Elon Musk Needs $1 Trillion in ‘Motivation,’ Says Tesla Board. The Stock Rises.

Tesla’s board is proposing some 425 million incentive-laden stock options for CEO Elon Musk. The value of that stock would be roughly $1 trillion if Musk hits all his milestones. (Photo by ALLISON ROBBERT/AFP via Getty Images)

Tesla stock jumped on Friday as the company’s board laid out plans to “motivate” CEO Elon Musk. Its proposal includes an unprecedented amount of motivation, but investors appeared not to mind.

Shares of the electric vehicle maker traded as high as $355.87, and closed up 3.6% at $305.84, while the S&P 500 and Dow Jones Industrial Average fell 0.3% and 0.5%, respectively.

Giving away a huge chunk of Tesla stock is what led investors to bid up shares. Tesla filed its 2025 proxy report, which includes details of Musk’s 2025 performance incentive, which, if approved, would grant him about 425 million incentive-laden stock options. That is roughly equivalent to 12% of Tesla’s stock outstanding. (He holds some 400 million shares of Tesla and controls another 300 million or so stock options).

The proxy includes some details about the process and, surprisingly, the language “if [Musk] were to remain at Tesla.” That gives the impression it was possible he could move on. During negotiations, it was clear to the board that Musk was “motivated by all-or-nothing, pay-for-performance” and that he wanted 25% voting control of Tesla.

Pay for performance is fine, but 12% of a company’s stock is a lot. Still, “the Special Committee believed it to be critical to Tesla to secure Mr. Musk’s commitment and focus to lead Tesla.”

All the options vest if Tesla achieves an $8.5 trillion market capitalization. That would put Tesla stock at, very roughly, $2,700 a share and make the 2025 performance award worth a cool $1 trillion. Musk’s total Tesla stock, assuming no additional sales or legal issues, would be worth roughly $3 trillion. (Some stock would likely need to be sold to pay taxes when exercising options.)

The 2025 award follows a pattern for Tesla’s board. In 2012, it awarded Musk about 80 million stock options. In 2018, Musk was awarded another 300 million-plus incentive-laden stock options.

It’s an unprecedented amount of money for a CEO. The board believes it is getting strong management to guide the company through explosive growth. The awards “represent a comprehensive plan to retain and incentivize Mr. Musk to lead Tesla through a new period of transformative growth.”

The board wants Musk focused on four things: cars, Tesla’s full self-driving software, robo-taxis, and AI-trained robots.

Incentives beyond market capitalization are tied to those issues. Tesla would need to deliver 20 million vehicles, achieve 10 million active FSD subscriptions, deliver one million Optimus humanoid robots, and have one million robo-taxis in commercial operation. All that would amount to $400 billion in annual earnings before interest, taxes, depreciation, and amortization, or Ebitda, according to a target laid out in the proxy.

Apple is expected to generate about $137 billion in 2025 Ebitda, according to FactSet. Tesla is expected to generate about $13 billion.

The package “represents a critical next step to keep Musk as CEO at least until 2030,” wrote Wedbush analyst Dan Ives in a report Friday. “Tesla is heading into one of the most important stages of its growth cycle with the autonomous and robotics future now on the doorstep.”

Ives rates Tesla stock a Buy and has a $500 price target for the stock.

William Blair analyst Jed Dorsheimer rates shares Hold and doesn’t have a price target for the stock. He thinks keeping Musk is a good idea, too.

“Tesla’s new incentive plan for Elon Musk signals he is here to stay and win. If he can pull off the long-term goal of an $8.5 trillion market cap company,” wrote Dorsheimer on Friday. “This would be an incredible achievement and aligned with shareholders.” He sees the measure, to be voted on by shareholders, passing easily.

Tesla’s stock move shows that investors align with those views. They don’t care about huge pay packages as long as Musk is at the helm. It appears he will be, now that he has the appropriate motivation.

Write to Al Root at allen.root@dowjones.com