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Tesla MoTors: The evoluTion of Governance froM incepTion To ipo
As might be expected with a new innovative com-pany, executive compensation at esla is heavily skewed toward equity-based pay. In 2009, Musk was awarded $24.1 million in compensation, com-prising $33,000 salary, $23.9 million in options,and $206,000 in other compensation and benets.
Tis mix is not inconsistent with that awarded atother technology companies in Silicon Valley, par-ticularly among companies whose shareholder baseis dominated by a controlling CEO. Hal o thestock option awards granted to Musk contain basictime-based vesting, with one quarter o those sharesvesting immediately and the remainder vesting monthly. Te other hal o Musk’s equity awards areperormance-based stock options, with milestonevesting. One quarter o these shares vest upon suc-cessul completion o the engineering prototype orModel S; one quarter vest upon completion o thevehicle prototype or Model S; one quarter uponthe rst Model S production vehicle; and the nalquarter upon completion o the ten thousandthModel S production vehicle. Milestone vesting iscommonly used by companies whose uture successis heavily reliant upon the successul introductiono new technology (see Exhibit 3).
What we might expect:
As elsa becomes a moremature company, it is likely to adopt executivecompensation packages that are more conventionalin structure. Tese might include a higher cash por-tion and lower equity portion. esla is also less like-ly to grant signicant options with strategic mile-stone vesting once it has established commercialsuccess. However, so long as Musk remains CEO,the mix o compensation might continue to skew heavily toward equity-linked rewards. Tat said, atsome point, Musk and others will potentially de-sire to consume their personal wealth or diversiy their investment portolios. When this occurs, thecompany is likely to increase the cash portion o compensation, or allow Musk to engage in hedging or sales transactions.
Why This MaTTers
1. Many prominent experts in corporate gover-nance advocate a set o best practices in termso board structure, antitakeover protections,and compensation. However, the case o esla demonstrates that governance is oten company specic, based on the organization’s current stageo development and operating needs. How wellis this understood by those who examine andcritique governance practices at specic corpo-rations—including proxy advisory rms, the -nancial press, and other experts?2. At esla, we see a pronounced change in theboard o directors rom inception to IPO. Tesechanges seem consistent with the skills requiredas the company developed operationally and -nancially. What changes should be made in theuture as esla continues to evolve as a publiccompany? How will the board change over timein terms o structure, composition, and skills set?
Te managerial challenges o esla are described in detail in: MichaelV. Copeland, “esla’s Wild Ride,”
, Jul. 21, 2008.
esla Form S-1/A, Filed June 15, 2010 with the SEC. esla FormS-1/A, Filed June 15, 2010 with the SEC.
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Corporate Governance Matters.
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