Two from the Institute for New Economic Thinking, both with doctoral candidate Matt Hopkins. First up, June 18:
Musk’s stock-option bonanza
On June 13, 2024, Tesla shareholders voted by a margin of almost four to one to re-ratify a bounteous stock-option package that the Tesla board of directors had granted to CEO Elon Musk in 2018, but which the Delaware Court of Chancery had rescinded five months earlier. With that grant in place, Musk can exercise, at a time of his choosing, 303,960,630 options to purchase Tesla shares at a strike price of $23.33. Tesla’s closing stock price on June 13 was $182.47. If, hypothetically, Musk had exercised these options on June 13, he would have reaped realized gains of $48.4 billion before taxes and $30.5 billion after taxes.
In an age when the public has become used to sky-high CEO compensation, the unprecedented size of Musk’s potential haul is, by comparison, in outer space. In both the Delaware court and the media, the question has been whether it is fair for one person, who was already among the richest in the world, to be paid so much. That focus of the debate, however, misses the purpose of the 2018 option grant and its deeper implications.
While it takes the form of a pay package, the point of the 2018 option grant is to enable Musk to secure his control over the allocation of Tesla’s resources by increasing his voting power in the corporation. From this perspective, the overriding issue is how Musk will use—or abuse—his control of the world’s leading EV producer. Anyone concerned with the EV transition should be asking whether Musk as Tesla’s CEO will make resource-allocation decisions that support value creation in the form of higher-quality, lower-cost EVs or, to the contrary, simply enable value extraction that results in financial predators, possibly including Musk, becoming wealthier than they already are.
We begin our analysis of this critical question by, as a first step, explaining why the stock-option packages that CEO Musk was granted in 2009, 2012, and 2018 have been the mechanisms by which he has been able to increase his voting power at Tesla. Then we document how, through the accumulation of Tesla shares, Musk’s percentage of voting power at Tesla has changed over the past 15 years. We outline how, in the era of “maximizing shareholder value”, financial predators can challenge Musk’s control of Tesla in ways that undermine EV innovation. That discussion raises the question of why Tesla, with Musk in control, did not adopt dual-class shares or delist from the stock market as ways of shielding its CEO from the “market for corporate control”. Finally, we ask whether, for the sake of the EV transition, Musk should remain Tesla’s CEO.
Musk’s CEO compensation
For all the attention bestowed on Musk’s compensation, almost all media outlets, think tanks, labor unions, and academics routinely report an erroneous measure of his stock-based pay, based on “fair value” accounting. Fair-value measures of stock-based executive compensation produce estimates of the value of the stock options and stock awards based on grant-date stock prices. But, as we have explained in several publications,[1] the point of stock options and stock awards is to incentivize executives to make decisions that increase the company’s stock price in the future. Insofar as the stock price rises from the date of the grant to the date when the stock option is exercised or the stock award vests, executives are rewarded financially by realized gains.
It is the realized gains from stock-based pay, not the made-up fair-value measure, that flow into the executives’ bank accounts and on which they pay personal taxes (generally at ordinary tax rates) to the U.S. Treasury. Moreover, it is the realized gains on stock-based compensation that the employing corporation treats as a compensation expense in its tax filings. In Elon Musk’s case, the dramatic difference between the two measures of executive pay is shown in Table 1.....
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To their credit the writers point out:
...It should be noted that most stock-option packages granted to senior executives in the United States vest over periods of one to four years from the date of the grant without any additional metrics added as vesting requirements. If the stock price rises above the exercise (grant-date) price, the executives can realize gains from exercising the options, even if the stock-price increase results from the use of, for example, stock buybacks to give the price a manipulative boost. In contrast, vesting conditions of all three of Musk’s option packages have been largely related to the success of Tesla’s innovation strategy....Additionally Tesla doesn't do stock buybacks, the company has other opportunities in which they invest their cash flow.
