Here’s Why Elon Musk Will Be The Highest-Paying CEO In 2020
Despite this, Forbes estimates that he is the highest-paid CEO of them all.
According to Forbes, Musk received $11 billion in stock options from Tesla TSLA +0.2 percent as part of the daring compensation plan he signed with the electric manufacturer in 2018.
When it was first announced, the proposal was worth $2.3 billion and was divided out over a decade.
However, it did not begin to take effect until 2020.
The options awards in the 2018 plan were contingent on Tesla meeting certain market capitalization and sales or Ebitda (earnings before interest, taxes, depreciation, and amortisation) goals.
Overall, Musk’s compensation package gives him the option to purchase a total of 101.2 million Tesla shares at a split-adjusted price of $70 per share.
(Tesla stock is presently trading at over $670 per share.) The pay plan is structured into 12 tranches, each of which can be unlocked only once Tesla achieves specific goals.
Musk’s options awards vested in four tranches in 2020, when Tesla reached certain market capitalization and operational milestones and its stock surged sevenfold, enhancing Musk’s fortune astronomically.
With a projected net worth of $165.7 billion as of May 5, 2021, the Tesla CEO is currently the world’s third wealthiest person, up from $24.6 billion in mid-March 2020.
On a yearly basis, each of the 12 tranches of options vests based on rising market capitalization goals and operational milestones pertaining to sales or adjusted Ebitda growth.
The market-cap milestones are based on a trailing monthly average, starting at $100 billion and increasing in $50 billion increments after that—but Tesla blew those out of the water, reaching a market value of almost $650 billion by the end of 2020.
Additionally, each quarter, a financial metric—either revenue or adjusted EBITDA growth—must be reached.
By the end of 2020, Tesla had achieved four of five goals, generating $20 billion in annualised revenue and increasing adjusted Ebitda from less than $1.5 billion to $4.5 billion.
Each tranche of options entitles Musk to purchase 8.4 million Tesla shares. According to Forbes, the Tesla CEO received a total option payout of $13.3 billion last year.
Forbes used the stock price of Tesla at the time each tranche of options vested and was approved by the Tesla board to determine the value of these various options awards.
It will cost Musk $2.36 billion to exercise the options; after those costs, Forbes estimates that the options added $11 billion to Musk’s fortune.
That puts him far ahead of Paycom CEO Chad Richison ($211 million in salary), who topped most of the 2020 earnings lists.
According to the documents, Musk is required to hold the newly issued Tesla shares for five years.
As a result, while he has the ability to execute a total of 33.77 million options from his 2020 awards, he can’t sell them right away.
While this may be one of the reasons he doesn’t appear on top-paid CEO lists, experts also point out that most executive pay evaluations focus on the grant date of options awards rather than when they vest.
Much of this is due to the Securities and Exchange Commission’s requirements for corporations to report executive salaries.
Jannice Koors, a senior managing director at pay consulting firm Pearl Meyer, explains, “The great majority of highest-paid CEO lists derive data straight from summary compensation tables in business filings each year.”
However, equity awards such as stock options are only declared in the year in which they are issued. “
So, if you have a firm that makes a ‘mega grant,’ which is designed to cover multiple years, you’re going to have peaks and valleys in the disclosures:
the year of the grant will show a huge amount in the summary pay table, but it won’t show up in subsequent years,” Koors adds.
Forbes looked at Tesla’s filings and calculated the value of the various tranches of options that vested in 2020: May 28, July 24, September 30, and December 31.
Tesla has continued to achieve new benchmarks since the start of 2021, particularly after reporting record first-quarter earnings.
Musk has passed two more tranches of his 2018 CEO Performance Award, giving him the chance to exercise another 16.9 million options, pending board approval.
He has cleared six tranches of option distributions so far, totaling 50.6 million shares (worth nearly $33.9 billion at current market prices).
At today’s stock values, the whole pay package of 101.2 million shares would be valued roughly $67.9 billion.