5 major takeaways from Tesla's $1 trillion pay package proposal for Elon Musk

The structure of the eye-watering pay package means Musk needs to grow Tesla's business at an unprecedented rate.

To unlock just the first portion of shares, the billionaire would need to nearly double Tesla's valuation to $2 trillion. The final tranches of shares would not vest until the EV giant's valuation has hit $8.5 trillion, double the market cap of Nvidia, the most valuable company ever.

The full pay package is also contingent on Tesla meeting 12 "operational milestones."

Those include selling about 12 million cars and one million Optimus robots over the next decade, putting a million robotaxis on the road, and boosting adjusted earnings from $16.6 billion in 2024 to a staggering $400 billion.

That's way above tech giants like Microsoft and Apple, which reported adjusted earnings of around $162.7 billion and $134.66 billion, respectively, in their most recent full financial year results.

The massive compensation package is structured so that it pays out tranches of shares over a 10-year period, as Musk hits specific goals.

One of the final objectives needed to unlock the full payout is for Musk to set up a "CEO succession framework," according to Tesla's SEC filing.

In May, Musk said he would be Tesla's CEO in five years' time "unless I die." But questions over who would take over Tesla if Musk were to step down have been swirling for years. If the billionaire wants to earn his full $1 trillion payout, he'd need to finally answer them.

In the "considerations and risks" section of Tesla's SEC filing, the company's board warned shareholders that if they don't approve the deal, Musk might leave Tesla for good.

Musk has previously hinted that he could reduce the amount of time he spends working on Tesla if he doesn't gain more voting control. The company said Musk could leave if Tesla fails to "adequately retain and incentivize him."

On the other hand, Tesla's SEC filing says that there is still a chance the $1 trillion pay package "may not be sufficient" to keep Musk at the company.

Tesla's risk assessment pointed to the package's contingent nature and the risk of legal challenges like the one that derailed Musk's previous pay deal.

The proposed pay package aims to address Musk's long-running frustrations with the amount of voting control he has at Tesla.

If he meets the compensation plan's targets, the billionaire's Tesla stake would rise from 13% to at least 25%. That's the level of control at which Musk said in January he would feel comfortable expanding Tesla's AI and robotics initiatives.

Depending on what happens with Musk's previous pay package, which is trapped in legal limbo, the Tesla CEO's voting stake could eventually hit nearly 29%.

Musk's 2018 compensation package, which was struck down by a Delaware judge last year, was already unprecedented in the history of executive pay — and that $46.8 billion payout is dwarfed by the Tesla CEO's new compensation plan.

In its SEC filing, Tesla's board said it was "irrelevant" to benchmark Musk's pay against the pay packages enjoyed by other CEOs, as no other chief executive faced such challenging and complex performance targets.

Instead, the board said a "special committee" had based Musk's new pay on his previous compensation plan after concluding that he was best motivated by "a pay-for-performance compensation framework with ambitious goals that no one else has achieved before."