On the surface, a $2.6 billion compensation package for any CEO sounds outrageous. But look at the numbers it hinges on.
If there are contenders for tech titan poster child, Elon Musk is clearly leading the pack. Unlike almost any other CEO in recent memory, Musk embodies the spirit of innovation, vision, risk-taking, fearlessness, and unbridled ambition while also having the popular appeal of a rock star–with ambitions to play on an interplanetary stage.
So what is all of that worth? Only what those who decide his salary say it’s worth.
In this case, it may be worth $2.6 billion over the next 10 years.
Sounds ridiculous, right? $2.6 billion to be CEO of any company is outrageous. Well, not exactly.
First off, America’s four highest paid CEOs already bring in about $100 million each in yearly compensation. Musk’s package works out to $260 million per year. Certainly excessive when compared to even the best compensated CEO today, Alphabet CEO Sundar Pichai, who clocks in at just over $100 million per year.
However, Musk’s current compensation (excluding the $20 billion of stock he owns in Tesla) is just over $45,000 a year! But even if you take that into consideration, along with the risks Musk took to get Tesla to where it is today–nearly going bankrupt and borrowing money from friends early in Tesla’s history–$2.6 billion still seems excessive by almost any measure.
Here’s a simple explanation of why it’s not.
The $2.6 billion is predicated on Tesla’s market cap increasing from about $56 billion today to $650 billion in 10 years. That’s a greater market cap than that of Amazon, 10 times the market cap of General Motors, and about a 10 times increase for Tesla over 10 years. (By the way, Musk’s $2.6 billion is tied to hard metrics, meaning that he could end up with nothing if certain milestones are not reached.)
But here’s where it gets interesting.
At $650 billion, Musk’s $2.6 billion is about 0.4 percent. Now, as a comparison, let’s say you started a company that’s worth $1 million today. In 10 years, it will be worth $10 million. What are you worth as CEO of that company? Using Musk’s numbers, (0.4 percent of $10 million) the answer would be $40,000 over 10 years, or $4,000/year. Would you consider that fair compensation?
I’m not saying that the analogy is perfect. It’s not–$2.6 billion is still an absurdly large number. But the shift in perspective changes things a bit.
To Musk’s credit, when asked about the compensation package for a New York Times article, his response was:
“None of it is intended for dynastic wealth creation,” he said. “The reason that it’s important to me personally is that there’s some pretty big things that I want to do.”
“I want to contribute as much as possible to humanity becoming a multi-planet species,” he said, alluding to a goal he has talked about often, including having people live on Mars. “That obviously requires a certain amount of capital.”
Many people believe that compensation should be directly tied to risks taken and value created. They would argue that anyone who wants to argue with that is simply being naive or ignoring the most basic precepts of capitalism.
On the other hand, there is no explanation that will be acceptable to the other group who see this as nothing but excessive.
Only time will tell what Musk is worth.
This article was originally published on Inc.
Image credit: LiveScience.com
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Tom Koulopoulos is the author of 10 books and founder of the Delphi Group, a 25-year-old Boston-based think tank and a past Inc. 500 company that focuses on innovation and the future of business. He tweets from @tkspeaks.