Tesla analyst offers blunt warning on Elon Musk pay package vote

This is what could happen next to Tesla shares.

Jun 11, 2024 - 02:30

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Tesla analyst offers blunt warning on Elon Musk pay package vote

Elon Musk was none too pleased.

"Yeah, this is not cool," the Tesla (TSLA) chief executive wrote on his X social-media website.

Musk was reacting to Saturday's announcement by Norway's $1.7 trillion sovereign wealth fund that it would vote against ratifying Musk's $56 billion pay-package proposal.

The fund, Tesla's eighth-biggest shareholder according to LSEG data said, said it appreciated “the significant value generated under Mr. Musk's leadership since the grant date in 2018," Reuters reported.

Still, “we remain concerned about the total size of the award, the structure given performance triggers, dilution, and lack of mitigation of key-person risk,” Norges Bank Investment Management, the operator of the fund, said.

In 2018, the fund had voted against the package. Shareholders are set to vote on the package for a second time on Thursday, June 13.

"We will continue to seek constructive dialogue with Tesla on this and other topics," the fund said.

Elon Musk, co-founder of Tesla and owner of X Holdings. Analysts are reviewing Musk's pay-package proposal, to be voted on by Tesla holders on June 13.
Apu Gomes/Getty Images

Musk: 'public sentiment is unequivocally supportive'

"If they actually surveyed their constituents, they would discover overwhelming support in favor," Musk said in his post. "So far, roughly 90% of retail shareholders who have voted have voted in favor of both resolutions. The public sentiment is unequivocally supportive."

The fund also said it would vote for a shareholder proposal calling on Tesla to adopt a freedom of association and collective bargaining policy, which would be considered a win for labor unions seeking to assert their influence within the Austin car maker.

The fund invests proceeds from the country’s oil and gas industry to secure pensions for future generations in Norway.

Delaware Chancery Court Judge Kathaleen McCormick rejected the package in January, calling it an “unfathomable sum.”

Yeah, this is not cool.

If they actually surveyed their constituents, they would discover overwhelming support in favor.

So far, roughly 90% of retail shareholders who have voted have voted in favor of both resolutions. The public sentiment is unequivocally supportive.— Elon Musk (@elonmusk) June 9, 2024

McCormick ruled that Musk and the Tesla board “bore the burden of proving that the compensation plan was fair, and they failed to meet their burden.”

Musk responded with a post saying: "Never incorporate your company in the state of Delaware."

In May ISS and Glass Lewis, two shareholder-advisory firms, advised voting against the package.

ISS said in its recommendations on Tesla’s proxy voting items that Musk’s stock-based package was outsized when it was approved by shareholders in 2018, and it failed to accomplish board objectives voiced at that time.

Tesla continues to push for its approval in the courts, while Musk has moved to reincorporate the company in the friendlier regulatory confines of Texas.

Tesla Chairwoman Robyn Denholm told investors in a June 5 letter that Musk’s contributions “have built Tesla from a company that was, in 2018, a loss-making, ambitious company with significant hurdles and challenges to overcome into what it is today — a company that is literally changing the world by driving so many critical initiatives that are making our planet more sustainable while at the same time delivering hundreds of billions of dollars of value to all of you who invested in Tesla’s dream.”

"When we made our commitment to Elon in 2018 — a commitment that was overwhelmingly approved by approximately 73% of disinterested stockholders — it had one simple purpose: to keep Elon focused on Tesla and motivated to achieve the company’s incomparable ambitions," she wrote.

Denholm added that "if Tesla is to retain Elon’s attention and motivate him to continue to devote his time, energy, ambition and vision to deliver comparable results in the future, we must stand by our deal."

"This is obviously not about the money," she said. "We all know Elon is one of the wealthiest people on the planet, and he would remain so even if Tesla were to renege on the commitment we made in 2018. Elon is not a typical executive, and Tesla is not a typical company.

"So, the typical way in which companies compensate key executives is not going to drive results for Tesla," Denholm said.

Tesla's stock has been on a downward trend lately, dropping from $249 on Jan. 2 to $176.34 at last check.

Analysts see stock impact

In April, Tesla posted a decline in quarterly deliveries for the first time in nearly four years and missed Wall Street estimates.

Meanwhile, Musk announced on X that "no Model Y 'refresh' is coming out this year." Model Y is the company's midsize SUV.

More Tesla:

"I should note that Tesla continuously improves its cars, so even a car that is six months newer will be a little better," he wrote on June 8.

Bernstein analysts on Monday said Musk's pay package was unlikely to pass the shareholder vote.

Around 25% of eligible voting shares are held by either passives, who are likely to follow the "no" recommendation of ISS and Glass Lewis, or institutionals who have publicly announced their intention to vote no, the investment firm said in a research note.

Bernstein pointed out that Tesla has never seen more than a 63% voter turnout in any shareholder vote.

Even assuming turnout is much higher at 75%, Tesla would need over 73% of the unaccounted-for voters to vote yes for the pay package to pass, the firm said.

The chances of Tesla's proposed redomestication to Texas being approved are higher but still uncertain, it added.

Bernstein said that if Musk's pay package is blocked, Tesla's diluted-share count would decrease by 9% going forward, increasing earnings per share by 10%.

If the pay package is rejected, however, the stock also would likely be down 5% or more amid concern that Musk might leave Tesla.

Bernstein kept an underperform rating on Tesla with a $120 price target.

The firm said that investors may be underestimating the risk that Musk's pay package will be rejected, making the risk/reward balance into the shareholder vote currently skewed to the downside.