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posted on 30 January 2018

CEO Pay Tied To Performance

from Challenger Gray and Christmas

Tesla announced today that CEO Elon Musk's compensation will be directly tied to the company's performance - placing goals that to some experts seem outrageous - attempting to turn Tesla, currently a $59 billion company, into a $650 billion company. If the company does not meet the valuation goals, in $50 billion increments, Musk will be paid nothing.

"Musk is attempting to transform the auto, aerospace, and energy sectors and is now seemingly trying to transform how CEOs are paid," said John Challenger, Chief Executive Officer of global outplacement and executive coaching firm Challenger, Gray & Christmas, Inc.

"No shareholder or employee of Tesla will lose on this deal," he added.

The compensation package also puts to rest any rumors of Musk's leaving the company, as the award is for long-term success. However, he does not have to remain CEO, and could instead step down into the Chief Product Officer or Executive Chairman roles. CEOs stepping into other executive roles was a trend in 2017: 30 percent of CEOs stepped into other C-level or board positions in their companies last year, compared to 21.4 percent of all CEO changes in 2016, and 19.7 percent in 2015, according to Challenger tracking.

"Clearly the company wants Musk's leadership at the executive level. They do not want to lose any of his institutional knowledge and vision and are willing to pay for his success," said Challenger.

This compensation structure is not completely novel, however, especially for Silicon Valley tech companies, according to Challenger.

"The typical Silicon Valley start-up structures compensation so that executives are paid in stock and equity, and if the company fails, they get nothing," said Challenger.

Will Musk's compensation package set the tone for CEO compensation? How likely are other companies to adopt this type of compensation package? What's the potential outcome if the company fails to meet these high valuation goals?

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