Elon Musk's $1 trillion pay fight — and other things to expect at Thursday's Tesla shareholder meeting

For Tesla (TSLA) investors, the trillion-dollar day is almost here — and already sparks are flying before Thursday’s annual meeting in Austin, Texas, even before it begins.

One big spark: Norway’s $1.9 trillion sovereign wealth fund, which holds a 1.2% stake in the carmaker, will vote against CEO Elon Musk’s new compensation package, one that could net the billionaire a hefty $1 trillion.

“While we appreciate the significant value created under Mr. Musk’s visionary role, we are concerned about the total size of the award, dilution, and lack of mitigation of key person risk,” the fund said in a statement, as first reported by the Wall Street Journal.

Musk’s pay package will be the main highlight on Thursday. But investors will vote on a slew of proposals, including the status of directors and Tesla investments.

Here’s a cheat sheet.

Trillion-dollar package

This is the big one, of course. Last month, Musk made an unusual plea at the end of the company’s earnings call, urging shareholders to approve his new pay package. He claimed, among other things, that he wouldn’t be comfortable without control over the company.

“My fundamental concern … if I go ahead and build this enormous robot army, can I just be ousted at some point in the future? That’s my biggest concern,” Musk said.

Musk currently holds a 13% stake in Tesla after various share sales over the past couple of years, but he hasn’t been “paid” in years, he said. His 2018 pay package is embroiled in a lawsuit in Delaware, where shareholders alleged they didn’t have enough information to properly vet the compensation awarded by the board, and a trial judge agreed. The Delaware Supreme Court is currently weighing the merits of Tesla’s appeal.

Musk’s new proposed package, which could be worth as much as $1 trillion, will most likely be approved by shareholders. The proposed package — revealed in early September — would grant Musk 12 massive tranches of stock options tied to targets the board argues are aggressive.

And approval would give Musk around 25% stock ownership of Tesla, which he claims is enough to have some “influence.”

“The stock options will vest over seven and a half years and will be granted upon Mr. Musk meeting aggressive … milestones, which would increase shareholder value proportionality,” James Mohs, associate professor of taxation at the University of New Haven, said to Yahoo Finance. “Considering most of the compensation is incentive-based, the overall package seems fair.”

But some shareholder advocates don’t buy it.

“It’s not to say that if he accomplishes this extraordinary increase in the value of the company that he shouldn’t be rewarded, but we’re talking about a package that is just way beyond anything that resembles reasonableness in terms of compensation,” said Brian Dunn, director of the Institute for Compensation Studies Professional Programs at Cornell University.

Dunn was also a plaintiff’s expert witness during Musk’s 2018 compensation trial.

“I think a reasonable board would have tempered that along the way and say, ‘Hey, look, that’s just not reasonable, right? People don’t get paid that much, and this is a public company, and we’re fiduciaries for the other shareholders, and we’re not going to give you 12% or 15% of the company,’” Dunn added.

The pro-Musk side argues that keeping Musk at Tesla and giving him control is good for the company.

Tesla chair Robyn Denholm, a friend of Musk who has become quite rich as a member of the Tesla board, pleaded with shareholders last week to approve the unprecedented compensation package, with the threat of Musk leaving the company.

“If we fail to foster an environment that motivates Elon to achieve great things through an equitable pay-for-performance plan, we run the risk that he gives up his executive position, and Tesla may lose his time, talent and vision, which have been essential to delivering extraordinary shareholder returns,” Denholm wrote in a letter last week.

But independent proxy advisers Glass Lewis and ISS argued that shareholders should not approve the latest pay package, claiming the award was excessive, dilutive to shareholders, and not issued by an impartial board.

Glass Lewis argued in particular that the proposal for Musk’s pay includes broad discretion for the board to approve dispersal of some tranches of stock, even if Musk does not hit the metrics.

The big board

In addition to voting on Musk’s pay, some of the board members who came up with that package are up for reelection:

• Ira Ehrenpreis, a venture capitalist who is also an investor in SpaceX (SPAX.PVT), is one of three directors on Tesla’s compensation committee and one of four on the nominating and governance committee.

• Longtime HR executive Kathleen Wilson-Thompson is also a member of both committees, plus the disclosure committee.

• Airbnb co-founder Joe Gebbia is on the audit committee. Interestingly, Glass Lewis advises investors to approve his election but not those of Ehrenpreis or Wilson-Thompson.

All three are expected to be elected to additional three-year terms, but not without some criticism because, like Musk, shareholders alleged they were also paid excessively.

Earlier this year, Tesla directors, including Denholm and James Murdoch, among others, had to return $919 million as part of a settlement stemming from a trial alleging the directors’ compensation from 2017 to 2020 was excessive.

“Most directors fees — they get $200K-$300K a year if it’s a big company — these [Tesla directors] were pulling down millions at grant value, and hundreds of millions in realized value,” Cornell’s Dunn said about the board members. “I think that the directors have a legitimate interest in staying directors, because they get paid so well.”

The xAI factor

The size of Musk’s compensation package and the election of board members aren’t the only issues. There’s also a question of Musk’s focus.

Aside from his unpopular political escapades in Washington — like slashing federal government jobs, for instance — Musk is not only leading Tesla but also his other companies, SpaceX, The Boring Company, Neuralink (NEUR.PVT), and his AI startup, xAI (XAAI.PVT).

The xAI startup, which also includes Musk’s X.com, has raised a sizable amount of capital and is one of the more prominent AI tech companies in the valley. Musk’s own SpaceX is an investor in xAI.

Its Grok chatbot assistant is now included in newer Tesla vehicles, so it was only a matter of time before investors started asking whether the two companies could formalize a partnership that includes equity.

While Musk said a merger was not on the table, he noted that an investment might be the way to go.

“It’s not up to me. If it was up to me, Tesla would have invested in xAI long ago,” Musk wrote on X.com responding to a user on whether Tesla and xAI should merge. “It would be great, but subject to board and shareholder approval,” Musk added.

Now, Tesla shareholders have a say in whether an investment will be made. Tesla’s board is refraining from making a recommendation on the vote.

Glass Lewis advised a vote against the proposal, not because the adviser doesn’t believe the investment is a bad idea, but because it is a decision that should not be determined by shareholders.

On the flipside, there is the perception of self-dealing where Musk is asking investors in one company to fund another venture; the same venture that Musk threatened to put his full-time efforts into, if he wasn’t given more control of Tesla.

Thursday afternoon should be interesting to watch indeed.

Pras Subramanian is Lead Auto Reporter for Yahoo Finance. You can follow him on X and on Instagram.

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