musk have found themselves
or really put themselves into the middle of a story that sounds more like the plot of HBO's
succession than real life.
The basic story is this, Elon Musk, Tesla's CEO, helped to take his company from the brink of bankruptcy
to one of the biggest companies in the world.
And his compensation for that was an unprecedentedly large pay package that turned him into the richest man in the world.
But then a judge undid the entire compensation plan, taking away Musk's entire,
unprecedentedly large pay package, that decision, of course, also unprecedented,
which then set up the also unprecedented, high-stakes vote we mentioned earlier,
where shareholders got to weigh in on whether they agreed with the judge's decision.
Uh, you know, Tesla is the largest automaker on the world in terms of market cap.
Elon Musk is this kind of once-in-a-lifetime singular CEO.
It's really a remarkable corporate story.
Yeah, you know, we've lived amongst Elon Musk headlines for so long now,
that I feel like it's easy to forget just how much he sounds like a fictional character.
You know, he runs a space company and wants to colonize Mars.
He runs another company that just implanted a computer chip into a human brain.
He, he bought Twitter kind of forced to buy Twitter and then renamed it X.
Uh, and he believes there's a pretty high probability.
Everything is a simulation and we are living inside of it.
I hate simulation theory, Kenny.
I hate it. I find it.
Don't think about it. Don't think about it too much.
I can't.
But this whole thing, Kenny, about Elon Musk's compensation,
this whole high-stakes corporate vote.
It is not just another wild Elon Musk tale.
It is a lesson in how to motivate the people running the biggest companies that,
like it or not, are shaping our world.
It is a classic economics problem with a very 2024 twist.
Hello and welcome to Planet Money.
I'm Kenny Malone.
And I'm Sally Helm.
Today, I'm the show simply a remarkable corporate story that is playing out right now.
Yeah, what is going on at Tesla? And why does it matter to more than just people
whose names, you know, may rhyme with the schmewon schmusk?
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The year is 2017. It feels like decades ago, but try if you will to rewind what you've
heard about Elon Musk over the last seven years. You know, to lots of people in 2017, he's still
this mysterious visionary dragging the United States into accepting electric cars.
And it is early in that process. It is still relatively unusual at this time to see a Tesla out in
the world. It's like, ooh, there's one of those electric cars that cost like $90,000.
Ooh, who could it be? Who's driving it?
Now, Elon Musk did not found Tesla. He was a very early investor.
It eventually took over as CEO and the company started by making really fancy cars.
Fancy electric sedan, fancy SUV, but it had promised that now 2017 was the time to launch
their more affordable model, the Model 3. This was going to be the iPhone of Tesla.
This was going to be the car that was going to bring electric vehicles into the mainstream.
Again, Bloomberg reporter Dana Hall.
And there was a lot riding on the Model 3. And Tesla was really struggling.
It was apparently bad. There were whispers of a possible bankruptcy.
Tesla was having trouble with very basic parts of their business,
namely making cars. The thing they do, yes.
Right. And Musk would later say that ramping up production of the Model 3 was
extreme stress and pain for a long time.
I mean, they had never made a car in high volume before. It was production hell.
Elon Musk was sleeping at the factory. I mean, things were really rough. And at the same time,
Musk was all through things. He wasn't sleeping at the factory, lasing around. This was like,
he was just working intensely hard and felt like he had to be on the production line fixing
problems. And so on occasion, he would sack out in a conference room or spend the night under a
table. I mean, this is sort of legendary lore within the company that he was just at the factory.
There apparently was a couch to sleep on, but whatever. It all sounds like the world's most
attentive CEO. And yet Tesla may not have had his full focus. He was also like running a space
ax. I mean, this is a man who has always run more than one company. And he's got a lot of ideas
and a lot of business ideas and keeping him kind of singularly focused on the task at hand is hard.
