Tesla's board has proposed a compensation package for CEO Elon Musk that requires a market cap of $650 billion.

The company's current market cap is about $60 billion.

Tesla has rarely made money in its 14 years and would have to take over the auto industry to make this proposal worth it.



Ahead of its annual shareholders meeting in March, Tesla announced Tuesday that over the next 10 years it wants to pay CEO Elon Musk entirely in stock and tie his compensation to the company — he'll be paid in full if Tesla's market cap increases to $650 billion from about $59 billion now.

"Elon will receive no guaranteed compensation of any kind — no salary, no cash bonuses, and no equity that vests by the passage of time," Tesla said in a preliminary statement filed with the Securities and Exchange Commission.

"Instead, Elon's only compensation will be a 100% at-risk performance award, which ensures that he will be compensated only if Tesla and all of our stockholders do extraordinarily well. The award consists of stock options that vest only if Tesla achieves specific milestones, which if fully achieved would make Tesla one of the most valuable companies in the world with a market capitalization of at least $650 billion — more than 10x today's value."

I wouldn't normally recommend anyone read SEC filings, but in this case it's worth it — if only to witness the most extreme formulation of the "shareholder value" theory ever offered in the history of business.

No profit, missed targets

A Tesla Model 3 at the company's retail store at Westfield Century City in Los Angeles. Bryan Logan/Business Insider

Tesla has achieved its current lofty market cap — which Musk has on several occasions argued is too high — despite rarely posting a profit in its 14 years of existence and consistently falling short of its ambitious production targets for its automotive business. Simultaneously, the company has also created a profitless energy-storage business and rescued the debt-laden SolarCity.

The current share price and market cap — larger than Fiat Chrysler Automobiles' and Ford's, and about equal to General Motors' — are not an accurate representation of even the core car business, which has if nothing else demonstrated that it can take ascending revenue and reliably convert it into both titanic losses and ongoing shareholder dilution through steady return visits to the Wall Street ATM that is the Tesla capital raise.

I won't be the only one reading the news of Musk's proposed pay package with the understanding that Tesla doesn't have enough cash in the bank to keep the lights on through 2018.

Tesla's market cap is, of course, a prediction about its future. For the sake of argument, I'll pull numbers for yearly vehicle production and disregard the hard-to-value energy-storage and solar businesses: General Motors sold about 7 million vehicles worldwide last year — it would take Tesla, which sold just over 100,000, decades to achieve that level of production.

But if everything goes fantastically well for Tesla over the next 10 years, it could max out annual production at its one factory in Northern California at, say, 500,000 vehicles, then build or acquire a few more factories to take capacity to its stated goal of 1 million a year by 2020, then perhaps double or triple that in the timeframe of Musk's new compensation deal.

So 3 million vehicles annually — and if I drink a couple of martinis, I could probably talk myself into 5 million.

Spending money like there's no tomorrow

Tesla is up over 40% in the past year. Andy Kiersz/Business Insider

Such a dismaying level of capital expenditure — building brand-new factories would be immensely costlier for Tesla than it was for competing carmakers that invested in that capacity decades ago — would mean the company's stock price had better go up because its revenue would be wholly consumed by growth.

You can see the disconnect, the required suspension of disbelief, the absolute commitment to the delusion of shareholder value satisfying all management requirements.

OK, maybe the Tesla stock pattern persists and somehow gets to a $650 billion market cap. If that's based on my martini-addled 5 million vehicles a year, and if Tesla can figure out how to actually make a profit on those cars, that's still 2 million fewer than GM achieved last year, with near-record sales in the US and actual record sales in China.

The Tesla board, with a straight face, is asking shareholders to vote for this.

I know, I know. Amazon. There's your $600 billion-plus market cap with infrequent profits, the visionary CEO, the remaking of an entire business sector (retail), and the creation of unforeseen enterprises, from cloud computing to virtual voice assistants.

Sorry, but this is a carmaker we're talking about, despite the Tesla board's insistence that it's the "world's first vertically integrated sustainable energy company."

And the wild notion that Tesla will get to $650 billion relies on the idea that, like Amazon, Tesla will dominate the auto industry in the coming years, though nearly every other car company in the world is enjoying robust sales and epic profits and rapidly expanding into new competitive areas beyond Tesla's bread and butter, electric vehicles, which now make up just 1% of the global market.

I won't even get into the wild ride that Tesla investors would be signing on for, given the stock's history of dizzying volatility, with routine swings of $100 a share in either direction.

Critics on Wall Street routinely knock the shareholder-value theory because it ignores the duty that companies have to customers, employees, society, and, increasingly, the environment. If executives are rewarded based on the stock price's going up, these critics say, they'll fall into the short-term trap of making that their only job.

The brave new world of Tesla's stock

Can you see the future? Mike Blake/Reuters

The Tesla proposal is shareholder value taken to a surreal new frontier.

Despite running a relatively mature business in a capital-intensive industry that shows no signs of achieving any goals anytime soon, Musk has crafted a story that investors now value at almost $60 billion. The board is betting he can pump another $600 billion into that yarn.

I should note that the overt nuttiness of this in no way invalidates Musk's mission to use Tesla and SolarCity to accelerate humanity's exit from the fossil-fuel era. If he pulls it off, we'll all benefit.

And over the past few months, after reporting on Tesla for over a decade, I've come to appreciate the theory that investing in Tesla is a way of forcing the auto industry to embrace Musk's master plan. In that way, society shares in the win at no cost — Tesla's stockholders are footing the bill and assuming the risk.

But beyond the fact that, if approved, this compensation proposal sets Musk up for a monumental failure and could be read by cynics as the board gesturing toward a leadership change, what's troubling about it is that it makes Tesla's story all about its finances, not about its products.

Why would you spend a single dollar on a Tesla vehicle, which will depreciate to zero, when you could use it to buy Tesla stock and watch it appreciate to infinity and beyond?

Expecting too much from Musk

This is happening at a critical moment when many Tesla observers, myself included, see a company whose core business of building and selling $100,000 all-electric vehicles looks potentially quite solid and sustainable, but whose more adventurous aspects, especially the Model 3, are stalled.

Musk isn't one to settle, so it's unlikely he'd call off the Model 3 and fall back on the core business for a few years. But his new pay package ensures he'll do nothing to align Tesla's share price with what the company is worth based on a rational analysis of its operations.

Not for nothing, it also implies a nearly constant dilution of shareholders — including Musk, who owns 20% of the company — through many, many additional capital raises in the coming years.

Tesla critics are almost always wrong. They were wrong about the company going out of business in 2008, wrong about it being unable to create a market for electric cars, wrong about it entering the mass market with the Model 3, wrong about the stock going down.

The temptation, given that pattern, is to assume Tesla is invulnerable. Up to this point, the company — and Musk in particular — has resisted that conclusion. Not anymore.

This column does not necessarily reflect the opinion of Business Insider.