Why is everyone talking about Musk's money?

0:07This message comes from ADP. 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 Hull. 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.

1:13And 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. You know, Tesla is the largest automaker in 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.

1:55Yeah, 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 bought Twitter, kind of forced to buy Twitter, and then renamed it X. 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, Sally. I really can't.

2:28But 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 on 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 shmuel and schmusk?

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3:55Capital One. What's in your wallet? Terms apply. Details at CapitalOne.com. 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 like 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.

4:37He 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 Hull. 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.

5:17The 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. You know, Elon Musk was sleeping at the factory. I mean, things were really rough. And at the same time, Musk was also running— Like, he wasn't, like, sleeping at the factory, like, lazing around. This was, like... He was just working intensely hard and, like, felt like he had to be on the production line fixing problems. And so, on occasion, he would, like, sack out in a conference room or spend the night, like, under a table.

5:55I mean, this is sort of legendary lore within the company that he was just, like, at the factory. There apparently was a couch to sleep on, but whatever. It all sounds like, you know, the world's most attentive CEO. And yet Tesla may not have had his full focus. He was also like running SpaceX. 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 in publicly traded companies because the CEO is hired to run things.

6:35but 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. Now, it's not like Elon Musk didn't have shares of the company in 2018.

7:11He 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... Oh! Whoa! 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 zero dollars.

8:06Because 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%.

8:49And I mean, 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. I mean, they were basically like struggling to build this car. People were calling this the moonshot deal. And, you know, 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.

9:29This is Joshua Walters. He's a Tesla driver, a longtime 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 remember that. I don't necessarily remember it being a big decision. I think to me it was pretty much a no-brainer. Why a no-brainer? What 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.

10:13Yeah, 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, like there's a lot of support for this crazy, crazy pay plan. Again, Dana Hall, and not to yada yada yada over this all too much, but I suspect you know where this 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.

10:55And I remember at one point turning to a colleague on our wealth team. And I was like, you know, like this pay package 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.

11:37Is 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 Tesla could have gone bankrupt was it not for Elon Musk laser 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.

12:24He 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.

13:02People 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-y 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.

13:40Right. 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 red eye, albeit on his corporate jet to Delaware. Actually, Dana 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.

14:23And I was in the hallways. He kind of came in with his phalanx 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 argued the shareholders didn't hear enough about any of this, like they didn't have enough information.

15:02One 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 longtime 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.

15:46I 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 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.

16:24So it had been like over a year. Like I kind of like forgotten, actually, that we were still waiting for the decision. But then came down the decision. Cue the newsreel. Tesla CEO Elon Musk just took a jaw-dropping financial hit. The judge says Tesla's board didn't make a fair compensation plan. Calling the CEO's$56 billion 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.

17:04She 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, end quote. And she says the board was rife with conflicts of interest 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.

17:47Then 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 has 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.

18:30I voted in favor 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 mulligan, 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.

19:10He said Musk seems capricious, like firing a team in charge of rolling out supercharging stations, then rehiring some of the people in charge of supercharging 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. Definitely. I already voted my shares. Oh, it's done deal. And 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.

19:55I 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.

20:29You know, the Delaware ruling violates a basic principle that is more fundamental than economic principles or laws of physics. It really boils down to no take backs. Again, Bloomberg reporter Dana Hull. 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 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.

21:10Yet 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.

21:48After 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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25:04That's for Planet Money Plus listeners. If that's you, thanks. If it's not, it could be. You could get sponsor-free listening and support the work of Planet Money. Just go to plus.npr.org. The morning after the big vote, we called up Dana Hall again. Now, 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, you know, 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.

25:4772 % of voting shareholders approved the pay package. So it wasn't close at all. It was not close at all. The meeting is now closed. And with that, Tesla shareholders, let's welcome Elon Musk. He came out onto the stage and people were chanting like Elon, Elon. Elon, Elon, Elon, Elon. And he did like 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.

26:31And we learned today that Vanguard, largest shareholder in Tesla after Musk, was a guess. Yes. Big institutional investor Vanguard, they had flip-flopped. Vanguard, we should disclose, has been a corporate NPR sponsor, and many people on staff polled Vanguard index funds as part of our retirement accounts. Indeed. Same with many people across the country. 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.

27:13Fifty six billion dollars in stock options, which, by the way, is now worth closer to forty six billion dollars 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 gets at the much bigger thing at play in this Tesla-Musk saga. Dana pulled up the Vanguard explanation and started beating it to us.