Recently, in a Tesla filing with the U.S. Securities and Exchange Commission (SEC), Musk sold $16 billion worth of stock last year and gave away 5 million shares worth nearly $6 billion to an undisclosed charity or recipient last November. These sell-offs and gifts totaled $22 billion.
According to common sense, after a large number of sell-offs, musk's stock should be reduced. But in fact, the Tesla stock currently held by Musk has not decreased but increased. It is understood that as of December 31, 2021, Musk held a passive stake of 21.2% of Tesla.
The reason for this is that Musk also exercised the option to subscribe for more Tesla shares while selling shares. Back in 2018, Tesla's extraordinary shareholder meeting, when a compensation package for Musk for the next decade was approved, in which Tesla's board of directors signed a very aggressive equity incentive plan with Musk.
Image source: Automotive News Europe
Equity incentives are very common in U.S. companies, and some equity incentive plans are relatively mild, for example, considering that the incentive recipients need to live expenses, there will be part of the salary in the incentive plan, there will also be bonuses, and some will be given a certain number of stock options after reaching a certain number of years of service.
However, the equity incentive plan signed by Tesla's board of directors with Musk is not so modest. Tesla's board filing with the SEC says Elon Musk won't receive any form of guaranteed compensation — no salary, no cash bonuses, no equity acquired over time, and the only compensation will be a 100 percent risk performance award.
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Targets set for 2012
Tesla was founded in 2003, and Musk entered Tesla in 2004 and led a Series A funding round. Documents filed by the board show that before 2012, Tesla's board of directors implemented a performance award, which expired in 2012. After more than 6 months of discussion, the Board of Directors finally decided to award the CEO Performance Award.
The documents submitted by the Board of Directors review past award history. In 2006, Musk released the original Tesla master plan, starting with building electric sports cars and then using that vision to develop a wide range of products such as affordable electric vehicles and zero-emission power generation units. Until the option was granted in December 2009, Musk would not receive any equity compensation for five years. In 2010 and 2011, Musk did not receive any equity grants. The compensation committee believes that the equity incentives that Musk received in December 2009 have provided sufficient incentive for him to fulfill his duties as CEO.
In 2012, to incentivize the success of the Model S program and advance the Model X and Model 3 in Tesla's program, and to further align executive compensation with the growth in shareholder value, the compensation committee reviewed Musk's equity compensation and hired Complisia as its external compensation consultant to advise it. Following such a review, the compensation committee recommended that the Board grant Mr. Musk new stock options. On August 1, 2012, the Board of Directors approved the 2012 Performance Award, which included an option granted to Musk to purchase 5274901 shares of Tesla's common stock at an exercise price of $31.17 per share, equivalent to 5% of the total number of shares issued by Tesla as of August 13, 2012.
Source: Compiled according to SEC filings filed by Tesla's board of directors
When the board awarded the 2012 performance award, both Musk and the board found the equity incentive plan very challenging. After unremitting efforts, in 2017, the team led by Musk completed most of the indicators, and only the gross profit margin reached 30% for 4 consecutive quarters.
Deducting the unfinished target, Musk could get a 4.5 percent stake. Musk not only received equity incentives, he himself is a shareholder of Tesla. Documents filed by Tesla's board of directors show that as of December 31, 2017, Musk had a total of 37,853,041 tesla common stock shares.
The board met with Musk several times during the development of the new incentive plan and exchanged views, and the board also spoke with 15 of Tesla's largest institutional shareholders to discuss and solicit their views on the 2012 Performance Awards and to inform them of considerations for the establishment of the new Performance Awards.
Many institutional shareholders said they liked the approach used in the 2012 Performance Awards, especially that Musk's reward program did not have the usual approach in the past, and musk's rewards had no salary, no cash bonuses, and no equity awards for time. Shareholders also suggested combining various operating metrics with market capitalization metrics. The Board of Directors attaches great importance to shareholder feedback and designs their recommendations into the reward program.
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In 2018, the equity incentive plan was signed again
Tesla's board of directors signed an equity incentive plan with Musk in 2012, which was originally a 10-year incentive that only expires in 2022. At the end of 2017, Musk completed most of the goals set at the beginning, the board of directors for the sake of Tesla's long-term development, but also in order to put pressure on Musk, did not wait for the expiration of the first signed incentive plan, in 2018 signed an equity incentive plan with Musk again, this time the equity incentive plan refers to the 2012 version, but the assessment indicators have changed.
In developing the new appraisal, the board briefly reviewed Tesla's growth history. In the five years since the 2012 Performance Award, Tesla's market capitalization has grown 17-fold. The Board believes that the 2012 Performance Awards have played an important role in Tesla's operational and financial success.
Source: Tesla Board Filed SEC Filings
The elimination rate of startups is very high, and at the beginning of Tesla's establishment, no one can guarantee that it will be successful. The equity incentive plan developed in 2012 is biased toward building cars and surviving the dangerous period of survival. In 2018, the board of directors to formulate the equity incentive plan of the thinking changed, Tesla is no longer facing the survival of the startup, but in order to gain a foothold in the market, it needs to continue to grow bigger and stronger, so the board of directors put forward more requirements for Tesla's operation.
In 2018, the performance awards set by Tesla's board of directors set revenue targets. In terms of market capitalization, it is divided into 12 grades for assessment, and an increase of $50 billion in each file is the goal of the completion stage.