So Tesla's board wanted to incentivize him. Yeah, this issue of how to incentivize the CEO to work hard,
it comes up all the time and publicly traded companies because the CEO's hired to run things,
but they're not necessarily the owners of the company. That would be the shareholders,
the people who own stock. And over time, some solutions have emerged to try to line up everyone's
interests, stock and stock options. This is by no means perfect, but the idea is that the CEO's
pay is then tied to performance. Yeah, so like they'll often still get some base salary, but most
of their compensation comes from shares in the company or the option to buy shares in the company.
That way, if the company does well, the CEO does too. Yeah, no, it's not like Elon Musk didn't have
shares of the company in 2018. He already owned lots of shares of Tesla, but the board apparently
wanted to find some way to make sure he was hyper, hyper focused on turning Tesla around. And so
they proposed this high risk, high reward version of the classic CEO stock options plan.
The high reward part of the plan was an absolutely wildly, astronomically unusual amount of money.
The valuation of the pay package was about $56 billion, including... Billion. Yeah.
So it was as much as $56 billion in stock options, but the high risk part is that this plan could
be worth as little as $0. There was no base pay, and it was going to be incredibly hard for Elon Musk
to make more than $0. Because the way this would work is that Tesla's board of directors set out
12 benchmarks. If Elon Musk managed to help Tesla grow its revenue and earnings and also the company's
value, he would have the right to more and more and more of the company's stock. Up to $56 billion
worth if he managed to hit all 12 benchmarks. But the very first benchmark was really far away. It
functionally required Musk to turn the company around and nearly double its value. And then the next
benchmark was even further away and less likely, and then the next was less likely and less likely,
and the top target required him to increase the value of Tesla by more than 1,000%.
And at the time we all thought it was crazy. I mean, I think everyone thought it was crazy.
Because Tesla wasn't a profitable company. They were basically struggling to build this car.
People were calling this the moonshot deal. And the way a publicly traded company works,
there's the board of directors. They are who came up with this moonshot deal as a way to incentivize
their unique CEO to focus. But the board doesn't just get to decide this. They have to put this wild
plan up for a vote. The voters are the owners of the company, the shareholders. You know, obviously
the compensation package that they were proposing was unprecedented. This is Joshua Walters. He's a
Tesla driver, a long time shareholder, not a ton of shares in the dozens, but he was engaged
enough to actually vote on this moonshot deal back in 2018. I don't necessarily remember it being
a big decision. I think to me it was pretty much a no-brainer. Why no-brainer?
It was a no-brainer about it. Well, at the time the money wasn't real. It was either the share price
is going to skyrocket and he's going to get paid. We're going to get paid. Everybody's going to be
happy. And I think we all kind of assumed that if the share price was that high, we would be happy
with the performance, too. Yeah, the moonshot required Tesla's valuation to go from $50 billion to
$650 billion. Joshua figures, that's not likely. And if it does happen, then it must mean
Musk was doing something right. In the end, it seems like most shareholders thought like Joshua,
and the vote passed with overwhelming support, like almost three-quarters of voters.
I remember being like, wow, there's a lot of support for this crazy pay plan.
Again, Dana Hall, and not to Yada, Yada, Yada over this all too much, but I suspect you know where
the story goes from 2018. And then they turned a profit in 2019 and then they kind of seemed like
they were off to the races. And I remember at one point, turning to a colleague on our wealth team.
And I was like, you know, like this pay package just doesn't seem so crazy anymore. And I think
we actually like wrote a story saying like, the moonshot is no longer crazy. Musk hit essentially
all of the 12 benchmarks and not only did the company go from being worth $50 billion to $650,
it eventually reached $1 trillion. It's come down from there, but you know huge gain.
And so under the terms of the pay package, Elon had earned his $56 billion in stock options.
And it is this pay package that turns him into the richest person on earth.
Is there an argument then that this moonshot compensation plan worked? Like it seems pretty
clear it did if he hit the milestones, right? Absolutely. I mean you can 100% argue that
you know Tesla could have gone bankrupt. Was it not for Elon Musk?
Lays are focusing on all the problems with production, sleeping on the factory floor,
and kind of rallying the troops to get out of this hole that they were in and his singular ability to
like basically ride herd on all of his employees and fix problems.
