Institutional Shareholder Services (ISS), a prominent proxy adviser, has recommended that Tesla shareholders vote against Elon Musk’s proposed pay package, which could amount to a staggering $1 trillion. This recommendation is part of their ongoing evaluation of corporate governance practices and shareholder interests. ISS characterized the proposed pay package’s “striking magnitude” as a major concern and criticized the absence of clearly binding terms that would ensure Musk’s commitment to Tesla amidst his numerous other business ventures, including SpaceX and xAI.
In a report released ahead of Tesla’s annual meeting scheduled for November 6, ISS highlighted that the proposed 2025 award carries an astronomically high grant value that is contingent upon far-reaching performance targets. The firm noted that reaching these targets could potentially create immense shareholder value. However, it also expressed concerns regarding the exceptional size and design of the award, pointing out that achieving the maximum payout of 423 million shares would require Musk to increase Tesla’s adjusted earnings twenty-fourfold to $400 billion, as well as boosting the company’s market cap to $8.5 trillion from the current $1.38 trillion.
ISS raised significant red flags, stating that while the performance targets are ambitious, the unprecedented scale of the award could lock in extensive compensation opportunities for Musk even in cases of only partial goal achievement. This could deter genuine commitment to the company from Musk, especially considering his diverse interests across multiple high-profile companies.
With Musk’s substantial wealth, estimated at $448 billion primarily from his stakes in Tesla and several other companies, ISS pointed out that the award lacks prescriptive measures to guarantee his focus remains on Tesla, a concern echoed by several investors wary of Musk’s distractions from his various enterprises. The advisory firm’s position represents a significant challenge to the Tesla board, particularly chair Robyn Denholm, who has been advocating for Musk’s pay package by emphasizing his exceptional abilities and vision for the company.
This situation follows a previous instance where ISS and another firm, Glass Lewis, had advised against the reinstatement of Musk’s earlier $56 billion pay deal, a recommendation that ultimately did not prevent shareholder approval. Observers note a potential shift in dynamics this year, given that Musk and his brother are among the shareholders who can vote on this proposal—an aspect not present during the previous vote.
While Tesla is currently seeking to appeal a court ruling regarding Musk’s past pay deal, it has already granted him 96 million shares valued at approximately $30 billion under claims of “good faith.” This action has raised Musk’s ownership stake from 13% to 16%, with implications that the new deal might push his shares to at least 25% if approved.
In a response to ISS’s recommendation, Tesla criticized the firm’s stance, suggesting that it lacks understanding of critical investment and governance principles. The automaker has also faced additional recommendations from ISS concerning its board of directors. Specifically, ISS signaled that Ira Ehrenpreis, chair of Tesla’s corporate governance committee, should not be re-elected, as he unilaterally implemented a bylaw that may restrict shareholders’ litigation rights. However, ISS did recommend support for two other directors.
Furthermore, ISS advised investors to reject a proposal for Tesla to invest in xAI, which has already seen a substantial investment from SpaceX, further complicating the governance landscape as it relates to Musk’s interests in advancing artificial intelligence technologies. The upcoming shareholder vote is poised to be a significant moment for Tesla, with implications for Musk’s financial incentives and governance structure against the backdrop of increasing scrutiny from various stakeholders.
