Scottish Mortgage Backs Musk's $56B Pay Package Amid Tesla's $574B Valuation

Key Takeaway

• Scottish Mortgage Investment Trust will back Elon Musk's $56 billion pay package at Tesla's upcoming shareholder meeting.
• The compensation plan, approved in 2018, ties rewards to Tesla's market value reaching $650 billion over 10 years.
• Tesla’s market value is currently $574 billion, having previously hit a $1 trillion market cap in 2021.

Scottish Mortgage Backs Musk's Pay Package

Scottish Mortgage Investment Trust, a long-time investor in Tesla, has announced its intention to support CEO Elon Musk's $56 billion pay package at the upcoming shareholder meeting. This decision comes after a Delaware court rejected the compensation plan in January, citing that Tesla's board had failed to act in shareholders' interests. Despite this, Scottish Mortgage, managed by Baillie Gifford, believes the package, initially agreed upon in 2018, should be honored due to the significant value it has created for shareholders. The pay package, the largest in U.S. corporate history, is contingent on Tesla's market value reaching $650 billion by 2028, a target that seems within reach given Tesla's current market value of $574 billion.

The Details and Implications of the Pay Package

The $56 billion pay package for Musk, which includes no salary or cash bonus, is based on a series of stock options tied to Tesla's market performance. The package was designed to incentivize Musk to achieve aggressive growth targets, which have already seen Tesla's market cap touch $1 trillion in 2021. However, the Delaware court's rejection of the package has led to a renewed vote among shareholders, scheduled for June 13. This vote will also address Musk's proposal to move Tesla's incorporation from Delaware to Texas, a decision that Scottish Mortgage has yet to finalize. The investment trust's manager, Tom Slater, emphasized the importance of meeting commitments made in 2018, despite the legal challenges and the potential $6 billion in legal fees sought by plaintiffs who opposed the package.

Concerns Over Musk's Focus and Tesla's Financial Performance

Amidst the debate over Musk's compensation, concerns have been raised about his divided focus. Steve Westly, a former Tesla board member, highlighted the need for Musk to concentrate more on Tesla, especially given the current challenges in the electric vehicle (EV) market. Westly pointed out that Musk's involvement in multiple ventures, including SpaceX and Twitter, could be detracting from his ability to lead Tesla effectively. This comes at a time when Tesla is facing increased competition from Chinese EV manufacturers and a significant drop in revenue. In Q1 2024, Tesla reported a 9% decline in revenue to $21.3 billion, with earnings per share falling 47% to 45 cents. The company has also announced a 10% reduction in staff headcount to address these financial challenges.

The Broader Impact on Tesla and the EV Market

The upcoming shareholder vote on Musk's pay package and Tesla's potential move to Texas will be pivotal for the company's future. The compensation plan has sparked a debate among investors, with some criticizing the Tesla board for being overly reliant on Musk and not ensuring that the company has a full-time CEO. New York City Comptroller Brad Lander, representing the city's pension funds, has voiced 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. Despite these concerns, Tesla's board supports the compensation plan, arguing that it has driven significant growth and benefited shareholders. Independent board chair Robyn Denholm emphasized that the ambitious targets set for Musk have been instrumental in Tesla's success.

Street Views

• Tom Slater, Scottish Mortgage Investment Trust (Bullish on Tesla):

  "Scottish Mortgage had agreed to the package Tesla set in 2018 and after agreeing to the deal, the firm believes the amount should be paid out."