Elon Musk’s acquisition of Twitter might be grabbing all the headlines right now but his other recent success with Tesla, is a great example of the power of equity compensation and shouldn’t be overlooked.
When Tesla announced their first-quarter 2022 earnings Musk, already the world’s richest man according to Forbes magazine, unlocked a further $23 billion in compensation because even though he’s the CEO of the electric-vehicle company he doesn’t actually receive any cash salary or bonus, but is instead paid entirely with stock options.
Why has Elon Musk never taken a salary from Tesla?
In 2018 Musk agreed a deal where he would be awarded shares in the carmaker, with the number of shares that would vest dependant on whether certain performance targets for Tesla’s market value, revenues and profits were hit. At each milestone reached Musk would receive share options and these would allow him to buy a tranche of shares at a set exercise price. Musk’s most recent hat-trick of targets achieved for the company has allowed him to pay $1.8 billion to buy 25.32 million shares, currently worth circa $23 billion.
When this long-term incentive package was agreed in 2018 it was deemed to be radical, bold and controversial, but it’s actually only the figures and targets which are extreme. Once you strip those away what you are left with is a fairly standard package of performance-vesting equity, which at its core is no different from the sort of plan which the hundreds of companies we work with every day use to reward their staff.
Aligning interests and maintaining loyalty
One of the benefits of an employee compensation scheme for employers is the staff retention and loyalty it instils. As Musk’s very public attempts to court Twitter have shown that deal is clearly taking a lot of his attention. Let’s not forget that he’s also a major shareholder and CEO of rocket maker SpaceX and a founder of the infrastructure and tunnel construction services company The Boring Company. He’s a man with a lot of different priorities vying for his time but the remuneration package agreed with automotive company guarantees that Musk remains interested in and focused on Tesla, rather than being distracted by something new.
It was noted by Tesla at the time this package was agreed that “Elon’s compensation will be 100% aligned with the interests of our stockholders.” By being given long-term stock options it was ensured that Musk must think and act like a long-term owner and since his only compensation remains a 100% at-risk performance award it means he will only benefit financially if Tesla and all of its stockholders do extraordinarily well. It was by linking their fortunes like this that the company therefore secured his loyalty.
This highlights the advantage of having a good share option plan when it comes to retaining and motivating top quality staff, while Musk, in turn, has used the power of employee ownership to generate huge financial gain for himself. It’s a win-win for both employer and employee.
Currently around half of the companies traded on the S&P 500 offer some form of Employee Stock Purchase Plan to their staff. Twitter itself has an employee equity scheme in place and according to the New York Times many Twitter employees make 50% or more of their total compensation from Twitter stock. It’s no wonder then that these employees feel personally invested in the company’s future and ongoing success.
Of course this type of plan isn’t going to generate such ridiculous amounts of wealth for everyone unfortunately, and we can’t promise that you’ll be able to buy out a social media platform with your returns but, as you can see, unlocking the power of employee ownership does bring with it huge benefits.
Want to learn more about equity compensation?
At Global Shares we understand the power of share options and have over 15 years’ experience helping companies of all sizes find the right equity plan management solution. Employee Ownership, Simplified, is our motto and we apply it across every aspect of our business. To find out how equity compensation could help your company with retention, talent attraction and rewarding top staff get in touch today.
Please Note: This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
