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How much the CEO of a company earns in a single year seems like a simple question, but specifying what executives actually do (and when) is a surprisingly difficult task.
A recent report published in the New York Times indicated that Elon Musk had generated $ 2.3 billion in 2018 as CEO of Tesla, but the situation is more complicated. Unless the electric car manufacturer is reaching really staggering goals, Musk might not personally benefit from this colossal price.
The difference is due to the fact that the compensation is calculated in accordance with the rules of the Securities and Exchange Commission with respect to reporting the compensation of executive directors, as opposed to what executive officers actually earn in a year given.
Many CEOs perceive the bulk of their compensation in the form of stock or stock options to buy stock at a given price and time. Often these share or option awards are not vested or become available to the CEO until a certain period has elapsed. Or, as in the case of Tesla, certain performance objectives are achieved.
It is therefore incredibly difficult to quantify exactly how much a CEO earns in a given year.
Become familiar with executive compensation
The Times published a compensation ranking of 200 corporate executives in 2018, based on an analysis by Equilar's executive compensation consulting firm.
One of the most amazing results has been reported compensation for Musk. According to The Times and Equilar, Tesla's CEO has received stock options with an estimated value of nearly $ 2.3 billion in 2018. The remuneration reported by Musk was more 17 times higher than the next highest ranking executive, Discovery Communications CEO David Zaslav.
However, after Business Insider highlighted Musk's dazzling compensation, Tesla contacted us through a spokesperson and challenged this characterization.
Here is Tesla's statement:
In 2018, Elsa actually earned $ 0 in Tesla's total compensation. Any contrary information is inaccurate and misleading. Unlike other CEOs, Elon does not earn any salary, cash bonus or equity over time. Its sole reward is a fully risk-based performance bonus specifically designed with ambitious goals, such as doubling Tesla's current market capitalization, which ranges from about $ 40 billion to $ 100 billion. As a result, all of Elon's compensation is directly related to the long-term success of Tesla and its shareholders, and none of the shares of its 2018 performance program has been acquired.
According to the proxy statement, under the company's Musk Compensation Plan for 2018, the CEO would receive a "forward purchase option of up to 10 years in which to buy 20 264,042 Tesla common shares, equally divided into 12 separate tranches each equal to 1% of the issued and outstanding shares of the Tesla Common Shares ", which would only vest if the Company achieved a combination of market capitalization benchmarks, income and profitability, and that Musk remained at the helm of the company.
The first of these milestones would be a combination of Tesla, reaching a market capitalization of $ 100 billion and revenues of $ 20 billion or a profit of $ 1.5 billion (previously, adjusted earnings before interest, taxes, depreciation and amortization). and amortization, or EBITDA).
As the first market capitalization objective is more than double the market capitalization of Tesla as at June 10, the Company has not yet met this target and none of Musk's stock options as part of the compensation plan. has not yet been acquired.
The New York Times wrote that the compensation plan was intended to ensure Musk's long-term commitment to Tesla's growth and profitability, citing the company's announcement that it would "incite and motivate Mr. Musk to continue not only to lead Tesla on the long run, but especially in the light of his other business interests, to devote his time and energy to doing so. "
Several commentators of the time have pointed out the unusual nature of the compensation program. Troy Wolverton of Business Insider said Musk already controlled much of Tesla's shares. He therefore already had strong incentives to strengthen the company's market capitalization.
Read more: 5 reasons why Tesla is probably about to bounce
According to Tesla's 2019 proxy statement filed with the SEC in 2018, the company has remunerated Musk with stock options with an estimated value of $ 2,283,988,504 under of the 2018 compensation plan. This value, shown on page 55 of the statement, has been calculated in accordance with the SEC's accounting rules for stock-based compensation.
The declared value of the stock options of $ 2.3 billion is based on Tesla's estimates of the potential value of the options, depending on the stock price performance of the shares. society. According to the proxy statement, this estimate "does not necessarily reflect the actual value that may be recognized by the Named Executive Officers, which depends in particular on the market value of our common shares".
