The Elon Musk pay problem | I have to say, I do feel for Tesla Inc.'s board of directors, and Elon Musk, as they try to design a new pay package for him. Here is the problem: - Tesla's board, with shareholder approval, gave Elon Musk a huge pile of contingent out-of-the-money stock options in 2018. These options would give Musk the option to buy about 304 million Tesla shares for $23.34 each, [1] which was the trading price of Tesla's stock at the time. The options would only be valuable if the stock price went up, and Musk would only get them if he hit a series of ambitious market-value and operational milestones. To get all the options, Musk would need to grow Tesla from about a $59 billion market capitalization to a $650 billion market capitalization, but if he did that the options would be worth tens of billions of dollars.
- He hit the milestones, he got all the options, and at their peak — when Tesla's market cap was about $1.5 trillion — the options were worth $138.8 billion. [2] (The stock closed yesterday at $334.07, for a market cap of about $1.1 trillion and about a $94 billion value for the option package.)
- Then, for complicated and somewhat unsatisfying reasons, a Delaware court took them away from him. After the ruling, Tesla's shareholders voted to let him keep the options, but the Delaware court ruled that that didn't work. Tesla is still appealing the decision, and who knows what will happen, but as of now, no options.
- Musk, and Tesla's board, and Tesla's shareholders, all want him to get his options back.
- At some level, Tesla can probably just give him the options back: After the original decision invalidating his options, Tesla moved its incorporation to Texas, which everyone expects will be more Musk-friendly than Delaware was. If the board voted tomorrow to give him another $94 billion of options, and shareholders voted to approve that, and a shareholder sued to stop it, it seems unlikely that a Texas court would stop it, though really who knows.
- But giving Musk the same options now would be much worse, for Musk and for Tesla, than giving him those options in 2018 was. (That is, re-granting him the options would be worse than just having the 2018 grant spring back to life.) In 2018, those options were contingent and at-the-money (the exercise price of the options was the then-current stock price), so they weren't worth very much. In 2025, those options are non-contingent (the contingencies have been met) and very in-the-money (the stock has gone up), so they are hugely valuable. Giving a chief executive officer a big pile of risky contingent options to motivate him to increase the value of the company in the future is good corporate governance, and encouraged by the tax code and accounting rules. Giving a CEO a big pile of valuable non-contingent options to reward him for previously increasing the value of the company is discouraged.
So the Financial Times reports: Tesla's board faces a dilemma over how to deliver more shares to its CEO if his 2018 package is not restored on appeal. … Reissuing the options would trigger a $50bn-plus accounting charge for Tesla and a punitive 57 per cent tax rate for Musk, since the options would be awarded "in the money", with the financial targets already exceeded.
But it has to do something: Tesla's board has formed a special committee to explore Elon Musk's pay which could lead to the electric-vehicle maker's chief being offered a fresh package of stock options as it seeks to resolve uncertainty over his future. The committee comprises just the chair Robyn Denholm and Kathleen Wilson-Thompson, according to several people familiar with the matter. As well as Musk's pay package it will also explore alternative ways to compensate him for past work should Tesla fail to reinstate his record 2018 pay deal via an appeal at the Delaware Supreme Court this year. … Musk, already the world's richest man, has threatened to leave the electric-car maker he co-founded unless he is awarded greater control over the company. ... The committee is still in the early stages of deliberation and neither a new package nor any decision on how Musk's new pay would be structured is guaranteed, the people said. Any stock options would be contingent on Tesla hitting financial, operational and share price targets. From a tax and accounting perspective, the cleanest approach is to award him a huge new pile of options struck at the current stock price and contingent on future targets, but the problems with that are: - It seems unfair to him: He was promised all those options for hitting various targets, and he was motivated, and he hit the targets; making him hit new targets to get back the shares he was already promised is rough. Growing Tesla from a $59 billion company to a $650 billion company was pretty ambitious, but he did it; growing Tesla from a $1.1 trillion company to, you know, a $10 trillion company seems less realistic.
- If you really make him whole for the lost value, it's expensive: Giving him new at-the-money options worth $94 billion would require giving him options on a lot more than 304 million shares.
