The following discussion and analysis of compensation arrangements of our named executive officers for 2009 and 2010 should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current considerations, expectations, and determinations regarding future compensation programs. The actual amount and form of compensation and the compensation programs that we adopt may differ materially from current or planned programs as summarized in this discussion.
Compensation Philosophy—Introduction
We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components. To achieve these goals, we designed, and intend to modify as necessary, our compensation and benefits program and philosophy, to attract, retain and incentivize talented, deeply qualified, and committed executive officers that share our philosophy and desire to work toward these goals. We believe compensation incentives for such executive officers should promote the success of our company and motivate them to pursue corporate objectives, and above all should be structured so as to reward clear, easily measured performance goals that closely align the executive officers’ incentives with the long-term interests of stockholders. To fulfill these goals, we are currently undertaking a comprehensive review and evaluation of all of our compensation programs, which we expect will continue throughout 2010.
In recent years, we have successfully navigated a wide variety of difficult operational and financial challenges and undergone several periods of rapid change that have directly affected the compensation structure of our executive team. The compensation offered to our senior executive officers has varied significantly as a result of these historical circumstances. Therefore, we will, as part of our evaluation of our compensation programs, seek to harmonize the compensation structures of senior executive officers and other employees to conform to our overall compensation philosophy.
Our current compensation programs reflect our startup origins in that they consist primarily of salary and stock options for senior executive officers. Consistent with our historical compensation philosophy, we do not currently provide our senior executive officers or other employees with any form of a cash bonus program, or, except as noted below, any severance provisions providing for continued salary or other benefits upon termination of an executive officer’s employment with us or other equity-based compensation, other than option grants. In certain limited cases, we have granted an executive up to 12 months vesting acceleration of certain stock options in the event of a termination of employment following a change of control. As a special dispensation to offset the risk to him associated with his relocation to California from Michigan and our strong desire to retain his talent and expertise, we also provided Deepak Ahuja, our Chief Financial Officer, the right to receive severance if he was terminated within the first 12 months of his employment. To date, we have not formally benchmarked our compensation program against any group of peer companies.
Beginning in the fourth quarter of 2009, we, primarily under the leadership of the Compensation Committee of our board of directors, began a comprehensive review of Chief Executive Officer, or CEO, compensation, director compensation, and executive compensation. The Compensation Committee retained Compensia, Inc., or Compensia, a compensation advisory firm, to provide data and consultation to the Compensation Committee in developing a systematic set of recommendations for CEO, director, and executive compensation. The Compensation Committee, currently consisting of Messrs. Buss (who joined the Committee in November 2009), Ehrenpreis, and Gracias, initially reviewed and made recommendations to the full Board on CEO and director compensation as described below, and in collaboration with the CEO has begun a comprehensive review of executive compensation, to be continued and completed in 2010. We anticipate increasing the flexibility and elements of our compensation structure, while striving to maintain transparency, simplicity, and a clear pay for performance orientation.
Additionally, as our needs evolve, we intend to continue to evaluate our philosophy and compensation programs as circumstances require, and at a minimum, we will review executive compensation annually. We anticipate making new equity awards and adjustments to the
components of our executive compensation program in connection with our yearly compensation review, which will be based, in part, upon the market analysis performed by Compensia that may include benchmarking against a peer group of companies to be determined in the future and the recommendations to the Compensation Committee by our Chief Executive Officer.
Role of the Compensation Committee in Setting Executive Compensation
The Compensation Committee has overall responsibility for recommending to our Board of Directors the compensation of our Chief Executive Officer and determining the compensation of our other executive officers. Members of the Compensation Committee are appointed by the Board of Directors. Currently, the Compensation Committee consists of three members of the Board, Messrs. Buss, Ehrenpreis, and Gracias, none of whom are executive officers of the Company, and Messrs. Buss, Ehrenpreis and Gracias each qualify as (i) an “independent director” under the rules of The Nasdaq Stock Market, and (ii) an “outside director” under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). See the section entitled “Management—Committees of the Board of Directors—Compensation Committee.”
Role of Compensation Consultant
The Compensation Committee has the authority to engage the services of outside consultants to assist it making decisions regarding the establishment of the Company’s compensation programs and philosophy. The Compensation Committee retained Compensia as its
compensation consultant in 2009 to advise the Compensation Committee in matters related to CEO compensation and director compensation. The Compensation Committee has begun, but not yet completed, its analysis of executive officer compensation for 2010, which may include recommendation from Compensia or another outside consultant. As of this filing, Compensia has assisted the Compensation Committee in determining appropriate equity grants to our CEO and non-employee director compensation.
