Academic level – Undergraduate 1-2
Type of paper – Analysis
Topic Title – Tesla Compensation Plan Analysis
What modifications, if any, would you recommend to the proposed Tesla compensation plan?
The proposed Tesla compensation plan is well-structured and encourages the CEO, Elon Musk, to work towards achieving aggressive goals that would benefit the company and its shareholders. However, the whole idea of the compensation plan was primarily based on Elon Musk’s rising ambitions and his profitability. Tesla’s plan for Elon Musk was unique because it gave him the opportunity to buy 1.69 million Tesla shares if the company’s valuation grew to $100 billion and reached an operational objective (Palepu & Mehta, 2018). Musk’s compensation plan was performance-based, with no pay if he failed to meet market cap, revenue, and EBITDA targets.
The current compensation plan requires changes because the portion of revenue that Elon Musk receives is too high compared to other executive members and employees, in addition to the fact that Musk raised the company’s ambitions. The plan locks in high pay opportunities over the award’s long-term and diminishes the compensation committee’s ability to adjust pay levels. Therefore, the core change I would establish is decreasing the company’s value target in the amount of 100$ billion to 80$ billion to meet realistic expectations.
In suggesting these changes, what goals are you pursuing?
The primary goals in recommending changes to the proposed Tesla compensation plan are to improve fairness and align compensation with a broader range of stakeholders. Liu’s research’s valuation methods show Tesla’s actual market value is overrated due to high operating cash flow, price-to-earnings ratio, and enterprise value-to-earnings ratio, indicating an overvalued stock price (2021). Thus, the firm’s value is overestimated despite Tesla’s high revenue and product success. The company’s financial condition was erratic, with continuously growing sales but elusive profitability, and the compensation plan did not rely on quick car production or good cash flow (Palepu & Mehta, 2018). The modification should also foster sustainable and responsible leadership and ensure the plan’s targets are ambitious and realistic.
These changes aim to promote equity, encourage collaborative performance, and maintain a balanced focus on financial success and ethical business practices within the company. The established goals can be met by addressing Elon Musk’s disproportionately high portion of the revenue received compared to others and considering a more attainable valuation target. By addressing valuation issues, encouraging equality, and keeping a balanced focus on realistic aims, the proposed changes to Tesla’s compensation plan improve fairness and create responsible leadership.
How do you prioritize these goals relative to aligning pay for performance?
Prioritizing the mentioned aims to align pay for performance focuses on developing a fair and equitable compensation system that rewards success while also considering the broader interests of stakeholders and the company’s long-term survival. While matching pay with performance is still necessary, ensuring that the compensation plan does not accidentally generate imbalances or incentives that may lead to short-termism or excessive rewards for particular employees is also crucial.
Equitable incentive distribution generates a sense of collaboration, teamwork, and motivation within the business, ultimately contributing to sustained performance and success. No matter how demanding the performance requirements are, many may question the reasonableness of billions of dollars in pay opportunities. Even when annualized, Musk’s compensation package dwarfs practically every CEO at the world’s largest and most lucrative public corporations, announced ISS (Palepu & Mehta, 2018). While ambitious objectives can inspire creativity and ambition, creating demanding and feasible targets to ensure reasonable expectations and long-term growth should be prioritized. The current step guarantees that the compensation plan supports short-term success and long-term value creation and stability, protecting the company’s interests throughout time.
Palepu, K. G., & Mehta S. (2018). “Tesla’s CEO Compensation Plan.” Harvard Business School Case 118-085.
Liu, S. (2021, March). Competition and valuation: a case study of Tesla Motors. In IOP Conference Series: Earth and Environmental Science (Vol. 692, No. 2, p. 022103). IOP Publishing. https://doi.org/10.1088/1755-1315/692/2/022103