How do you solve this problem? Well! I will tell you one approach that is very simple and that works in theory, but that would be insane to actually propose to a board of directors. The essential problem is that you want to award Musk a bunch of options with (1) a low strike price but (2) an at-the-money strike price. That is, the problem is that Tesla's current stock price is too high, because Musk has already accomplished what Tesla wanted him to accomplish in 2018. A related problem is that you want to award Musk a bunch of options that are contingent, but you also want to reward him for hitting the targets he already achieved. Again, the essential problem is that he has accomplished too much already. Describing the problem that way makes the solution clear. The solution is to undo the work he has already done, so you can award him new options that are contingent on redoing that work. Like: - If you drive Tesla's stock price back to $23.34, you can give him 304 million new options struck at $23.34. Those will have no tax or accounting problems, and then you quickly drive the stock price back up to $334.07 and his options are worth $94 billion.
- If Musk goes off and spends most of his time on other endeavors — SpaceX, XAI Holdings, the government — then Tesla can offer him new options contingent on meeting new operational goals like "come back to the office" and "start selling cars again."
Obviously I am kidding, but also Tesla's stock price did fall more than 50% from its peak last December to its trough last month, as Musk has been distracted from Tesla and has alienated customers with his extracurricular activities. I am not saying that he did any of this to solve the problem of pricing a new options award. It's just, you know, it did kind of help with that problem. If you are a business that imports Chinese goods into the US, and you know that US tariffs on China are currently 30% but will soon go up to 145%, you should probably import as much stuff as possible now, before the tariffs go up, and just put it in a warehouse to sell over time. Pay 30% tariffs now on stuff you plan to sell in 2026, because if you import it in 2026 you'll pay more. Conversely, if you knew last week that tariffs on China were 145%, but would soon go down to 30%, you should have held off on importing stuff until the tariffs went down. If you had stuff on a ship, you should have left it on the ship for an extra week so as not to pay the tariff; then, when the tariffs went down, you could dock the ship and unload it and pay the lower tariffs. That is not particularly practical advice, though. For one thing, predicting the path of tariffs seems risky. But also, most importers do not control the ship, so if tariffs go up while the ship is sailing from China to the US, you just have to pay the extra tariffs. Here's a Bloomberg News story about a ship that left China when tariffs were 20% and arrived in California when they were 145%, which is a risk that importers take now. If the ship had arrived 3 weeks later, the tariffs would have been 30%. But who can plan on that? There is, however, an abstract version of "leave it on the ship," which is roughly "bring it into a warehouse in the US that is, for legal purposes, still the ship." The Wall Street Journal reports: [SKU Distribution's Mesa, Ariz., warehouse] is the ultimate U.S.-based tariff refuge. The 110,000-square-foot building sits in a foreign-trade zone, meaning companies can import products tariff-free while they are stored or used to assemble other goods at the warehouse. That allows companies to avoid paying duties until the products are shipped out to U.S. buyers. "Everyone is getting educated on it now," said James Peacock, SKU's chief executive. "We're growing like mad." When President Trump's "Liberation Day" tariffs hit, New York-based gun-safe seller SecureIt Tactical had safes moving through different stages of its supply chain. Safes were sitting in shipping containers in China, traversing the Pacific Ocean and inching through the Port of Los Angeles. Directing the safes to the Mesa facility bought SecureIt time to help weather the cost of the Trump administration's tariffs, said Tom Kubiniec, the company's CEO. Actually the foreign-trade zones are not perfect substitutes for leaving stuff on a ship, because importing stuff into the trade zone defers the payment of the tariff, but locks in the rate: The facilities can't solve all tariff challenges. If Trump lowers duties—as he agreed Monday to do on Chinese imports while trade negotiations continue—companies will still be on the hook for the amount assessed when their goods entered a foreign-trade zone. The president could change that rule—but that, customs broker Julie Pettit said, is "a false hope that I wouldn't plan my business on." Ah well. Leaving the stuff in the warehouse until tariffs fall doesn't work, because you lock in the old higher tariffs. Leaving the stuff in the warehouse until that rule changes might work, but only if the rule changes. Betting on tariff volatility seems safe; betting on that rule change seems riskier. Still it feels like there is a financial product to be built here? You build a huge warehouse at some port in the US, you build a similarly huge floating warehouse on a barge 100 feet offshore, you ship all your products from China to the floating warehouse, they get there, and then you make a tariff call. If you think tariffs will go down next week, you keep them in the offshore warehouse until next week; if you think they'll go up next week, you move them into the onshore warehouse pronto. (This is extremely not any sort of advice, and I'm sure I'll get emails saying, like, "no 100 feet offshore doesn't work.") And then there's