There’s one name you won’t find on the various lists of the highest-paid CEOs of 2020: Elon Musk. Yet, Forbes calculates, he’s the most highly compensated chief executive of them all.
Musk was paid about $11 billion last year, by Forbes estimates, all in Tesla TSLA stock options awarded to him as part of the audacious compensation plan he inked with the electric carmaker in 2018. That plan, worth $2.3 billion when it was first spelled out, was spread over a decade. But it didn’t start kicking in until 2020.
The options awards detailed in the 2018 plan were based on Tesla hitting various milestones for market capitalization and either revenue or Ebitda—earnings before interest, taxation, depreciation and amortization. In all, the pay package entitles Musk to options that will give him the right to buy a total of 101.2 million Tesla shares at a split-adjusted price of $70 per share. (Tesla shares currently trade north of $670 apiece.) The compensation package is divided into 12 tranches, each of which can be unlocked only when Tesla hits certain milestones.
The first four tranches of Musk’s options awards vested in 2020, as Tesla hit various market capitalization and operational milestones and its stock increased sevenfold, boosting Musk’s fortune astronomically. The Tesla CEO is now the third-richest person on the planet, with an estimated net worth of $165.7 billion as of May 5, 2021—a huge jump from the $24.6 billion he was worth in mid-March 2020.
Each of the 12 tranches of options vest upon both rising market capitalization goals and operational milestones relating to either revenue or adjusted Ebitda growth on an annualized basis. The market-cap milestones are based on a trailing monthly average, beginning at $100 billion and increasing by $50 billion increments thereafter—but Tesla blew those out of the water, rising to a market capitalization of more than $650 billion by the end of 2020. In addition, a financial metric—either revenue or adjusted EBITDA growth—must be hit each quarter. Tesla hit four of these targets by the end of 2020, reaching $20 billion in annualized revenue and growing adjusted Ebitda from less than $1.5 billion to $4.5 billion on an annualized basis.
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Each tranche of options gives Musk the right to purchase 8.4 million shares of Tesla. Last year, the Tesla chief was awarded a total options payout worth $13.3 billion, Forbes calculates. To find the value of these different options awards, Forbes used Tesla’s stock price at the time closest to when each tranche of options vested and was approved by the Tesla board. To exercise the options, it’ll cost Musk about $2.36 billion; net of those costs, Forbes calculates that the options added $11 billion to Musk’s fortune.
One caveat, however, is that Musk must hold the newly awarded Tesla shares for five years, according to filings. So while he has the right to exercise a total of 33.77 million options from his 2020 awards, he can’t immediately turn around and sell those shares.
While that may be one reason he doesn’t show up in top-paid CEO lists, experts also point out that most analyses of executive pay focus on the grant date of options awards, rather than when they vest.
A lot of this comes down to how companies are required to disclose executive compensation with the Securities and Exchange Commission. “The vast majority of highest-paid CEO lists take data straight from summary compensation tables in company filings each year,” explains Jannice Koors, a senior managing director at compensation consulting firm Pearl Meyer.
Equity awards like stock options, however, are disclosed only in the year in which they’re granted. “So, when you’ve got a company that makes what we call a ‘mega grant’ that is meant to cover multiple years, you’re going to have peaks and valleys in the disclosures: The year of the grant will show a big number in the summary compensation table, while in following years it won’t show up,” Koors says.
Forbes analyzed Tesla filings and used the vesting dates to value the respective tranches of options that vested in 2020: May 28, July 24, September 30 and December 31.
Since the start of 2021, Tesla has continued to hit new milestones, especially after blowout first-quarter earnings. Musk cleared another two tranches of his 2018 CEO Performance Award, which will give him the right to exercise another 16.9 million options—once that is approved by the board. The six tranches of options payouts that he has cleared to date amount to roughly 50.6 million shares (worth around $33.9 billion at current stock prices).
In all, the full compensation package of 101.2 million shares would be worth around $67.9 billion, at today’s stock prices.