She says however there is also an argument that it did not work because if it was meant to focus
Elon on Tesla, well that didn't seem to happen. He has as many side projects as ever.
Plus there's also the question of how much is Musk actually responsible for this huge rise in the
company's stock price? Which is a deeply complicated question because there is of course stuff like
leadership and sleeping on the factory floor and prioritizing what to do next to turn the company
around. But there is also timing and possibly luck and this is kind of always true when the stock
price rises. It could be because the CEO did something good or it could be a little random. There
are so many variables. And in Tesla's case there is this extra weird thing. People think about Tesla
less like a car company and more like a tech company which itself increases the value of the stock.
And a big reason people think that is probably because of Elon Musk because he's this science
fiction figure who's heavily associated with new fancy technologies. Yeah, you know, whatever the
reason Elon Musk hit those benchmarks and got those moonshot payouts which is what vaulted his net
worth past other billionaires and that is the story of how he became the richest man on earth.
Now here is the story of how a huge chunk of that net worth disappeared with the stroke of a pen
in Delaware. Right. A Tesla shareholder who did not like this massive compensation package filed
a lawsuit. Now that lawsuit ends up landing in front of a judge in Delaware because of course Tesla
is incorporated in Delaware. Yes, classic place to incorporate. Of course. Yeah. Of course. In the fall
of 2022, you know, Elon Musk flies on a on a red eye albeit on his corporate jet to Delaware.
Actually, Dan flew out to Delaware too. Not on a private jet. You know, it's interesting. I've covered
Elon Musk and Tesla for over a decade and it's been a while since I've been in the same room as him
because you know, he like sort of exists now in the stratosphere and I was in the hallways. He kind
of came in with his fellings of attorneys and assistants and bodyguards and he was wearing a suit
and he seemed like ready for battle. Now the anti-musk compensation side of the battle
argued that this was just such a huge payout like this is such a huge chunk of the company to give
over as compensation. And they also said Musk had a lot of friends on the Tesla board. Also his
brother, very close person and there was like barely any negotiation about the terms of this package.
They also argue the shareholders didn't hear enough about any of this like they didn't have enough
information. One of the big questions in the courtroom was simply about incentives. Basically,
why was it that Elon Musk needed such an outrageously huge potential payout to, you know,
just do his job as CEO. Dana says at one point a long time board member got up to explain the
thinking behind the moonshot deal. He explained it as basically neuroscience. They needed to incentivize
Elon. Money alone wasn't going to do it. He needed a dopamine hit and so these 12 tranches were
like structured to give him this regular dopamine hit. Like you meet a milestone boom you get more
stock options and that seemed to work. I mean, it's fascinating. It's like a fascinating window
into the mind of this man that the board was like, we need to kind of think about dopamine. What
will give Elon the dopamine that he likes in order to meet these milestones? It seems that part of
the problem was that Elon Musk was already so very rich back in 2018. He was worth billions of
dollars already. And so you have this board taking a typical version of CEO incentives and putting
those on like steroids or like, I don't know, whatever drug gives you a dopamine hit I guess.
Both sides presented their case to the judge who went away to decide what should happen here.
So it'd been like over a year. Like I kind of like forgotten actually that we're still waiting
for the decision. But then came down the decision. Queue the news real.
Tesla CEO Elon Musk just took a job dropping financial hit. The judge says Tesla's board didn't
make a fair compensation plan. Calling the CEO's 56 billion dollar compensation unfathomable.
Saying approval of that pay package was quote deeply flawed.
The Delaware judge essentially agreed with the anti-musk compensation arguments. She wrote all of
this up in a 200 page ruling. And the ruling is really wild to read. I mean, she references
Shakespeare and she references Star Trek. The judge says quote this decision dares to boldly go
where no man has gone before or at least where no Delaware court has tread and quote.
And she says the board was right with complex of interests. And Elon should not get this money.
