Why It Matters:

At Tesla, CEO pay has been linked to company performance since 2012; and in 2018, Elon Musk was given an exorbitant performance-based compensation award consisting of a 10-year grant of stock options hinging strictly on financial benchmarks, namely market cap and revenue-based operational milestones. At the time, Tesla’s Board of Directors assured investors that “Elon’s compensation will be 100% aligned with the interests of our stockholders.”

Since that time, Tesla has faced shareholder lawsuits accusing them of breaching their fiduciary duties to the company and its shareholders by granting unjust enrichment to Musk and wasting corporate assets. These suits resulted in the one of the largest shareholder settlements of its kind: an order for the company’s directors to return $735 million to the company to settle claims of gross overpayment. 

The interests of Tesla’s shareholders extend beyond financial targets. They recognize the need for companies to prioritize environmental, social, and governance policies and practices to sustainably achieve long-term goals while avoiding exposure to regulatory and legal, financial, and reputational risks.

This is why Tulipshare is demanding that Tesla enact mandatory human rights and environmental due diligence policies that are linked to senior executives’ compensation packages to incentivize timely and systemic improvements regarding human rights and climate change.

During a time of social unrest, environmental crisis, and financial instability in the wake of the pandemic, Musk’s ~$56 billion executive compensation plan has “helped lift the ceiling on CEO pay” and widened the gap between workers and top executives’ pay packages, according to The New York Times.

Musk’s compensation award is so massive, that the Economic Policy Institute (EPI) had to exclude his pay from their most recent report because including his $23.5 billion worth of stock options exercised in 2021 in the sample “would have resulted in an increase of CEO pay in 2021 relative to 2020 of over 300% (the ‘average’ for the sample would have been just under $100 million).”

EPI equated Musk’s realized compensation to roughly 1,000 times the average pay of other large-company CEOs. Though the report acknowledged that “it may make some sense to provide stock options to a CEO to incentivize the CEO to take measures that will boost shareholder returns,” EPI inquired “is it really necessary to give a CEO options on 16 million shares of stock (which is how many shares Musk exercised options on in 2021) to achieve this goal?” Considering Musk is Tesla’s largest shareholder, he is already incentivized to increase the company’s financial returns.

It may come as a shock for some, but despite Tesla’s self-declared goal of “Accelerating the World’s Transition to Sustainable Energy,” the company actually lacks a low carbon strategy and codes of business conduct – two crucial items on the list of why the company was removed from the S&P 500 ESG Index entirely in 2022 (causing a 6% drop in stock price). Tesla was also removed from the ethical index due to future risks associated with employee discrimination claims and “multiple deaths and injuries related to its autopilot vehicles,” according to S&P Dow Jones Indices. Given that inflows into sustainable funds rose from $5 billion in 2018 to more than $50 billion in 2020—and then to nearly $70 billion in 2021, even Musk’s criticism of ESG does not negate the fact that Tesla needs to increase transparency and accountability on ESG performance to ensure shareholder value.

Tesla’s 2021 Impact Report states that “Tesla customers helped accelerate the world’s transition to sustainable energy by avoiding 8.4 million metric tons of CO2e emissions.” However, the Transition Pathway Initiative currently ranks Tesla’s management quality as a one out of six, stating that the company does not recognize climate change as a relevant risk. Moreover, a 2022 report from As You Sow found that, out of 55 companies assessed, Tesla is actually making the slowest progress to reach net zero emissions - ranking dead last.

Since the pandemic has highlighted that human rights-related risks are endemic in global value chains, a growing number of investors are increasingly pressuring companies and their boards to adopt mandatory corporate human rights and environmental due diligence (mHREDD). The adoption of the UN Guiding Principles on Business and Human Rights (UNGPs) has led to legislative and regulatory developments in various jurisdictions seeking to drive stronger business engagement with human rights risks. And as of March 2021, more than half of S&P 500 companies (57%) implemented at least one ESG metric in their compensation plans. These businesses acknowledge a bevy of “potential benefits flowing from mandatory human rights and environmental due diligence (mHREDD), including greater certainty, clarity and coherence – and a more level playing field.”

