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Tesla's 10-year deal with Elon Musk hinges on performance

Musk’s new compensation plan means he will be paid only if the company reaches major milestones in operations and market value.

 Elon Musk's new performance award deal with Tesla is a 10-year plan hinging on company performance.
Patrick T. Fallon/Reuters/Corbis

Tesla on Tuesday announced a new 10-year pay deal with CEO Elon Musk based on achieving milestones in market value and operations. 

In order for Musk to fully vest in stock options, Tesla's market cap would need to grow to $650 billion. That's a $600 billion increase over the next decade. The award is modeled after Musk's 2012 agreement, and the founder is guaranteed no compensation, salary, cash bonuses or equity unless specific milestones are met. 

The award is comprised of a 10-year grant of stock options that vests in 12 stages. Each stage vests only if a pair of milestones are both met. In order to meet the first milestone, Tesla's current market cap will have to increase to $100 billion. Then, for each of the remaining 11 milestones the cap must continue to increase an additional $50 billion, totaling a $650 billion value in order for Elon Musk to fully vest in the reward. 

For operational milestones, Tesla must meet several escalating targets for revenue and adjusted earnings before interest, tax, depreciation and amortization. The milestones are aligned with the same shareholder value creation used in Musk's 2012 performance award. 

For each of the 12 performance milestones achieved, Musk will vest in stock options corresponding to 1 percent of Tesla's total outstanding shares. If none of the 12 milestones are achieved, Musk won't be compensated at all. Of course, for Musk to receive any of the compensation he must remain CEO for Tesla or serve as both Executive Chairman and Chief Product Officer. Though there aren't any current plans to bring in a new CEO, this does leave wiggle room for Tesla to make some executive moves. 

Like this new plan, Musk's 2012 deal awarded him with stock options vested only when Tesla's market cap increased in $4 billion increments and when it achieved predetermined operational milestones. Those included production targets for vehicles and milestones for development of its Model X and Model 3 programs. To date, all of those market cap milestones and nine of the 10 operational milestones have been met.