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Tesla unveils pay plan for Elon Musk: He could get nothing for 10 years

Tesla Inc. released a new compensation plan for Chief Executive Elon Musk. The company is preparing to report 2017 financial results. (Jan. 23, 2018)

Tesla Inc. released a new compensation plan for Chief Executive Elon Musk on Tuesday, with payments dependent on massive increases in the electric car maker's stock market value.

The announcement comes as Tesla prepares to report 2017 financial results that are expected to include massive cash losses.

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The new pay plan is similar to Musk's current arrangement, the crux of which is this: The higher Tesla's stock price goes, the more Tesla stock Musk gets.

The eye-popping part: The new plan envisions the Palo Alto company's value skyrocketing. It sets market value targets in 12 increments, starting at $100 billion and topping out at $650 billion. (The company's current market value is about $59 billion.)

If the stock hits none of the milestones, Musk would get nothing.

"Elon will receive no guaranteed compensation of any kind — no salary, no cash bonuses, and no equity that vests simply by the passage of time," Tesla announced.

"Instead, Elon's only compensation will be a 100% at-risk performance award, which ensures that he will be compensated only if Tesla and all of its shareholders do extraordinarily well," the company said. "Because all Tesla employees are provided equity, this also means that Elon's compensation is tied to the success of everyone at Tesla."

It's unclear how much the financial rewards will motivate Musk, who already is a billionaire and by all indications isn't in it simply to get rich.

"Musk doesn't need the money," said Efraim Levy, an analyst at CFRA Research. "This is the usual case of Tesla giving the bulls something to cling to and giving the bears something to use to say the stock is overvalued. It does create a robust bulls-eye target to give people enthusiasm for Tesla stock but it doesn't change company fundamentals."

Beyond stock market value, the milestones also include revenue and profit targets. The company, founded in 2003, has never posted an annual profit.

At each milestone, Musk could exercise options on about 1.69 million shares of Tesla stock — an amount equal to 1% of the shares outstanding as of last Sunday. At the first milestone, after Tesla's market capitalization reaches $100 billion, he will be able to exercise options worth roughly $400 million. That value could rise if he waits to cash in and the stock keeps rising; it could diminish if Tesla were to issue more shares, as it probably will.

Currently, Musk owns about 22% of Tesla shares, worth about $13 billion. Those shares are not at risk under the new pay plan.

The plan reflects the audacious nature of the Tesla endeavor. The company sees itself not simply as an electric car manufacturer, but rather, as it said Tuesday, as the "world's first vertically integrated sustainable energy company."

The vision: Tesla cars and Tesla trucks charged by Tesla storage batteries powered by Tesla solar roof systems. Plus, Tesla-brand utility-scale battery farms that store green power when the winds don't blow and the sun doesn't shine.

"I actually see the potential for Tesla to become a trillion-dollar company within a 10-year period," Musk told the New York Times.

For now, Tesla continues to hemorrhage billions in cash as it loses money on every vehicle it produces.

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The company can't hope to begin turning profits until its new Model 3 electric sedan is produced in high volume. The car was released in July, and Tesla was supposed to be producing them at a rate of hundreds of thousands per year by now.

But "production hell" problems, as Musk has called them, have caused major delays. Tesla's battery manufacturing line in Nevada and its auto assembly line in Fremont, Calif., are struggling to do their work at the necessary volume.

Tesla reported delivering only 1,770 Model 3s in 2017. Musk isn't the first automobile entrepreneur to struggle with production: In 1903, when Henry Ford launched the Model A, only 1,708 were sold in the first year.

Still, Tesla stock buyers see tremendous upside once volume production is achieved. Last year, the company reported that 455,000 potential Model 3 customers had put $1,000 refundable deposits down to reserve a place in line.

Tesla said the 10-year pay plan offers incentives to keep Musk at the company while allowing flexibility for his role to change. He's obligated to either remain as CEO or change his title to chief product officer while continuing to head the board of directors if a new CEO is brought in, although "there is no current intention for this to happen."

The plan is similar to Musk's 2012 performance package, which also was tied to growth in the company's stock. But with the company much larger now, the stakes are higher.

For Musk to receive the maximum compensation, Tesla's market capitalization would have to swell more than 10 times to $650 billion over the next 10 years.

Musk will get paid in 12 tranches if he meets market capitalization and operational milestones, Tesla said. The first tranche would kick in if Tesla's market capitalization hits $100 billion and the company reaches targets for revenue and earnings.

Each additional tranche requires a $50-billion increase in market capitalization and escalating revenue and profitability targets.

The pay plan offers a mix-and-match system that requires a market value milestone be reached for each tranche, but allows Musk to choose one item from a list of revenue and earnings measures to qualify for option vesting.

Under one scenario – far-fetched but possible if investor sentiment remains enthusiastic – Tesla could reach a $550-billion valuation with revenue of $175 billion without making a cent in profit, and Musk would still score big.

Under more likely scenarios, any earnings targets achieved would use a definition of profit that deducts interest costs on Tesla's loans and depreciation costs on the investment money spent to build Tesla factories.

Tesla is expected to return to the capital markets for new cash to keep the company running. That could include more borrowing or issuance of new shares.

Shareholders will be asked to approve the plan at a special meeting in March.

In Musk's 2012 pay plan, he was paid for hitting market capitalization targets in $4-billion increments and operational milestones, including vehicle production targets. Tesla stock has increased more than seventeenfold in that period.

In its news release Tuesday, the company did not mention vehicle production as part of the new pay plan.

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UPDATES:

11:05 a.m.: This article was updated throughout with additional details and analyst comment.

This article was originally published at 8:15 a.m.

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