Harvard Business Review: What's really behind the pay package for Tesla's Elon Musk

Tesla's board recently approved one of the largest (and most talked about) CEO compensation packages in history. While much has been written about Elon Musk's milestone-based, decade-long pay package, Harvard Business Review's George Serafeim argues, "Elon Musk’s unusual compensation plan isn’t really about compensation at all."

Above: Tesla's CEO Elon Musk (Instagram: elonmusk)

Serafeim says, "much of the discussion to date misses the point. The design of the compensation plan and its announcement were... about signaling a credible commitment to Tesla’s purpose: to become a clean energy giant that helps address climate change by transforming mobility. To get there, Musk needs not only the normal sort of investor confidence, but also for investors to buy into his radical vision for the company."

And this requires a long-term timeframe. At the end of the day, "Tesla is not exciting for investors purely as a normal car company; it’s exciting because it could be one of the world’s most valuable companies in a low-carbon future... You invest in Tesla not for safe returns, but for the possibility that it could become one of the century’s most important companies."

Above: Tesla's Model S (Instagram: icepunisher)

This won't happen overnight. Looking ahead, Serafeim believes, "The future of mobility will see a convergence of three trends that only a few years ago people saw as independent: autonomous vehicles, shared vehicles, and electrified vehicles. Such a future would help decarbonize the sector, which would contribute to the climate change challenge; dramatically improve health outcomes, due to fewer accidents and lower pollution; provide more-affordable mobility; and reduce traffic, contributing to better quality of life."

To that end, "Musk’s compensation plan, with its ambitious targets for market capitalization, focuses the mind on exactly this vision. For Tesla to reach a $650 billion valuation by 2028, the market will have to shift dramatically... [and] Musk knows that one of Tesla’s biggest competitive advantages is the patience and long-term thinking not only of management but also of its investors. Maintaining that patience requires constant focus on that north star of a half-a-trillion market value. By tying his compensation to that vision, he is telling Wall Street where his focus will be."

Above: A look inside Tesla's interior (Instagram: themaverique)

After all, Musk made this point crystal clear on Tesla's recent earnings conference call. He wants steadfast, long-term investors instead of fickle, quick-buck day traders. On the call, Musk remarked, "if people are concerned about volatility, they should definitely not buy our stock. I'm not here to convince you to buy our stock. Do not buy it if volatility is scary... We have no interest in satisfying the desires of day traders. I couldn't care less. Please sell our stock and don't buy it."

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Source: Harvard Business Review