I mean, that's that's as dramatic as it can get in Delaware court. I suspect pretty
dramatic ruling and it's like, wow, like the wealthiest guy in the world just got like a big part
of his wealth like chopped off at the knees. Like what happens next? Well, what happens next is
Elon Musk posts on X quote never incorporate your company in the state of Delaware. Then two days
later, he announces a shareholder vote to reincorporate in Texas where the company's physical headquarters
and big factory are. Tesla and Musk also say, you know what? Fine. The judge thinks we didn't
give shareholders enough information before the first vote. So we will do the vote again.
Give them another chance to weigh in on this pay package. The date was set June 13th, 2024.
And that, that was the big vote that has been all over the news. It's a big old redo.
And what's been so interesting is that it really seems like some people wanted to use this
as an opportunity to try and exert a little power over their very unusual CEO.
I voted in favor of the first time. That's Joshua Walters. You heard him earlier,
Tesla driver, shareholder. And he was totally into this package back in 2018.
We actually talked to Joshua the day before the big vote. And he told us that he read that
Delaware ruling as basically saying the original deal is void because voters like him were misled
in some way. I don't necessarily feel misled, but if we're getting a mole again, then you know,
I'm going to vote and advocate based upon the current facts and the current situation.
And for Joshua, the current situation is very different. He doesn't like how Musk has been running
the company lately. He said Musk seems capricious, like firing a team in charge of rolling out
super charging stations, then rehiring some of the people in charge of super charging stations.
Also, Joshua thinks Musk has been distracted. Musk still runs SpaceX. He started a new AI
company. He bought Twitter. He still has his freaking tunnel making company.
And so given all of that, Joshua was going a different direction on his vote.
Oh, definitely. I already voted my shares.
Oh, it's done.
I voted against. Yeah. There does seem to be a fundamental thing here, which is like,
you agreed to a deal and he did the thing that he was supposed to do.
And now you're reneging on the deal, basically. I mean, not basically that's literally what's
happening. No, I don't disagree that that's what's happening. I don't necessarily think he should
be rewarded for the decisions he's made recently. And this is really the only mechanism we have to
punish him for that for lack of a better way of saying it. On the other hand, there were also
lots of shareholders who did not feel the same way as Joshua. And honestly, if you step back from
the legal technicalities and can somehow set aside the brain exploding amount of money here,
I don't have a very hard time understanding why those people might vote in favor of this thing
again. The Delaware ruling violates a basic principle that is more fundamental than economic
principles or or a laws of physics. It really boils down to no take backs. Again, Bloomberg
reporter Dana Hall. I mean, from Elon's perspective, he's like, listen, I did the job. I was asked
to meet all these milestones. I met them. Like, you've got to give that money back. When this ruling
comes down, is he like just not compensated for any of the CEO stuff he did during that entire
stretch then? Is that like where things currently stand? Right. Like if you'd listen to
Robin Denholm, the chair of Tesla's board, she put out a video where she basically is like,
Elon needs to get paid. Yeah, Tesla has had this kind of vote for Elon's money campaign.
And there have been all these important musk allies out there on the TV news circuit,
including this CNBC appearance by the current board chair, Robin Denholm.
The ratification of the pay package is really about fairness. Fairness to our CEO.
But if you sit back, shareholders have benefited tremendously. Employees have benefited tremendously.
They're all shareholders in the company. And the only person who hasn't been paid is actually the
leader of the company, Elon. So Robin Denholm, board chair, thought people should vote yes on the
pay package this time around. After all, one thing Elon Musk has made clear is that he has lots of
other things he could be doing with his time. And if he doesn't get all these stock options,
will he be interested in running Tesla? After the break, the votes come in.
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The morning after the big vote, we called up Dana Hall again.
Did you watch the announcement of the vote live?
I did. Do you want to just paint a scene for us?
Yeah, the scene was that Tesla's General Counsel just sort of went through the resolutions.
And finally, our stockholders have approved the ratification of the 100% performance-based
stock option award to Elon Musk that was approved by stockholders in 2018.
72% of voting shareholders approved the pay package, which is basically-
It wasn't close to the goal. It was not close at all.
The meeting is now closed and with that Tesla shareholders, let's welcome Elon Musk.
