Tesla's life-or-death gamble! Should 878 billion be kept for Musk, or should the risk of a stock price crash be taken?

Tesla (TSLA.O) board of directors has gone all-in on Elon Musk. Now, investors must decide whether to support the boldest bet in the company’s history.

Shareholders will vote on Thursday, facing a clear choice presented by the board: pay Musk up to $878 billion in company stock, or risk his departure—a scenario that could lead to a drop in the company’s share price. Experts say this decision is essentially a referendum, testing whether traditional corporate governance rules apply to the world’s richest man.

The board and many investors believe that only Musk can deliver on the promise to transform Tesla into an artificial intelligence giant, launching millions of self-driving robotaxis and humanoid robots. If Musk achieves all the board’s performance targets within ten years, Tesla’s market value will rise to $8.5 trillion, and Musk will hold about a quarter of the shares.

This level of compensation far exceeds that of any other CEO, and even if most performance targets are not met, Musk would still receive a record-breaking payout worth hundreds of billions of dollars. Many investors are not concerned about this staggering amount.

“If the share price can rise sixfold—which is the core requirement of this plan—then I’ll make a lot of money too,” said Nancy Tengler, CEO and Chief Investment Officer of Laffer Tengler Investments, a Tesla investor. “If he can deliver transformation and vision, why should I care how much he makes?”

Other major shareholders and executive compensation experts warn that the proposal brings significant risks to investors. Experts say this compensation plan violates governance principles, not only because of its sheer size, but also because the board is explicitly betting Tesla’s future on a leader with numerous conflicts of interest, whose unchecked power within the company could be further entrenched. They argue that responsible governance requires the board to always keep an open and competitive market for the best CEO candidates.

Musk did not respond to requests for comment, and a Tesla board spokesperson also declined to comment.

During negotiations, Musk told board members that unless an agreement was reached, he might prioritize his other companies—including rocket company SpaceX, AI startup xAI, and brain-machine interface company Neuralink. Board chair Robyn Denholm has repeatedly emphasized the risk of losing Musk when pitching the compensation plan to shareholders.

Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, said the Tesla board is being coerced by a “superstar CEO.”

“In my view, the appropriate response should be ‘good luck,’” Elson said.

Major shareholders, including the largest U.S. public pension fund CalPERS and the Norwegian sovereign wealth fund, have publicly opposed Musk’s compensation plan, echoing these concerns. Norges Bank Investment Management said on Tuesday that the compensation proposal could dilute shareholder value and fails to mitigate the “key person risk” of betting Tesla’s future on Musk.

The board has tried to ensure Musk’s long-term leadership through stock vesting and other terms.

Krishna Palepu, a Harvard Business School professor specializing in corporate governance, said the proposal ties Musk’s compensation to a significant increase in stock value and requires him to hold the shares for five years, aligning his interests with those of shareholders.

He said Musk has a track record of extraordinary share price growth, and only by achieving this again can he receive the maximum payout.

“The amount is huge because the goal itself is huge,” Palepu said.

The Leverage of Bold Promises

Musk’s influence over the board and shareholders largely stems from Tesla’s current stock market valuation—which far exceeds the actual financial performance of its declining electric vehicle business. Instead, Tesla’s $1.5 trillion market value is almost entirely dependent on Musk’s long-standing promise that Tesla will dominate the future of autonomous vehicles and humanoid robots.

Some corporate governance experts say that Musk now wields enormous power to make unprecedented compensation demands by threatening to leave (which could cause Tesla’s share price to crash). Board chair Denholm also hinted at this in her October 27 letter to shareholders: “Without Elon, Tesla could suffer significant value loss, as our company may no longer be valued for its future vision.”

David Larcker, director of the Corporate Governance Research Initiative at Stanford Graduate School of Business, said that from a purely economic perspective, the board’s position to retain Musk is understandable.

“If you think Musk might leave and Tesla’s share price would plummet, you certainly don’t want that to happen on your watch,” he said.

Gautam Mukunda, a lecturer at Yale School of Management, said that if Musk achieves the board’s performance targets, his Tesla holdings would already make him the world’s first trillionaire, and there’s almost no need for investors to incentivize him with a “second trillion.” He said, the board should not be intimidated by the threat of departure from the person who stands to lose the most if Tesla’s share price falls (i.e., Musk, the largest shareholder).

“This guy is holding a gun to his own head and saying: ‘Give me a trillion dollars,’” Mukunda said. “When a CEO asks for something, the board’s job is not to nod like a bobblehead.”

Musk Holds Voting Power

Musk will control a potentially decisive voting bloc in Thursday’s vote—his own 15% stake.

Previously, when Tesla was incorporated in Delaware, Musk did not exercise his voting rights in the previous compensation plan. But the board states in the current proposal that under Texas law, the CEO can do so. After Musk’s previous compensation plan was struck down by a judge due to a shareholder lawsuit, Tesla moved its incorporation to Texas.

The Delaware judge described Musk’s 2018 compensation plan—initially valued at $56 billion and now worth $128 billion—as an “unimaginable sum,” the result of negotiations with directors who were close to Musk and themselves overpaid.

Tesla has appealed and agreed to pay Musk stock currently worth $40 billion as a “first step” in fulfilling the 2018 plan. If the Delaware court reinstates the compensation plan, this award will be forfeited.

A provision passed in Texas in May this year makes it harder for shareholders to file lawsuits—the provision allows companies to require investors suing directors or executives to collectively hold at least 3% of shares, and Tesla has adopted this rule.

The bigger threat facing the Tesla board comes from Musk himself—the threat of his departure. Charles Whitehead, a professor of business law at Cornell University, said the Tesla board is facing a “classic extortion.” He said the unresolved key issue for the board is “if this CEO leaves, or in case of an accident, who will replace him?”