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Elon Musk’s $2.6 Billion Tesla Challenge

Musk

The recent tumble in Tesla share prices may have suggested that investor patience was wearing thin, but shareholder approval of a $2.6-billion compensation plan for Elon Musk tells a slightly different story.

On Wednesday, Tesla (NYSE:TSLA) shareholders voted to approve the $2.6-billion, 10-year compensation package that has media headlines gushing over the sum, but skirting over the timeframe and the conditions attached.

The compensation plan is directly tied to Elon Musk’s success—and it speaks to the nature of shareholder patience in a very clear way: If Tesla doesn’t hit some specific milestones, Musk doesn’t get paid.

And that’s true in every sense: He receives no salary, no bonuses, no equity. Every penny is directly tied to success.

Or, as Tesla noted in a statement: Musk isn’t going to get paid “simply by the passage of time”.

This is a “100% at-risk performance award, which ensures that he will be compensated only if Tesla and all of its shareholders do extraordinarily well.”

But if he does succeed, the reward will be massive: He could also end up with a 28-percent stake in Tesla, which would be worth around $200 billion.

He’s already worth $20 billion, so a Tesla salary is pretty easy to shrug off. And if anyone likes a challenge, it’s Elon Musk. 

But this is what he’s got to make happen in order to see that payday: Get Tesla to a $650-billion market valuation.

That’s a huge ask. As of today, the company has a $52-billion market cap. And there are at least a dozen other milestones tied to that.

The market-cap goals are lined up in increments with the $2.6-billion compensation package. So, if Musk gets Tesla’s valuation up to $100 billion, he’ll get 1/12th of the package.

It’s not the first time Musk has taken on a challenge of this nature. It’s not even the first time he’s done it with Tesla. Related: Dow Gains Despite Fed’s Rate Hike

So, it should come as no surprise that Tesla shareholders are willing to up the ante—for both. Musk has already taken Tesla from a $3-billion valuation in 2012 to an over-$50-billion valuation today.

And approval came despite a recommendation by an advisory firm to reject the deal as too pricey.

Investor confidence is still there, even if patience is running thin; and for shareholders, it’s all about incentive. 

In the meantime, Tesla stock is down after news that the company wouldn’t meet its Model 3 production targets.

On Tuesday, Tesla shares were down almost 7 percent on the week, and Goldman Sachs put a $205 price target on the company, reiterating a sell rating.

On Wednesday, share prices bought back, regaining almost 2 percent.

(Click to enlarge)

The Tesla bulls are hard to hold back, even surrounded by Goldman Sachs’ skepticism.

Tesla’s missed production targets before. This isn’t the first time, and it won’t be the last. But Musk always delivers, and now he’s got an extra incentive that would make him the richest man in the world.

By Tom Kool for Safehaven.com 

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