Tesla’s $50 billion question comes down to the wire

On Thursday, Tesla shareholders will face a stark choice: approve Elon Musk’s enormous pay package, the largest ever awarded to a chief executive, or risk him picking up his ball and going home. 

The shareholder meeting on Thursday is a referendum on Musk’s tumultuous leadership, in which he took a relatively niche startup, wrested it away from its founders, and turned it into what is arguably one of the most consequential car companies in modern history. To reward him for this feat, shareholders are being asked to cast an unprecedented vote on Musk’s compensation — to the tune of $50 billion — for the second time.

Last January, a Delaware court judge invalidated Musk’s pay package, first approved in 2018, arguing that the process was flawed because shareholders lacked insight into its development and that Tesla’s board was too chummy with its already very rich CEO. Incensed, Musk pulled some strings to set up another vote, while also pushing for a proposal to reincorporate Tesla in Texas as a way to avoid the scrutiny of Delaware’s shareholder-favoring court system.  

Tesla’s board says the pay package is needed to secure Musk’s attention — even as it becomes less clear that money is what really motivates him. 

“If I were a shareholder, I would be asking myself for starters whether the $50 billion Elon Musk is requesting in exchange for his full attention would in fact secure it,” said Gregory Shill, a professor at the University of Iowa College of Law, “or if, as some colleagues have argued, it would be unlikely to.”

In a letter to shareholders last week, Tesla board chair Robyn Denholm argued that for Musk to receive his historic compensation, he needed to hit certain operational thresholds and boost the company’s stock and valuation — and he did. In 2020, the company became the most valuable automaker in the world with a market capitalization of over $400 billion. In 2021, it briefly reached a $1 trillion valuation. 

The original proposal “had one simple purpose,” Denholm said, “to keep Elon focused on Tesla and motivated to achieve the Company’s incomparable ambitions.” Tesla must “retain Elon’s attention and motivate him to continue to devote his time, energy, ambition and vision to deliver comparable results in the future,” she added.

Musk, in typical fashion, was more blunt: give me 25 percent of the company or I’ll spin out the AI division into another company, he said on X. 

The question of the CEO’s “attention” and “focus” is unique among Fortune 500 companies. No other company has a chief executive who seems so uninterested in the job he is most known for. Musk spreads himself dangerously thin, overseeing SpaceX, The Boring Company, Neuralink, X Corp., and xAI, the AI startup that just received $6 billion in financing. And while Tesla is the source of Musk’s wealth and popularity, it’s obvious his attention has wandered considerably in recent years. 

On Wednesday, Tesla posted a lengthy list of its accomplishments under Musk, including vehicle delivery growth and milestones in developing the company’s Full Self-Driving software that Musk has argued will eventually lead to fully autonomous vehicles. 

The company makes no mention of the last six months of turbulence, including several rounds of layoffs, a nearly 30 percent drop in share price, and rampant price cutting, leading to the lowest profit margins in six years. Many observers have noted that the recent slowdown in EV sales growth appears to be entirely localized within Tesla, which still commands over 50 percent of the market. Unsold Teslas are piling up in parking lots in numbers so large they can be viewed from space.  

Samantha Crispin, a partner at Texas-based law firm Baker Botts and chair of the corporate department, said these difficulties could sway certain investors, depending on when they bought into the Tesla story. 

“A recent investor that hasn’t seen the type of return on investment, like somebody who would have invested pre-2018, they may well have a very different point of view,” Crispin told The Verge.  

The vote has quickly emerged as a showdown between institutional investors — large funds that include Tesla shares in their pooled investments — and retail investors, also known as mom-and-pop shareholders, who own individual stocks. 

Tesla has the largest share of retail investors in the S&P 500, according to Reuters, to the tune of 43 percent. On X, Musk claims he has the vast majority of their support, which comes as little surprise. Musk actively courts the favor of mom-and-pop investors, sparing with them on Twitter, allowing them to ask questions during earnings calls, and inviting them to lavish events at his factories. This time around, Tesla is offering factory tours led by Musk himself to a select group of shareholders to entice them to vote. 

The only problem is that retail investors have historically proven apathetic about voting their shares. When they do vote, they tend to favor management. But most often, they don’t even bother. 

“Retail investors can be much more unpredictable,” Crispin said, “in terms of how they may end up voting on a matter [or] whether or not they actually show up to vote.”

Meanwhile, several top proxy advisory firms have recommended voting against the proposal, arguing it is too “excessive” and would dilute the value for individual shareholders — which bodes poorly for Musk’s chances. 

Even if Musk wins the vote, he wouldn’t automatically become $50 billion richer. That’s because Tesla has yet to file its appeal to the Delaware court’s ruling, which it would need to do in order to allow Musk to receive his compensation. A positive outcome would feature prominently in said appeal and could lead to the judge’s ruling being overturned. 

Tesla shareholders are also being asked to approve a proposal to reincorporate the company in Texas. That could work against Tesla’s effort to convince the Delaware courts to reverse its ruling. And it could sink its support among institutional investors, which have long preferred Delaware because of its predictability. 

“It’s a known quantity with many decades of established legal precedent that people respect, and Texas is an unknown quantity in that regard,” said Stephen Diamond, an expert on corporate governance at Santa Clara University’s law school. Diamond also noted that reincorporation to Texas requires a higher vote threshold than the compensation vote, which may also make it harder to accomplish. 

All of these issues will be on display at Tesla’s Austin factory on Thursday. The fanboys will be there, as will the average shareholders alongside the big investors, the sovereign wealth funds, and money managers. Musk has long argued that Tesla isn’t a simple car company — it’s really a tech company. In fact, it’s an AI and robotics company attempting to capture the zeitgeist alongside tech’s other big players. 

He’s clearly a true believer. Tomorrow’s vote will be the ultimate decision on whether everyone else buys it, too.