In February 2022 – the month before Tesla opened its first Giga Factory in Europe – the European Commission published a proposal for a directive on corporate sustainability due diligence. This proposal creates several new obligations for corporate supply chains, including the need to prevent adverse impacts of corporate activities on human rights, such as child labor and exploitation of workers, and on the environment. Now, in response to outcries in the United States for a mandatory corporate liability scheme in line with the EU directive, a proposal is gaining support that would adopt the equivalent requirements of the Foreign Corrupt Practices Act (FCPA) for human rights and would require companies to document efforts to prevent abuse through due diligence. Additionally, the U.S. Securities and Exchange Commission has recently finalized new rules that would require more detailed disclosure of climate-related risks and greenhouse-gas (GHG) emissions.

The United Nations has outlined the key elements of effective and equitable human rights and environmental due diligence, which Tulipshare believes Tesla should implement in anticipation of proposed legislation to avoid greater regulatory and legal risk.

There is great shareholder risk in the senior executives’ current compensation plan that is heavily dependent on share price and market cap, and arguably a company based heavily on buzz rather than meeting production targets.

There are many arguments as to why Tesla’s underlying fundamental value does not justify its stock price, and EPI found that if it does not achieve a 100% market share and an extraordinarily high level of profitability, its stock price will eventually drop significantly – meaning that Musk will have been able to personally claim $23.5 billion in purchasing power in 2021 alone, even though that was never matched by actual economic activity nor the financial benefit of Tesla shareholders whose wealth was diluted to make room for Musk’s stock options.

In fact, YTD Tesla stock prices in early 2024 leading up to the annual shareholder meeting were down ~30%. And, since the 2018 $56 billion pay package was awarded to Musk, as of June 2024, Tesla's stock market value had fallen 52% since peaking in November 2021 at $1.2 trillion — a startling loss of $620 billion in market capitalization. Moreover, Musk's attention has been split between Tesla and his many other ventures, including his purchase and restructuring of Twitter, now known as X Corp., which he purchased for $44 billion by selling of Tesla stock in 2022 (taking him from 22% Tesla ownership to 13%). Not only does this split focus of an overpaid CEO understandably worry Tesla shareholders, Musk took Twitter private once he completed the purchase that was fraught with volatility, a major legal battle, and mass layoffs. By taking Twitter private, Musk no longer is beholden to the interests of investors, nor does he have to regularly report to shareholders on company performance every few months - yet another reason why his public threats concerning Tesla's future carry such weight with retail investors fearful of him making such a move at Tesla, or abandoning the company altogether.

Earlier in 2024, the Delaware Court of Chancery struck down Musk's 2018 award as an "unfathomable sum" that was unfair to shareholders, ruling that the board lacked independence and proferred no evidence that the pay package was actually negotiated for, nor any evidence of proper disclosures regarding the award to shareholders before putting it up for a vote. For context, Delaware is often chosen by businesses as the best state for incorporation due to the corporate tax breaks the state offers; and the Delaware Court of Chancery is renowned for its use of chancery judges, rather than juries, who are impartial and not beholden to special-interest donors or shifting politics, and they hear primarily only corporate cases wherein they base their rulings on 200-plus years of established Delaware corporate case law and precedent. This court system is also known for its expediency - allowing cases to be expedited before the state's supreme court, ultimately saving corporate litigants both time and money. As of April 2024, more than two-thirds of the publicly-traded corporations that make up the S&P 500 are incorporated in Delaware (325 total).

But, for Musk, all of the benefits of incorporation in Delaware are outweighed by his desire for more money by way of further Tesla share dilution of about 8.7%. Now Tesla will be reincorporated in Texas after the Delaware court's decision favored shareholder interests over Musk's personal financial gain - an emerging pattern investors are seeing from Musk when he fails to get his way. This move to Texas mirrors Musk’s previous actions when he relocated Tesla’s headquarters from California to Texas after clashing with health officials during the COVID-19 pandemic. This pattern of behavior is deeply troubling and highlights the need for robust governance and accountability.

The ratification of the 2018 award which was ultimately approved by shareholders (along with reincorporation of Tesla in Texas following the Delaware ruling) lacked any additional evidence as to why further share issuance (now valued at $45 billion) was the only way to ensure Tesla's longevity. Instead, Tesla's chairperson issued a letter stating that ratification of the award was the only means of "retaining Elon's attention and motivating him." Tesla's diminished share price and loss in market cap are enough to show that this financial performance-based payment plan does not equate to greater shareholder value, but Tesla investors likely ratified the pay package anyway in 2024 due to Musk's threats to move AI and robotics work outside of Tesla if he did not attain 25% ownership in the company.

