Vanguard, the second-largest shareholder of Tesla after CEO Elon Musk, outlined its rationale for endorsing his $56 billion compensation package in a brochure issued by the investment advisor on Friday.
During the Annual Shareholder Meeting on Thursday, Musk’s proposal for validation was approved after a re-vote mandated following a nullification by a Delaware Chancery Court Judge earlier this year.
Prominent stakeholders and investment entities with substantial holdings in the car manufacturer assumed a prominent role as the endorsement became one of Tesla’s major recent challenges. The potential ramifications were significant, as a rejection could have spelled the conclusion of Musk’s leadership at Tesla, where he transformed the company from a relatively unknown disruptor into the most valuable automaker globally within less than two decades.
While various companies and investment organizations stated their disapproval of Musk’s compensation package, Vanguard disclosed on Friday that it endorsed the validation. Following an extensive assessment, which involved engagements with executives and board members, Vanguard ultimately decided to back Musk’s endorsement:
“In our analysis of the performance award for 2024, which would provide Tesla’s CEO with around 300 million options (adjusted for stock splits since the initial grant date) subject to the fulfillment of a series of performance criteria, we observed that the company’s performance and shareholder returns since 2018 have significantly surpassed the market and have stood out positively.”
It also highlighted that the total shareholder returns were in the 98th percentile among all Russell 3000 companies from 2018 to 2023. “There are few companies that have generated as much absolute market value appreciation as Tesla.”
Moreover, Tesla’s board members and executives were fully cognizant of Musk’s impact and lent their full support to his endorsement, as communicated to Vanguard:
“To enhance the funds’ voting decisions, we engaged with Tesla’s executives and board members. During our discussions, board members reiterated their confidence in the importance of retaining the CEO and emphasized that the plan’s five-year post-exercise ownership requirement upholds the alignment of the CEO’s financial interests with the company’s shareholder base.”
All reservations or qualms Vanguard harbored prior to the meeting were effectively dispelled after the evaluations and engagements with executives. The firm stated that it voted in favor of Musk’s compensation package validation on Thursday:
“Our analysis, in line with our concerns in 2018, concluded that the current value of this grant significantly deviates from CEO compensation levels in any potential peer group. Nonetheless, the unique circumstance of assessing the plan retrospectively allayed our fears that substantial compensation could be earned without the company outperforming the market or peers. Given the strong alignment of executive compensation with shareholder returns since 2018 and the advantages the board emphasized regarding the motivational value for the CEO in upholding the original agreement (which received majority shareholder approval in 2018), the Vanguard-advised funds voted in favor of ratifying the CEO’s 2018 option award at the 2024 annual meeting.”
Vanguard’s ownership of 232 million Tesla shares represents approximately 7 percent of the automaker. The firm oversees assets totaling around $9 trillion.
You can view Vanguard’s complete assessment of the Tesla Shareholder Meeting here.
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