The pay plan, which shareholders must still approve, is designed to keep the 46-year-old billionaire as Tesla’s top leader for years to come while also allowing for the possibility he will transition eventually from the day-to-day role of CEO into one of executive chairman and chief product officer.
The plan, which is modeled on the program set for Mr. Musk in 2012, entails a 10-year grant of stock options that would vest in 12 tranches, each with shares equal to 1% of the company’s total shares outstanding as of Jan. 21, 2018. A tranche would vest only if a pair of milestones are achieved, one based on market value, the other on a measure of revenue or profit.
For example, the first tranche would vest if Tesla hits $100 billion in market value and either $20 billion in revenue or $1.5 billion in earnings before interest, taxes, depreciation and amortization, after adjusting for stock compensation. For all 12 tranches to vest, Tesla’s market value would have to reach $650 billion.
Tesla, which reported revenue of $7 billion for 2016, had a market value of about $58.8 billion as of Monday’s close. Mr. Musk owns about 20% of the company, according to S&P Global Market Intelligence.
Mr. Musk could net billions of dollars by hitting only a few of the milestones. Tesla said in a proxy filing the 20.26 million stock options today would have a preliminary value of about $2.62 billion. But if Tesla were to reach the audacious market value of $650 billion—as much as Amazon.com Inc. is worth today—the company said Mr. Musk’s stock award would reap him as much as $55.8 billion fully vested.
That total, however, assumes the company’s shares outstanding won’t be diluted. Tesla has added tens of millions of shares over the past several years, so that total dollar figure is unlikely.
“This ensures that Elon will continue to lead Tesla’s management over the long-term while also providing the flexibility to bring in another CEO who would report to Elon at some point in the future,” Tesla said in a statement about the plan on Tuesday. “Although there is no current intention for this to happen, it provides the flexibility as Tesla continues to grow to potentially allow Elon to focus more of his attention on the kinds of key product and strategic matters that most impact Tesla’s long-term growth and profitability.”
Tesla said that if none of the tranches are achieved, Mr. Musk wouldn’t receive any compensation. That would put him in circumstances similar to those of some other prominent Silicon Valley leaders who own enormously valuable stakes in their companies but receive little or no salary.
Mr. Musk is saying, “I want to set an audacious goal, and then if I achieve it, then pay me audaciously,” said John Challenger, a longtime expert in corporate compensation as chief executive of Challenger, Gray & Christmas. “He is in some ways capturing the spirit of Silicon Valley.”
Mr. Musk’s previous compensation program, granted in 2012, targeted a market value of $43.2 billion along with meeting certain milestones by 2022. It required him to remain CEO.
Adam Jonas, an analyst for Morgan Stanley, said the pay package is a “marketing tool” to attract talent and raise more money as the company faces greater competition in making electric and self-driving vehicles. “We view this incentive package as more important to investor confidence than to Musk financially,” Mr. Jonas wrote in a note to investors.
Since Tesla overtook Ford Motor Co.’s market value last year, and flirted with that of General Motors Co. , the Silicon Valley auto maker’s valuation has been a continual point of conversation. Critics question why investors are betting so much on a company that has yet to turn an annual profit and that has delivered a fraction of the sales of much larger auto makers.
Fans say they are betting on Mr. Musk’s vision for personal transportation that includes electric cars that drive themselves and draw their power from Tesla’s solar panels and storage batteries.
Such enthusiasm fueled Tesla’s growth last year, even as Mr. Musk struggled to ramp up production of the Model 3 sedan in a test of his ability to transform a luxury niche player into a more mainstream auto maker.
Mr. Musk had previously committed the company to reaching a market cap of $700 billion, something he reiterated last year. “I could be completely delusional, but I think I see a clear path to that outcome,” he told analysts in May.
Mr. Musk, who also heads other companies including Space Exploration Technologies Corp., or SpaceX, has hinted that he might want to change his role at Tesla.
In May, an analyst asked Mr. Musk if he planned to step away from Tesla after bringing out the Model 3, as he had previously suggested.
“I intend to be actively involved with Tesla for the rest of my life,” Mr. Musk said. “Hopefully, stopping before I get too old—or too crazy, I don’t know. But that doesn’t mean I should be CEO forever.” He suggested a role contributing in “product design and technology.”
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