There is some truth to the notion that stock-related executive compensation creates a strong link between executive performance and executive pay; however a company’s revenue and share price are not the only indicators of success, sustainability, or shareholder value. Notwithstanding the fact that both share price and market cap are significantly down at Tesla, this is why support for ESG measures in executive compensation plans has continuously increased year-over-year, and, in 2022, more than nine out of ten directors (92%) agree that some type of non-financial metrics should be factored in.

Harvard Law School Forum on Corporate Governance, which published an article the week of Tesla's 2024 AGM entitled, “Tesla Should Take the Court Decision Seriously, Not Dismissively,” also reported earlier this year that three-quarters of S&P 500 index companies embed some type of sustainability metric into their leadership compensation plans, proving the practice is now deeply ingrained. But, despite regulatory and investor scrutiny continue to ramping up, Tesla noticeably does not integrate human capital management-related metrics in executive pay plans - despite 90.4% of S&P 500 companies doing so, nor does Tesla integrate environmental metrics into executive pay plans - despite 53.6% of S&P 500 companies doing so.

The fact remains that - even without the ratification of the 2018 award - Musk already has substantial financial incentives due to his significant holdings in Tesla, yet his attention is divided among multiple ventures, including X (formerly Twitter), SpaceX, Neuralink, and The Boring Company. This split focus deeply concerns shareholders. Chairperson Denholm's letter claiming the need to retain Musk's attention through compensation is unconvincing; instead, Tesla should factor in sustainability performance metrics to respect its human and environmental rights impacts. The opposition to Tulipshare's proposal claiming the proposal calls for "confused metrics" is misleading. This proposal (Proposal 11 on pp. 107-08 of Tesla's 2024 Proxy Statement) requests performance-based components in the executive compensation structure linked to human rights and sustainable performance metrics. and Tesla's citation of its Global Human Rights Policy is additionally misleading as it lacks any connection to executive pay, underscoring the need for this proposal to adopt and disclose new sustainability-focused performance metrics.

In April, Tesla laid off 14,000 employees, or 10% of its global workforce, alongside declining stock prices. The push for an unprecedented compensation package that does not align with recent performance is inappropriate and has been denounced by advisory firms ISS and Glass Lewis, as well as major investors. After the 2024 AGM which ratified Musk's pay package, Forbes reported that Wall Street sees Tesla stock as overvalued, with the average price target set at $172.92 — making the stock 3.4% too high — based on 32 Wall Street analysts offering 12-month figures; and that "[w]hile Tesla shareholders’ vote in favor of Musk’s pay might make him feel good, investors would be better off buying a low cost S&P 500 index fund." This is not the outcome that best suits Tesla investors' long-term financial and sustainability goals, underscoring the need for executive pay reform at the company.

Ultimately, while tying senior executive compensation to financial performance has achieved significant growth for the company in the past, this growth is neither sustainable and, in many cases, nor is it ethical. In a world increasingly focused on long-term ESG goals, this could hurt investor sentiment toward the company in the long run. Corporate disclosure of carbon emissions and human rights data allows shareholders and climate activists alike to hold company executives accountable.

As noted by B. Riley’s Chief Market Strategist, "Retail investors are a very important cohort for Tesla” and the company’s most recent stock split is “an acknowledgment of that fact."

Which is why now is the time for investors to put the pressure on Tesla to live up to its own sustainability-centric ethos.

Sources for short description: violation of labor laws, allegations of child labor in supply chains and racism, including a lawsuit filed by fifteen Black current and former employees.

2024 PROPOSAL FILING

On December 8, 2023, Tulipshare filed a first-year proposal at Tesla requesting that, within one year, the Board Compensation Committee adopt targets and publicly report quantitative metrics appropriate to assessing the feasibility of integrating sustainability metrics, including metrics regarding diversity among senior executives, into performance measures or vesting conditions that may apply to senior executives under the Company’s compensation plans or arrangements. This proposal earned 10.1% shareholder support at Tesla's 2024 AGM! That's a strong showing that Tesla's investors are ready for executive compensation to be directly linked to measurable and improved sustainability impact.

We will continue to engage with the company and keep you informed on the progress of this engagement.