Here’s what Elon Musk needs to do to earn his Tesla trillion

Tesla (TSLA) CEO Elon Musk thanked shareholders for approving a pay package that could reach nearly $1 trillion. Now comes the hard part — what needs to get done to unlock the full payout.

Prior to approval of the latest plan, Musk held a 13% stake in Tesla after various share sales over the past couple of years.

This year’s package — revealed in early September — would grant Musk 12 massive tranches of stock options tied to targets the board argues are aggressive. The total value of the 12 tranches amounts to approximately 424 million shares, which would end up giving Musk around 25% control of Tesla.

Each of the 12 tranches is tied to both an operational milestone and a market cap threshold for it to be awarded.

The operational milestones are achievements that include delivering Tesla’s 20 millionth vehicle, having 1 million robotaxis in use, or selling 1 million Optimus robots. Tesla’s EBITDA would also have to eventually reach $400 billion (Tesla earned $16.6 billion in total last year) as part of the operational milestones.

Each milestone requires reaching a market cap threshold, with the first requiring a $2 trillion market cap, which is not that far off from Tesla’s current $1.5 trillion valuation.

Ultimately, to receive the full award, Tesla, with Musk at the helm, would need to achieve a market capitalization of $8.5 trillion, in addition to meeting all operational milestones.

Tesla claims Musk would also be locked into his shares, meaning he can’t cash out and leave the company, at least not immediately. The shares Musk earns in the new package allow him to vote with those shares upon receipt, but he can’t sell them until they vest, which will take a minimum of 7.5 years from the time of the award.

Compensation experts argue that Tesla could have issued a special class of voting stock that would have given Musk the control he desires without the massive financial payout. Musk claimed during Tesla’s Q3 earnings call that this option was not possible because Tesla incorporated without that special class of stock in place, unlike tech companies like Google (now Alphabet (GOOGL, GOOG)) and Facebook (now Meta (META)).

While the milestones and market cap thresholds appear quite aspirational, Musk may have a backup plan for acquiring some new shares.

Independent proxy adviser Glass Lewis, which urged shareholders to reject the package, argued that the just-approved pay package includes broad discretion for the board to approve dispersal of some tranches of stock, even if Musk does not hit the metrics.