And going back to December 18, 2023:
GM’s $10-billion roadblock
The UAW strike against GM, which began on September 14, concluded six weeks later with UAW workers securing a long overdue boost to their wages and benefits that were cut prior to and during GM’s bankruptcy in 2009. Importantly, the UAW won the right to extend its master agreement to UAW members employed in GM’s EV battery production.
During the negotiations, GM’s CEO Mary Barra warned that the financial damage caused by the strike would threaten the company’s ability to invest in its EV transition, telling workers: “make no mistake: If we don’t continue to invest, we will lose ground, and it will happen fast … Nobody wins in a strike.”
In 2021, GM had announced an increase to $35 billion in projected costs for its EV transition from 2020 to 2025. Since 2018, when the company began to execute the transition, through Q3 2023, GM raked in $57.2 billion in net income, a large proportion of which comes from sales of its gas-guzzling, high-margin trucks, SUVs, and crossover vehicles. The profits from GM’s internal combustion engine (ICE) vehicles could be committed to funding the company’s EV transition. Instead, GM has been using its cash flow to give multibillion-dollar manipulative boosts to its stock price.
Notwithstanding Barra’s warning to GM’s workers about jeopardizing the EV transition, on November 29, the company announced that it was doing a $10-billion stock buyback in the form of an accelerated share repurchase (ASR). Given the market price of GM’s stock on November 29, the $10-billion ASR is equal to about 25% of the company’s shares outstanding.
An ASR differs from an ordinary stock buyback program by enabling the company to reduce shares outstanding by the full value of the authorized buybacks (in this case, $10 billion) on the date of the announcement. In contrast, an ordinary stock buyback program entails open market repurchases carried out periodically at management’s discretion over the life of the program. An ASR, therefore, gives an “accelerated” boost to earnings per share.
This ASR is in addition to the $4.9 billion in open-market repurchases that GM has carried out under ordinary buyback programs since 2022. Moreover, under GM’s existing repurchase authorization, Barra and her CFO Paul Jacobson can execute another $1.4 billion in open-market repurchases at their discretion. GM also announced a 33% increase in its dividends per share.
These massive distributions to shareholders raise questions about GM’s commitment to an EV transition. In January 2021, GM had stated its intention to produce only zero-emission battery EVs by 2035, echoing China’s announcement in late 2020 of a similar policy objective. In 2020, GM sold 2.9 million vehicles in China out of a worldwide total of 6.8 million.
In an interview on CNBC’s Squawk on the Street on the day of the $10-billion ASR announcement, Barra was asked about the prudence of this huge distribution to shareholders, given GM’s recent problems with its autonomous EV division Cruise as well as its declining market share in China, the nation that has surged to global leadership in the EV transition.
Barra was dismissive and vague, saying,
as we got through some of the elements of the year that were driving a lot of uncertainty, once we had that certainty, we were able to make this decision and get to a price or get to a place from a cash balance perspective that is more what we have said we want to have going forward, so this was really a reflection of our capital allocation framework. You know, when you look at the last few years, there’s been a lot of uncertainty, whether it’s the pandemic, semiconductor, labor, those are past us.Over the past two decades, China has become a key market for GM. The company’s unit sales in China peaked at approximately 4 million vehicles in 2017 before declining 43% to 2.3 million in 2022. Of the GM cars sold in China in 2022, about 1.3 million were low-priced vehicles made by SAIC-GM-Wuling Automobile. GM’s sales of Chevrolets, Buicks, and Cadillacs in China dropped dramatically from about 1.9 million in 2017 to 1.0 million in 2022. The vast majority were ICE vehicles, which, given China and GM’s stated 2035 goal, will become increasingly irrelevant as the EV transition proceeds....
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Since that article was written we have seen these (and many more) headlines. In the last few days:
SAIC-GM Appoints New President Amidst Company Restructuring
Hyundai Motor Group Smoked Ford And GM In EV Sales. It's Second Only To Tesla
GM lays off more than 1,000 software employees, 600 in Michigan
And one of my favorites from January, just after the Lazonik - Hopkins paper: