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Good day. This morning’s jobs report will give us a better idea of whether the recent rather weak economic reports were (a) a welcome sign of a gradual normalization of the US economy and the incipient return of inflation to its target, (b ) an indicator of increasing recession risks as pandemic stimulus. and savings are exhausted, or (c) simply seasonal noise within a still very strong economy. When the numbers come in, tell me what you think of them: robert.armstrong@ft.com.
Elon Musk’s stupid pay package isn’t much stupider than everyone else’s
This spring there has been quite a bit of huffing and puffing about the incentive pay package that Tesla gave its CEO, Elon Musk, in 2018. If it stands, it will pay Musk $56 billion. A Delaware judge canceled the package in January, claiming the board was not sufficiently independent at the time of its approval. Tesla’s board of directors wants shareholders ratify again at the company’s annual meeting next week. Last month two attorney The advisers recommended that investors vote against it.
A large Tesla shareholder, Baillie Gifford’s Scottish Mortgage Investment Trust, backs The plan:
“We agreed the remuneration package with Tesla in 2018 because it introduced extremely challenging targets that would generate a huge amount of money for shareholders if they were achieved,” Tom Slater, manager of the £14.1bn trust, told the Financial Times. “Having agreed to this, we believe it should be paid.”
That’s right. The size of the prize offends people, perhaps rightly so. But it was agreed upon by the shareholders and the board of directors. Without analyzing the principles of board independence under Delaware law, recovering the money now seems like a trap. To invoke the playground rule: no fools.
What offends me is not the size of the prize, but the structure. And, unfortunately, that structure has a lot in common with most public company pay packages.
He package It works, or worked, roughly as follows: It gave Musk the option to buy up to the equivalent of 12 percent of Tesla’s outstanding shares as of January 2018, at the then-share price. The options were granted in 12 equal tranches, the first when the company’s market capitalization reached $100 billion and maintained that level, on average, for six months. Each successive tranche is consolidated when Tesla’s market capitalization adds and sustains an additional $50 billion, up to a maximum of $650 billion. Market capitalization targets depend on additional revenue and profit targets.
The problem is that a pay package like this has the effect of making it the executives’ job to drive up the stock price. This should not be the executive’s job at all.
Before saying why you shouldn’t do it, it’s important to note that if you increase the stock price was Musk’s work has been done incredibly well. Yes, Tesla’s market capitalization of $567 billion has now fallen below the primary target of the pay package. But the stock price has compounded at 37 percent annually since 2018. To the extent that Musk is in control of the stock price, he has done such a good job of driving it up that many people don’t understand how it can be so high (a car company trading at 70 times its earnings?). If his intention was to turn the purchase of shares into payment for entry into a cult, it seems to have worked.
On the other hand, to the extent that Mr. Musk No in control of the stock price, the salary package was very poorly designed. We can all agree that there is a link between what CEOs do and the creation of economic value by the companies they lead. We can also all agree that there is a link between the creation of economic value in a company and its share price. But we also know that these connections are weaker than determined, are only partially understood, and can be out of control for a long time.
This laxity is the first premise of an argument against paying executives based on stock price. You should pay people to achieve results they can understand and control. Proponents of equity payments will cite some version of the claim, attributed to Ben Graham, that in the short term the stock market is a voting machine and in the long term it is a weighing machine. That’s probably correct in most cases, but timing matters.
Are six years enough for the vote to be weighted? That’s not the only synchronization problem. When will we be able to determine whether investment projects initiated by a CEO have added long-term value, rather than being a gimmick or a flash of the plan? This is not to mention the fact that it’s a bit strange to reward executives based on fluctuations in the value of the stock market in general. Can Musk also control the market valuation multiple, or whether or not tech stocks are hot among investors? And then there is the much-discussed problem of the asymmetric incentives inherent in stock awards. A high-risk corporate tactic may make the boss rich if he succeeds, but it won’t ruin him if he ultimately destroys the company.
All of this makes a pretty clear argument against pay packages like Tesla’s, where executive awards are based directly on stock price or market capitalization targets. But the same arguments apply to pay packages that indirectly link pay to share price.
Stock options that vest for three to seven years are the basis of compensation plans at most public companies. These rely primarily on the company meeting its financial goals, but they still put executives in the business of driving up the stock price. The stock price determines how much the executive will be paid when financial goals are met. But this is not what executives should focus on; They should focus on improving the company in everything it does.
Stock compensation is a bad idea. People like to talk about shareholder and executive alignment. But which shareholders? During what period?
It is best to pay cash, based on financial (returns) and operational (production) metrics. There are many reasons why companies don’t do this. One of them, I would speculate, is that deciding on such a pay package would require the board of directors to commit to a clear and specific vision of what the company’s goals are, how achieving those goals creates value, and exactly how much that is. value to the business owners if those objectives are achieved. Tying executive pay levels to stock price outsources those difficult decisions to the market, leaving the board of directors off the hook.
a good read
The Michigan boom.