Tesla shareholders will vote on Elon Musk's controversial $56B pay package this week: Here's what's at stake


Generally speaking, most shareholder meetings are rather staid affairs with little drama. Even Berkshire Hathaway’s (BRK-B, BRK-A) “Woodstock for Capitalists” is losing some of its allure.

For EV maker Tesla (TSLA), however, boardroom drama will be on full display. On Thursday afternoon from its Giga Austin plant, Tesla will announce the results from shareholder votes on a number of key issues — most importantly, the status of CEO Elon Musk’s compensation. While Wall Street expects Musk to secure his pay package, it won’t come without a battle.

To review: Musk’s all-stock pay package, awarded in 2018, has been embroiled in controversy and was struck down by a Delaware court earlier this year, with the judge finding that Tesla’s board didn’t act “in the best interests” of Tesla shareholders by approving the $56 billion award. Since then, Musk and Tesla’s board, led by chair Robyn Denholm, have been advocating rather forcefully for Tesla shareholders to approve a newly submitted pay package, which is very similar to the original 2018 award invalidated by the judge.

LOS ANGELES, CALIFORNIA - APRIL 13: Elon Musk attends the 10th Annual Breakthrough Prize Ceremony at Academy Museum of Motion Pictures on April 13, 2024 in Los Angeles, California. (Photo by Axelle/Bauer-Griffin/FilmMagic)LOS ANGELES, CALIFORNIA - APRIL 13: Elon Musk attends the 10th Annual Breakthrough Prize Ceremony at Academy Museum of Motion Pictures on April 13, 2024 in Los Angeles, California. (Photo by Axelle/Bauer-Griffin/FilmMagic)

Will he get a raise? Tesla CEO Elon Musk is pictured at the Breakthrough Prize Ceremony at the Academy Museum of Motion Pictures on April 13, 2024, in Los Angeles. (Axelle/Bauer-Griffin/FilmMagic) (Axelle/Bauer-Griffin via Getty Images)

Just this last week Denholm submitted an open letter, urging shareholder approval of Musk’s compensation package.

“Fairness and respect require that we honor the collective commitment we made to Elon — a commitment that was, and fundamentally still is, about retaining Elon’s attention and motivating him to focus on achieving astonishing growth for our company,” Denholm wrote in her letter.

Denholm’s choice of words — “retaining Elon’s attention and motivating him” — raised eyebrows, as most independent board chairs generally do not pen open letters urging shareholder approval of management pay packages, let alone claiming the compensation is needed to keep the CEO motivated.

“While top management often shows great interest in keeping down other costs for the company, it has no interest in keeping down its own pay. If the firm’s directors are not actively working to limit CEO pay, then no one is,” economist and CEO pay expert Dean Baker wrote in a research paper published by the nonpartisan Economic Policy Institute.

Even before the 2018 pay package was invalidated by the Delaware court, Musk threatened shareholders about his divided attention, as he is in charge or spends significant amounts of time at SpaceX, X.com (formerly Twitter), and the Boring Co., among other ventures.

“I am uncomfortable growing Tesla to be a leader in AI & robotics without having 25% voting control. Enough to be influential, but not so much that I can’t be overturned,” Musk said from his X account in January. “Unless that is the case, I would prefer to build products outside of Tesla.”

Case in point: Tesla recently had to deal with reports that Musk ordered Nvidia (NVDA) AI chips meant for Tesla to be diverted to X.com. Musk defended the move after the report’s release, claiming Tesla lacked space to use the chips, and they would have sat in a warehouse otherwise.

Musk’s AI and robotics threat, odd strategic moves and backtracks, and his own advocacy for his pay package have shareholders concerned that he won’t care as much about Tesla if he doesn’t get what he wants. Denholm even acknowledged as much, claiming there are “other places” Musk could take his time and energy.

“What we recognized in 2018 and continue to recognize today is that one thing Elon most certainly does not have is unlimited time. Nor does he face any shortage of ideas and other places he can make an incredible difference in the world,” she wrote.

Musk supporters have doubled down on the argument that his presence is necessary for the future of Tesla.

“Elon is the ultimate ‘key man’ of key man risk,” billionaire Tesla investor Ron Baron wrote last week in an open letter. “Without his relentless drive and uncompromising standards, there would be no Tesla.”

“I’d argue that no other executive is as aligned with shareholders as @elonmusk who committed to no salary, no bonus, no stock comp FOR 10 YEARS, unless he created tremendous value for @Tesla shareholders,” ARK Invest founder and CEO Cathie Wood posted on X late last week.

Cathie Wood, chief executive officer and chief investment officer, Ark Invest, speaks during the Milken Institute Global Conference on May 2, 2022 in Beverly Hills, California. (Photo by Patrick T. FALLON / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)Cathie Wood, chief executive officer and chief investment officer, Ark Invest, speaks during the Milken Institute Global Conference on May 2, 2022 in Beverly Hills, California. (Photo by Patrick T. FALLON / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)

Musk fan: Cathie Wood, chief executive officer and chief investment officer at Ark Invest, speaks during the Milken Institute Global Conference in May in Beverly Hills. (PATRICK T. FALLON/AFP via Getty Images) (PATRICK T. FALLON via Getty Images)

Conversely, proxy adviser firm Glass Lewis urged shareholders to vote against Musk’s compensation, arguing that the “excessive size” of the award and the dilutive effect of it on existing shareholders were major concerns. ISS, the other major proxy adviser firm, recommended that shareholders vote down the package as well.

While a few smaller shareholder groups came out against Musk’s pay package, one big one weighed in against Musk over the weekend — Norway’s $1.7 trillion sovereign wealth fund.

“We remain concerned about the total size of the award, the structure given performance triggers, dilution, and lack of mitigation of key person risk,” Norges Bank Investment Management (NBIM), the operator of the fund, said.

The fund, which also opposed Musk’s pay package in 2018, holds a $5.6 billion stake encompassing 31.57 million shares, or 0.99% of all shares outstanding, making it Tesla’s seventh-largest shareholder, per Capital IQ. Other large funds that own the largest Tesla stakes — Vanguard, BlackRock, and State Street, among others — have not commented on Musk’s pay package.

The drama could be much ado about nothing when the votes are counted, however, with shareholders expected to give Musk what wants.

“[Musk’s pay package] has been an area of hot button contention among some investors but we would expect the 2018 package will be overwhelming [sic] reapproved,” Wedbush analyst Dan Ives predicted in a note to investors late last week.

While approval of the pay package will remove one “overhang” on Tesla stock, Ives believes Tesla needs Musk more than ever to navigate the company through a crucial time.

“Musk needs to commit all AI initiatives will be under the Tesla hood and will be not be separated,” Ives said, reiterating his Outperform rating and $275 price target.

CFRA’s Garrett Nelson believes the vote will be closer than expected.

Clearly, the Board is concerned about the vote given its shareholder outreach efforts,” Nelson said in a statement to Yahoo Finance, writing that the vote will likely come in below the 73% approval the plan received in 2018.

Nelson added: “We have long argued that one of the primary reasons the stock trades at such a massive premium to the rest of the industry is the innovation of Musk. If the pay package were to be voted down, it could increase uncertainty regarding the future direction and leadership of the company.”

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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