The documents submitted by Tesla's board of directors list more detailed appraisal requirements, such as:
In developing revenue and adjusted EBITDA metrics, the Board carefully considered a variety of factors, including Tesla's growth trajectory and internal growth plans, as well as a history of high growth in investing in new businesses and tangible assets in the technology sector, taking into account the historical performance of other companies.
There is also a difference between this incentive plan and 2012, when there was no rule on how long it must be held after the exercise of the right, and the equity incentive plan formulated in 2018 required Musk to continue to hold for 5 years. Of course, there is a tax on equity gains in the U.S., and given this, the incentive plan allows Musk to reduce some of his shares for tax purposes.
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Is Musk's aggressiveness related to equity incentive plans?
Tesla's achievements are inseparable from the efforts of Musk's leadership and his team, and it is reasonable to obtain equity incentives, and such equity incentive plans have also made Musk the world's richest man.
In order to quickly complete the goals in the equity incentive plan, Musk must have a corresponding plan in formulating Tesla's strategy and even his usual words and deeds. We do not have sufficient evidence to show that Tesla's aggressive approach is directly related to Musk's equity incentives, but Tesla has so many traffic accidents and data security risks that people will inevitably associate with this aspect.
For example, Tesla's AutoPilot is a major selling point of its sales, however, AutoPilot has had many serious accidents in the process of using it. Musk often talks about the arrival of the era of fully autonomous vehicles, but how far away such a future is from now is still unknown.
As can be seen from the public information, AutoPilot belongs to the L2 level and has some automatic driving functions. But the driver still needs to control the steering wheel. According to the level of automatic driving, AutoPilot is not yet able to meet the conditions of automatic driving. Tesla, on the other hand, used misleading terms such as "fully autonomous driving (FSD)" in its official propaganda.
In addition, the technical route of autonomous driving has always been debated by lidar and visual recognition.
Either technology route has advantages, as well as shortcomings that are currently insurmountable. Pure visual recognition is the simulation of a human eye driving a car. Musk is a staunch supporter of pure vision, Musk once said in an interview with the media: "Self-driving cars should use the same feelings as human drivers to drive cars, people rely on eyes and intelligence to drive cars, and self-driving cars should do the same." ”
In order to solve the problem, some vision companies have absorbed millimeter-wave radar to make up for the shortcomings. However, Musk doesn't think so. According to media reports, Tesla released the FSD Beta V9 system, canceling the millimeter wave radar and relying solely on cameras to achieve assisted driving.
The chief engineer of a listed company told reporters that he recently drove in Haikou and experienced the limitations of vision sensors. When it rains heavily in Haikou, the truck raises not only water droplets, but a large water mist, completely unable to see the road conditions in front, if only rely on visual sensors to drive is dangerous, need millimeter wave radar to help drivers identify obstacles in front. In addition, relying on vision sensors alone cannot cope with the fog in the Yangtze River Delta and the dense water mist outside the tunnels in the mountainous areas of northern Guangdong.
In real life, we are sometimes exposed to visual illusions. When you stand at the edge of the lake, look down and see your figure on the calm water, if you look up into the distance, there will be distant peaks on the lake. This specular phenomenon is common. Hu Xiaobo, chairman & CEO of Shenzhen Radium Intelligent System Co., Ltd., told reporters that Tesla's Autopilot uses a visual technology route, it is difficult to bypass the mirror phenomenon, once the system can not identify obstacles in time, traffic accidents may occur.
Autonomous driving requires a lot of data to train models, and visual self-driving is no exception. According to research by the RAND Corporation of the United States, an autonomous driving system needs to pass at least 11 billion miles (about 16.093 billion kilometers) of driving data to test and verify the system and algorithms to achieve mass production conditions. 11 billion miles means running all roads across China 4,000 times. The fleet of 100 test vehicles, 7× 24 hours of non-stop testing, takes 500 years to run.
Obviously Musk is not willing to do this, Tesla commercializes the AutoPilot, sells models such as Model S, Model X, Model 3 and other models to the majority of users, and then obtains the user's driving data through the background. This practice obviously makes the majority of car owners act as "guinea pigs", and they take a certain risk to help Tesla collect data. According to media reports, on Earth Day 2018, Tesla released a set of electric vehicle mileage data, reaching 7.2 billion miles.
The majority of car owners continue to contribute data to Tesla, and there have been many driving accidents, which have attracted the attention of regulatory authorities. According to foreign media reports, the National Highway Traffic Safety Administration (NHTSA) said that since 2018, there have been more than 11 Tesla owner accidents or related to the autopilot function on their cars, which have caused a total of 17 injuries and 1 death. According to reports, the investigation included Tesla's Model Y, Model X, Model S and Model 3 models, involving 760,000 Tesla vehicles.
Increasing regulatory scrutiny is putting Tesla's self-driving car technology at risk. A few days ago, the National Highway Traffic Safety Administration launched a second investigation into the possible defects of Tesla's Autopilot. A spokesman for Germany's Federal Motor Vehicle Office recently said the office is investigating Tesla's auto-lane changing feature and whether it is approved for use in Europe. The Dutch Automobile Association is also in contact with the Dutch automotive agency responsible for approving the sale of Tesla vehicles in Europe.
In any case, Musk is a business wizard, and his radical and high-profile strategy has indeed led Tesla to become the world's most valuable car company in just a dozen years, and he has also gained a huge fortune, as to whether his strategy is related to its equity incentive plan, it remains for everyone to distinguish.
Text: Wan Renmei Editor: Qi Meng Zhang Deyuan (intern) Layout: Zhao Fangting