some rent differential between the two warehouses that serves as an indication of market expectations about the future path of tariffs: The more you think tariffs will go up (down), the more you will pay to stash your stuff onshore (offshore). Build out a whole tariff futures curve from warehouse rents. Anyway this is dumb but the point is that that there is a ton of tariff volatility, and when there is a lot of volatility, there is money to be made as a derivatives structurer. If you can shift your tariff payments in time, you can hedge or speculate on tariff risk. There was not a lot of demand for that a year ago, but now there is. We have talked a couple of times about what I once called "in some ways the simplest solution to the tariff problem," which is that (1) the US Constitution really quite clearly says that only Congress can impose tariffs, (2) the various high recent tariffs have been imposed unilaterally by President Donald Trump, not Congress, so (3) a court could tell him to knock it off. In some other ways that is the least simple solution, of course. What if a court tells him to knock it off and he refuses? Various people have brought court cases on this theory, and yesterday the US Court of International Trade had a hearing on one of the lawsuits. The Wall Street Journal reports: Justice Department lawyer Eric Hamilton … argued the panel didn't have the authority to question the basis of Trump's emergency declaration at all. That was a political question to be handled by the executive and legislative branches, he said. Hamilton said IEEPA establishes a process for Congress to review the president's decision. Judge Gary Katzmann said that view would eliminate the judiciary's traditional role in deciding whether the executive branch had acted in a way consistent with the law. Under the administration's argument, there are "three branches of government but the judiciary is somehow omitted or deleted from that government structure," Katzmann said. Restani posed a scenario in which there was a national shortage of peanut butter. "Can the president declare a national emergency?" she asked. "Peanut butter becomes a political question." Hamilton disagreed, saying Congress set clear boundaries in IEEPA for exercising presidential power. When we have previously discussed this, I suggested that either Congress set clear boundaries and the current tariffs go beyond those boundaries, or Congress didn't set clear boundaries and so the current tariffs are an unconstitutional delegation of power from Congress to the president: Either way, the claim that the president gets to set whatever tariff rates he wants on every country forever seems to undermine the constitutional requirement that only Congress can set tariffs. But I'm not sure how much that matters. The approximate traditional rule of thumb in the financial industry is that your bonus depends on (1) your performance, (2) your group's performance and (3) your firm's performance. If you don't make any money for the firm, you won't get much in the way of a bonus. If you're the top equities salesperson but the equities division has a bad year, you'll get a big share of a small pot. If you have an absolutely lights-out year and bring in tens of millions of dollars of revenue, but a rogue trader in another group loses all the money and the firm goes bankrupt, you get nothing. Bad luck for you. This is only a very approximate traditional rule, though; it's not true. Often a bank will have a terrible year, but will need to pay up for the good employees in the in-demand groups, because otherwise they'll all leave for rivals and next year will be even worse. Even when a firm goes bankrupt, its first order of business will often be to pay big retention bonuses to the useful employees. You will maximize your pay by doing a good job in a hot group at a successful firm, but one out of three will often get you something. Anyway Credit Suisse Group AG had a pretty bad start to 2023, in that it collapsed and was bought by UBS Group AG in a fire sale arranged by the Swiss government at a 99% discount to its peak stock price. But lots of individual bankers at Credit Suisse were doing just fine and apparently earned their bonuses: A dozen former Credit Suisse bankers were unlawfully stripped of their bonuses when UBS Group AG bought its collapsing rival, a Swiss court said in a verdict that could pave the way for fresh lawsuits from hundreds more employees over unpaid compensation. The country's finance ministry issued an order following the bank's rescue by rival UBS Group AG in March 2023, telling Credit Suisse to cut bonuses altogether for its executive board members, reduce them by 50% for managers one level lower, and by 25% for employees two levels down. The provision of state guaranteed aid had been the justification for the bonus ban. On Wednesday the Federal Administrative Court ruled in a "pilot judgment" for a group of 12 that the government's decision was wrong. The decision could potentially affect about 1,000 people it said. From the court's announcement: The [Swiss Federal Department of Finance] and UBS, which took over Credit Suisse, argued across the board that the reductions and cancellations were justified because the employees concerned had belonged to the three upper management levels of Credit Suisse and were therefore responsible for its strategy and complete failure. However, neither the FDF nor UBS could demonstrate that even a single one of the twelve managers concerned had caused excessive risks and jeopardised the financial situation of Credit Suisse through their wrongful actions or omissions. None of the managers concerned by this Judgment belonged to the top management level of Credit Suisse.
