Elon Musk’s 2020 income was through the roof.
He received four grants to buy 8.4 million Tesla shares in 2020. After paying the exercise price, those blocks of stock options were each worth $ 6.2 billion at Wednesday’s closing price.
The combined $ 24.8 billion value of those options is more than Musk was worth a year ago when Forbes calculated his list of billionaires, when he ranked the 31st richest person in the world.
2021 and 2022 could be almost as lucrative for him.
The company’s annual financial presentation this week revealed that Musk will likely receive three additional option grants this year, each as large and lucrative as the ones he received in 2020.
At current values, those three tranches of options would be worth $ 18.6 billion.
Analysts now forecast that Tesla’s financial results for 2022 will also reach heights that would bring Musk three additional blocks of options. Tesla could hit one of those profit targets in 2021, which would mean Musk could match the four tranches of options he received last year.
Few investors complain about Elon Musk’s pay.
The stock’s 743% rise in 2020 made it the biggest winner on the stock market, as well as one of the most valuable companies in the world. That has calmed most of the criticism he might have faced.
“Tesla’s prestige is Musk,” said Daniel Ives, technology analyst at Wedbush Securities. “The reason investors haven’t blinked is that due to Elon Musk’s strategic direction, Tesla is at the top of the electric vehicle mountain and heading into the golden age of electric vehicles. And it has put Tesla on the cusp of being a trillion dollar market capitalization company.”
Rising Tesla’s share price and his options to buy new shares have made Musk the richest person on the planet, according to Bloomberg, surpassing Amazon founder Jeff Bezos.
How did Elon Musk get rich ?
Unlike Musk, Bezos receives no stock options from Amazon, and earned a relatively modest salary of $ 81,840 in 2019, plus security services valued at $ 1.6 million a year. But instead of benefiting from stock options or grants as most CEOs do, you primarily benefit from increasing your Amazon stock.
Musk similarly owns 170 million shares of Tesla, worth about $ 137.2 billion, in addition to existing shares, he has options to buy new ones. In fact, the nearly $ 123 billion gain in 2020 in the value of the stock Musk already owns dwarfs the value of the additional options he received.
Musk, who bought a majority stake in Tesla in 2004 when it was an upstart private company years after making its first car, is paid no salary. Before his current lucrative compensation package, he had an older version that paid him with options to buy 22.9 million adjusted Tesla shares divided by a price of $ 6.24 each. Those options are worth $ 18.3 billion today.
The options you received last year came from a second compensation package that was overwhelmingly approved by Tesla shareholders in 2018. It allows you to receive options to buy up to 101 million adjusted shares divided at $ 70 each. Those options can come in 12 separate tranches of the same size.
If Tesla’s stock price continues to rise, so will the value of options. In late May, when Tesla confirmed that Elon Musk received the first block of options for 2020, they were valued at “only” $ 770 million after exercise price. Today they are worth US $ 6.2 billion.
Musk has not exercised any of his options. Executives often exercise them when they expire or to free up cash. Musk has never sold Tesla stock.
Cost of Tesla options
Those options come at a cost to Tesla, although it is not a cash expense.
Share-based compensation accounted for a $ 1.7 billion impact on Tesla’s bottom line last year. The company does not disclose how much of that was Musk’s or how much was stock for its other 70,750 employees.
The company makes the stocks available to its employees. His presentation said that “our compensation philosophy for all of our people reflects the origins of our startup, with an emphasis on share-based awards.”
But the same filing says the company does not match employee contributions to its 401 (k) plans, in cash or in company stock.
When Elon Musk was recently asked on Twitter about the company’s lack of support for 401 (k) plans versus its own compensation package, he responded, “Everyone at Tesla gets stock. My compensation is all stocks / options, which I don’t take off the table. That is what you are not taking into account.
Tesla said Musk had so many options, much earlier than expected, that it caused the increase in share-based compensation expenses. In 2019, share-based compensation was approximately $ 900 million.
Musk did not receive options in 2019, but part of that $ 900 million was an expense that Tesla set aside because it believed Elon Musk would receive options in early 2020.
While share-based compensation doesn’t drain cash from Tesla’s coffers, it does change the company’s earnings picture.
The company reported positive net income for the first time in 2020, earning $ 721 million. Critics point out that its profit was far less than the $ 1.6 billion Tesla received from the sale of regulatory credits to other automakers.
They claim that the company actually lost money on the sale of cars and that it cannot depend on the proceeds from the sale of those loans in the long term.
Without the $ 1.7 billion in share-based compensation, Tesla’s net income would exceed the proceeds from the sale of those regulatory credits. And Tesla’s critics could not have claimed that he lost money selling cars.