We came out onto the stage and people were chanting like,
Elon, Elon. He did a little leap into the air that wasn't quite like a jumping jack,
but he did this kind of like happy leap. And then he was like,
I just want to start off by saying, hot damn, I love you guys.
Clearly, what happened was that some of the large institutional funds that voted against
the pay package in 2018 voted for it. And we learned today that Vanguard,
the largest shareholder in Tesla after Musk was a guess.
Yes, big institutional investor Vanguard, they had flipped flopped.
Vanguard, we should disclose, has been a corporate NPR sponsor and many people on staff
pulled Vanguard index funds as part of our retirement accounts.
Indeed, same with many people across the country.
True.
But yeah, so Vanguard had been a no on the pay package and now they were a yes.
They explained in a statement that initially back in 2018, they thought the moonshot payout was so big
that even the ridiculously ambitious benchmarks were not a guarantee that Musk would deserve a payout
that big $56 billion in stock options, which by the way is now worth closer to $46 billion
because Tesla's stock price has fallen.
But even with that stock price drop, in the year 2024, Vanguard felt like Tesla had so
dramatically outperformed other companies that they were now voting in favor of giving Elon Musk
the compensation plan.
And there is another little line in their statement, very
stodgy institutional investor statement, that kind of got to the much bigger thing at play in this
Tesla Musk saga. Dana pulled up the Vanguard explanation and started beating it to us.
To further inform the funds voting decisions, we met with Tesla executives and board members.
During our engagement, board members reinforced their conviction regarding the importance of
retaining the CEO and highlighting that the plans five year post exercise holding requirement
maintains the alignment of the CEO's economic interests with the company's shareholder base.
Retaining the CEO and maintaining the alignment of the CEO's economic interests with the shareholder
base. That sure sounds like it is speaking directly to the question that started this whole thing.
How do you incentivize a unique CEO like Elon Musk? If he doesn't have these tens of billions of
dollars in Tesla stock, is he going to pay attention to Tesla? Is he even going to stay at Tesla?
And if he left, how bad would that be for the shareholders?
So what does that tell you about what actually happened here? What the people voting
yes were actually voting on? For better or worse, love Elon Musk or Haydom, regardless of the fact
that he bought Twitter and started x.ai and has created all these other companies and is not a
full-time CEO and seems to be very busy and very scattered and is not 100% at the CEO chair.
And Tesla five days a week, people are willing to kind of give him latitude because
he is completely intertwined with the company. I mean, Elon is Tesla and Tesla is Elon and they
want him to stick around and they are so highly dependent on Elon Musk. I think for Tesla, a big question
is still, you know, key man risk. Key man risk. What we've seen here is a case where the key man
in this case, Elon Musk as CEO, has become so intertwined with the company and presumably the company's
stock price that it could be catastrophic to have him leave. And the way the shareholders have decided
to keep him engaged is with a payout so enormous that Musk could now own something like one fifth
of the company. One tricky thing here is that this vote to pay him, it does not mean he gets the
money right now. It's just an additional piece of evidence that Tesla and Musk can take back to
the Delaware judge to say, look, people had good information about the deal and they still
overwhelmingly voted for it. One other thing the shareholders overwhelmingly voted for,
leaving Delaware and re-incorporating Tesla where everything is bigger. Texas.
Listeners, we are asking for your help. Have you or someone you know ever taken an idea from
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how you use dating apps or negotiated a trick to decide on like what restaurant to go to.
It doesn't have to be a good tip. Bad ideas are also welcome. But tell us about your econ
life hacks and love hacks at mpr.org slash love hacks. This is because we're writing a
planet money book and we will include some of your stories in a chapter about love and dating.
Again, that is mpr.org slash love hacks. This episode was produced by James Sneed with help
from Sophia Shukina, edited by Sally Helm. It's me. Sally at the Helm. And fact checked by
Sierra Huatis. Engineering by James Willits. Alex Goldmark is our executive producer.
A very, very special thanks this week to professor David Yoffy from the Harvard Business School
who helped us understand lots and lots about executive compensation. I'm Kenny Malone.
And I'm Sally Helm. This is mpr. Thanks for listening.
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