Scottish Mortgage Backs Musk’s $56B Pay Deal Amid Tesla Revenue Drop

Key Takeaway

• Baillie Gifford’s Scottish Mortgage Investment Trust supports Elon Musk’s $56 billion pay package, despite previous Delaware court rejection.
• Concerns arise over Musk's divided focus and Tesla's financial struggles, including a 9% revenue drop in Q1 2024.
• Upcoming shareholder vote on June 13 will decide on Musk’s compensation and Tesla's potential move to Texas.

Baillie Gifford's Support for Musk's Pay

Baillie Gifford’s flagship Scottish Mortgage Investment Trust, a long-time shareholder of Tesla, has announced its intention to support Elon Musk’s $56 billion pay award at the upcoming shareholder vote on June 13. The pay package, which is the largest in US corporate history, was initially approved in 2018 when Tesla was facing production challenges. Tom Slater, manager of the £14.1 billion trust, stated, “We agreed the remuneration package with Tesla back in 2018 because it introduced extremely stretching targets that would make a huge amount of money for shareholders if they were reached. Having agreed to that, we believe that it should be paid out.”

The Delaware court had previously struck down the award, citing that Tesla’s board failed to act in shareholders' interests. Following this, Musk proposed moving Tesla’s incorporation from Delaware to Texas, a resolution that will also be voted on by shareholders. Slater mentioned that Scottish Mortgage has not yet decided on whether to support the move to Texas, noting that “it’s complicated.”

CEO Focus Concerns

Steve Westly, a former Tesla board member, has raised concerns about Elon Musk’s divided focus, especially at a critical time for the electric vehicle (EV) industry. Speaking at the VivaTech conference in Paris, Westly emphasized the need for Musk to concentrate more on Tesla. “For any CEO of any of the top companies in the world, you need to be laser-focused on what you’re doing. And it appears now that Mr. Musk’s focus is in too many areas,” Westly stated. He compared Musk’s leadership to that of Nvidia’s CEO, Jensen Huang, who he described as “arguably the greatest CEO in the world right now” due to his focused approach.

Westly noted that Musk’s distractions, including recent staff layoffs and controversies over his compensation, have contributed to Tesla’s lagging performance compared to its peers. Despite these issues, Westly acknowledged Tesla’s potential to innovate, highlighting the announcement of a $25,000 low-cost Tesla model expected by early 2025. “Don’t bet against the guy [Musk], he’s got a pretty good track record,” Westly added.

Financial Performance and Layoffs

Tesla’s financial performance has been under scrutiny following its largest quarterly revenue decline since 2012. The company reported a 9% drop in revenue to $21.3 billion for Q1 2024, with earnings per share falling 47% to 45 cents. Analysts had projected earnings of 49 cents per share on revenue of $22.22 billion. The revenue decline was attributed to reduced average vehicle selling prices and a drop in vehicle deliveries. Total gross margins fell to 17.4%, down 199 basis points from Q1 2023.

In response to these financial challenges, Tesla announced a more than 10% reduction in staff headcount. The layoffs included senior executives and the entire supercharger team, although Musk later indicated plans to rehire some supercharger employees and expand the network. “Tesla will spend more than $500 million to expand its supercharger network and create thousands of new chargers in 2024,” Musk stated on X, formerly known as Twitter.

Shareholder Vote and Compensation

Tesla’s upcoming annual shareholder meeting on June 13 will be pivotal, with investors voting on Musk’s $46 billion compensation package and the proposal to reincorporate Tesla in Texas. The compensation package, initially valued at $56 billion, was voided by a Delaware court earlier this year but has been reintroduced by Tesla. The vote on Musk’s pay requires a simple majority, excluding shares owned by Musk and his brother, Kimbal Musk.

The proposal has sparked a debate among investors. New York City Comptroller Brad Lander, representing the city’s pension funds, criticized the Tesla board for being “overly beholden” to Musk and not ensuring that Tesla has a full-time CEO. “The board has yet to ensure that Tesla has a full-time CEO,” the investors stated. They also raised concerns about Musk using Tesla resources for his other ventures and the potential risk to stock values if Musk were forced to sell his pledged shares.

Tesla’s board, however, supports the compensation plan, arguing that it has driven significant growth. Independent board chair Robyn Denholm highlighted that Musk’s targets were “extraordinarily ambitious” and that the plan has benefited shareholders. “If he failed, Elon was entitled to receive no salary, no cash bonuses, and no equity,” Denholm said. “But if Elon was able to make it happen, you and all other stockholders would reap the benefits.”

Street Views

• Tom Slater, Baillie Gifford (Bullish on Tesla):

  "We agreed the remuneration package with Tesla back in 2018 because it introduced extremely stretching targets that would make a huge amount of money for shareholders if they were reached. Having agreed to that, we believe that it should be paid out."
  "It’s egregious that the plaintiffs in the case are being awarded $6bn for bringing legal action against the company... As a shareholder I don’t think we should be paying outrageous legal fees, but we should be happy to meet a commitment we signed up for after remarkable corporate performance leading to huge creation of value for shareholders."
  "The latest version of full self-driving showed significant breakthroughs in capabilities. This could well be the moment of full self-driving we’ve been waiting for. At the same time, Chinese electric-vehicle makers are making real progress in terms of the cost and quality of the products."