Tesla ( TSLA ) stock fell 1.6% Tuesday after a Delaware judge denied CEO Elon Musk's $56 billion pay package for a second time .
The Delaware Court of Chancery in January struck down Musk’s performance-based pay package , in the form of stock options, ending a multiyear lawsuit brought by a Tesla investor and heavy metal drummer who argued the scheme was excessive and that Tesla misled shareholders into approving it. On Monday, the court denied Musk’s motion to revise the earlier ruling.
Musk has previously indicated that he could walk away from the EV maker for compensation reasons. In a post on X in January , he said that if he does not secure 25% voting control in the company, he “would prefer to build products outside of Tesla.”
Musk once held a 22% stake in the EV maker, but that stake has fallen to 13% , as he sold shares to fund his purchase of Twitter in 2022 , subsequently renaming it X.
Musk’s 2018 package was an effort by the Tesla board to retain him. At the time it was announced, Tesla shares rose 4% .
In order for Musk to achieve the full value of the package, which includes roughly 304 million stock options, he’d have to see Tesla hit a market cap between $50 billion and $650 billion by 2028, with the top of that range earning him the maximum value of $55.8 billion. Given Musk’s 22% stake at the time, the deal would have brought his voting control closer to 30%, court documents said.
When Tesla shareholders voted to approve the package a second time in 2024, Tesla chair Robyn Denholm said the deal was required "to retain Elon’s attention and motivate him to continue to devote his time, energy, ambition" to Tesla.
"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," wrote Denholm in a June letter to shareholders. "We want those ideas, that energy and that time to be at Tesla, for the benefit of you, our owners. But that requires reciprocal respect."
Following Monday's ruling, Elon Musk wrote in a post on X: “Shareholders should control company votes, not judges.”
“The court’s decision is wrong, and we’re going to appeal,” said Tesla in a separate post on X. The company noted that shareholders have voted twice to confirm the pay package.
Given that Tesla’s market cap has reached more than $1 trillion thanks to its recent stock rally, the value of the package has reached roughly $100 billion. Tesla’s market cap was closer to $60 billion in 2018, when Tesla was in the dark depths of “production hell” to mass manufacture Model 3s , to borrow a phrase Musk himself used at the time. The $55.8 billion maximum value of the package was described as “theoretical” by the company then, but Tesla has surpassed every metric laid out in the board’s terms to Musk.
The package raised eyebrows in 2018, to say the least, with Institutional Shareholder Services (ISS) calling the deal “staggering” and warning that the plan didn’t encourage Musk to grow Tesla profitably.
Harvard Business Review noted at the time the pay deal was inked that, while the package would keep Musk at Tesla through the next decade, the discrete metrics “may encourage manipulation to achieve the targets.”
JPMorgan analysts in October warned of a “growing gap between fundamentals and valuation” at Tesla, even as the stock flies to new heights, noting that the company’s underperformance on deliveries in the third quarter means Tesla could face its first-ever year in which deliveries fail to grow. On Tuesday, data from the China Passenger Car Association showed that Tesla's EV sales in China fell 4% in November from the prior year.
Given shares' recent rally beginning in late October after its third quarter earnings, Tesla stock is up more than 40% for the year. While its quarterly results were mixed as a whole, positives included Tesla reporting a higher-than-expected third quarter profit and improved margins. Another bright spot: Elon Musk's close ties to President-elect Donald Trump may aid the company's autonomous driving efforts.
Wedbush analyst and Tesla bull Dan Ives said Tesla will find a way to award Musk in order to retain him.
In a note to investors Tuesday morning, he wrote, “Musk is Tesla and Tesla is Musk. One way or another the Board is getting Musk his pay package (and another long term one for the next decade) to secure Musk will be CEO of Tesla at least through 2030.”