There is a crude sense in which, if a giant investment bank collapses over a weekend, somebody probably messed up somewhere. But it can be hard to figure out who, or to prove it: A bank failure is an emergent property of lots of individual decisions, and you can rarely point to one person and say "it's that guy, he did it." At a failed bank, most employees — at least below the top management level — will be able to say either "I actually had a great year" or else "well I was doing the best I could in a rough environment." Why shouldn't they get their bonuses? One rationale for the rough traditional rule of thumb is that it creates a good partnership culture: If the senior managers of the investment banking division know that their bonuses are contingent on the good work of the trading division, they will do their best to monitor the risks that the trading division takes. They will push upper management to get good responsible traders put in charge of the trading division; they will pay attention to trading risks when they sit on firmwide committees; they will go out for casual drinks with senior traders and say "you're not doing anything stupid are you?" Every banker will feel some sense of responsibility, not just for her own performance and her group's, but for the performance of the firm as a whole. At some scale, though, perhaps that is unrealistic. No individual banker can entirely control or even monitor her bank's performance, so you might as well just pay everyone what they earned. Stochastic diversification | We talked yesterday about leveraging up your retirement accounts. Unsurprisingly I got a lot of reader feedback; "doing counterintuitive financial engineering in your personal account" is maybe the single topic that most interests Money Stuff readers. I want to mention a few things. First of all, I wrote about why you might leverage up your retirement accounts, particularly as a young professional. I made two points: - Most of your economic net worth as a young professional consists of your future income from your job, and buying a lot of stocks gives you an appropriate amount of diversification.
- Another big chunk of your net worth as a young professional probably consists of your house, which is very levered, so buying a lot of stocks also diversifies that.
A couple of people pointed out a third, subtler advantage, which is that leveraging up your retirement account offers time diversification. When you are a young professional you probably do not own a lot of stocks, but when you are near retirement you probably do own a lot of stocks, because you keep buying more stocks each year. Therefore, the amount of money you have in retirement will depend a lot on your investment returns when you are in your 60s, and much less on your investment returns when you are in your 20s: A high percentage return on your small pot of money in your 20s won't make you much money, but a big percentage loss on your large pot of money in your 60s will cost you a lot of money. By investing a little when you are young and broke, and a lot more when you are at the peak of your career, you end up taking a lot more market risk later than earlier. Your dollar-weighted returns depend largely on how the market does late in your career. And you can diversify away from that by taking more risk earlier in your career, by borrowing to invest. Here's a 2008 paper by Ian Ayres and Barry Nalebuff on the idea: By employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time. Using stock data going back to 1871, we show that buying stock on margin when young combined with more conservative investments when older stochastically dominates standard investment strategies - both traditional life-cycle investments and 100%-stock investments.
And: Investors use mutual funds to diversify over stocks and over geographies. What is missing is diversification over time. The problem for most investors is that they have too much invested late in their life and not enough early on. ... This leads to our simple advice: buy stocks using leverage when young. Ayres and Nalebuff recommended 2 to 1 leverage early on, achieved with broker margin, stock index futures or ideally with "the purchase of deep-in-the-money LEAP call options." (That is, buy a one-year call option on the S&P 500 index with a strike price of roughly 50% of the current index level and a premium only slightly higher than the other 50%; there's very little time value to that option, so you are essentially just paying a cheap interest rate to borrow half the price of the index.) But here in 2025 a couple of readers argued for a different roll-your-own approach, which is, you guessed it, levered exchange-traded funds. You can pretty easily go buy an ETF that offers twice the daily return of the S&P 500 index. As we have discussed, holding a daily 2x S&P ETF for 30 years probably will not give you twice the 30-year performance of the S&P: These funds rebalance every day, creating "volatility drag" that can reduce returns. But, you know, maybe? The 10-year total return of the ProShares 2x S&P 500 fund is about 18.3% per year; the equivalent for an unlevered S&P 500 fund is about 12.4%: You're not exactly getting 2x exposure, but you're getting more than 1x. This is extremely not investing advice but I am passing it along because these ETFs are all plastered with warnings saying "this is intended to be held for one day and will get real weird after that," and putting them in a 401(k) to hold for decades is among the more counterintuitive things that my readers have found to do with their personal accounts. DeepSeek's 'Tech Madman' Founder Is Threatening US Dominance in AI Race. Trump Tax Plan Gains Momentum in House as It Heads to Floor Vote. Milan's 'Empty London' Tax Bet Pays Off as UK Wealth Exits Soar. Josh Kushner's Thrive Capital Gains $522 Million From Carvana Trade. A Buffett-Backed College Faces GOP Tax Threats After Investment Success. Moët Hennessy's crisis: dubious deals, soaring prices and hubris. United Adds Caviar Service and Luxe Jammies in Race for Superpremium Travelers. The man behind the rise of 'golden passports.' The Unraveling of the King of Davos. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! |
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