Tesla wrote in the proxy statement: "We are required to report, in accordance with the rules of the SEC, any award of stock options to Mr. Musk at values determined in the respective grant date and determined by certain assumptions "set forth in the Financial Accounting Standards Board. guidelines.
In other words, the SEC rules require Tesla to disclose a measure of the market value of the unvested options from Musk's compensation plan, in accordance with the standard accounting rules for the compensation of the Chief Executive Officer.
But the company said that, under the terms of the compensation plan and as stated above, none of these shares had yet been acquired, the first tranche being acquired only if Tesla reached for the first time a market capitalization of $ 100 billion and one of the revenue and profitability. objectives is achieved.
In addition to the compensation for unvested stock options, the proxy letter also includes a salary of $ 56,380, in accordance with the California Minimum Wage Act. Tesla pointed out in his letter that "Mr. Musk has not accepted his salary in the amount of $ 56,380, $ 49,920 and $ 45,936 for 2018, 2017 and 2016, respectively". Musk has traditionally refused Tesla's annual paychecks.
What is reported may be different from what happens
In the proxy statement, Tesla pointed out the difference between the level of remuneration indicated and the real financial gain realized by Musk: "As a result, there may be a significant discrepancy between the compensation indicated for Mr. Musk in a given year. in those sections and the value actually realized as compensation in that year or over a given period. "
The company also reiterated the long-term and performance-based nature of Musk's compensation:
In addition, the vast majority of Mr. Musk's past stock option award, including the 2012 CEO Performance Award and the 2018 CEO Performance Award, represented an incentive for future performance and their the value is only realizable if Tesla's share price appreciates relative to the grant dates, and the Company fulfills the applicable vesting conditions.
In summary, Tesla informed the SEC that it had granted Musk stock options with an estimated value of $ 2.3 billion in 2018 under the plan. long-term compensation. But he can not really benefit from these options before the company reaches at least one of its ambitious goals.
Courtney Yu, director of research at Equilar, the executive compensation and corporate governance data company who worked with The Times on her CEO compensation ranking, explained the situation in an e-mail to Business Insider.
"Although the SEC requires some calculation, for example using the fair value at the date of allotment of unvested share awards, this often does not reflect what the executive actually receives once the awards are made. of shares acquired or options exercised, "wrote Yu.
Yu emphasized the eventuality of the CEO's announced compensation.
"Once everything is said and done, Elon Musk could realize the entire $ 2.3 billion of this option, or nothing because the company is not meeting its performance targets," he said.
Mr. Yu also stated that a compensation measure including the value of the unvested shares at the date of grant, as reported to the SEC, is still a useful indicator for comparing CEO-to-company compensation. "because it is a standardized calculation at all levels".
Companies often publish other measures of CEO compensation in addition to the compensation indicated in SEC guidelines to provide a more complete picture of what executives earn.
"However, it is also quite common for companies to provide alternative calculations, such as the value of stock awards and options exercised, because they think it gives a better idea of what actually makes a CEO, "Yu wrote.
This fracture is quite common
As an example of another company showing both a declared earnings under SEC rules and actual realized CEO compensation, Yu directed us to the ExxonMobil proxy statement. for 2018, which included a graph showing that the realized value of executive compensation tended to be much lower than reported. compensation:
The graph shows how the reported earnings of ExxonMobil's CEOs over the past decade – roughly analogous to the $ 2.3 billion reported by Tesla – paints a very different picture of the compensation achieved than company CEOs oil companies actually collect each year. In 2017, the CEO, Darren Woods, actually realized that 29% of the reported earnings of about $ 17 million. Between 2008 and 2017, the average wage earned was just under half of the average wage reported.
Tesla's compensation plan for Musk remains different because of the high potential value for Musk and the extremely ambitious performance targets attached to this compensation. The basic division between what a company is required to report to the SEC and the actual increase in the net worth of its CEO is not uncommon among large companies.
While the reported payoff is surprisingly high, shades of compensation for corporate executives mean that Musk could not gain any real value in the form of new Tesla shares among these billions of dollars in options.
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