Role of Executive Officers in Compensation Decisions
For executive officers other than our Chief Executive Officer, the Compensation Committee has historically sought and considered input from our Chief Executive Officer regarding such executive officers’ responsibilities, performance and compensation. Specifically, our Chief Executive Officer recommends base salary increases and equity award levels that are used throughout our compensation plans, and advises the Compensation Committee regarding the compensation program’s ability to attract, retain and motivate executive talent. These recommendations reflect compensation levels that our Chief Executive Officer believes are qualitatively commensurate with an executive officer’s individual qualifications, experience, responsibility level, functional role, knowledge, skills, and individual performance, as well as our company’s performance. Our Compensation Committee considers our Chief Executive Officer’s recommendations, but may adjust up or down as it determines in its discretion, and approves the specific compensation for all the executive officers. Our Compensation Committee also relies on the experience of our directors affiliated with venture capital firms, which have representatives on the boards of numerous private companies, in determining and approving the specific compensation amounts. All such compensation determinations are largely discretionary.
Our Compensation Committee meets in executive session, and our Chief Executive Officer does not attend Compensation Committee discussions where recommendations are made regarding his compensation. He also abstains from voting in sessions of the Board of Directors where the Board of Directors acts on the Compensation Committee’s recommendations regarding his compensation.
Chief Executive Officer Compensation
In developing compensation recommendations for the Chief Executive Officer, the Compensation Committee has sought both to appropriately reward the Chief Executive Officer’s previous and current contributions and to
create incentives for the Chief Executive Officer to continue to contribute significantly to successful results in the future. Our Chief Executive Officer, Elon Musk, has been working for an annual base salary of $33,280, during his tenure as our Chief Executive Officer in order to help us preserve our cash balances. Prior to December 2009, Mr. Musk also did not receive any equity compensation for his services. In addition to serving as the Chief Executive Officer since October 2008, Mr. Musk has contributed significantly and actively to us since our earliest days in April 2004 by recruiting executives and engineers, contributing to the Tesla Roadster’s engineering and design, raising capital for us and bringing investors to us, and raising public awareness of the Company. Further, Mr. Musk has served, and continues to serve, as our Chief Product Architect.
As part of its review, the Compensation Committee requested summary data from Compensia concerning ranges of compensatory equity ownership levels as a percentage of the company by Chief Executive Officers who have played a significant role in the founding and early stage growth of technology companies. This review included an assessment of founder ownership data in late-stage, pre-IPO companies of similar size and capital to us and founder ownership data of a broad sampling of technology companies at the time of the IPO. The data presented to the Compensation Committee by Compensia analyzed the total beneficial ownership of founder CEOs immediately prior to the IPO. It was noted that the vast majority of these CEOs acquired their equity through compensatory equity grants as opposed to preferred stock acquired via investment.
Based on its judgment, a review of competitive market ownership data, and its view that compensation should be tied to clear, measurable performance goals that would best align Mr. Musk with stockholder interests, the Compensation Committee recommended, and in December 2009, the Board adopted a compensation approach for Mr. Musk which provides compensation primarily through stock options designed to promote long-term stockholder interests.
Among the accomplishments achieved during Mr. Musk’s involvement with us that the Compensation Committee felt deserved recognition, the Compensation Committee considered our successful launch of the Tesla Roadster in 2008, the extension of sales to Europe in 2009, our early success in building a well-recognized worldwide brand, and our success in fundraising during the 2008-2009 time period, when despite difficult external conditions, we raised equity financing and entered into the DOE Loan Facility, together totaling more than $500 million.
In recognition of these achievements and to create incentives for future success, the Compensation Committee recommended, and the Board of Directors approved a grant to Mr. Musk of 3,355,986 options to purchase shares of our common stock at an exercise price of $6.63 per share representing 4% of our fully-diluted share base prior to such grant as of December 4, 2009, with / 4 of the shares subject to the option vesting immediately, and / 48 of the shares subject to the option scheduled to vest each month thereafter over the next three years, assuming Mr. Musk’s continued service to us through each vesting date.
In addition, to create incentives for the attainment of clear performance objectives around a key element of our current business plan—the successful launch and commercialization of the Model S—the Compensation Committee recommended and the Board of Directors approved on December 4, 2009, an additional grant to Mr. Musk of 3,355,986 options to purchase shares of our common stock at an exercise price of $6.63 per share totaling an additional 4% of our fully-diluted shares prior to such grant as of December 4, 2009, with a vesting schedule based entirely on the attainment of performance objectives as follows, assuming Mr. Musk’s continued service to us through each vesting date:
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• / 4 of the shares subject to the option are scheduled to vest upon the successful completion of the Model S Engineering Prototype; • / 4 of the shares subject to the option are scheduled to vest upon the successful completion of the Model S Validation Prototype; • / 4 of the shares subject to the option are scheduled to vest upon the completion of the first Model S Production Vehicle; and
1 th 1 th
1 th 1 th 1 th
The milestones for this option award were designed to reward Mr. Musk for company-based performance goals that align Mr. Musk’s compensation with the long-term interests of stockholders and the United States Department of Energy. The milestones were set at levels that are attainable and critical to our success. If Mr. Musk does not meet one or more of the above milestones prior to the fourth anniversary of the date of the grant he will forfeit his right to the unvested portion of the option.
Executive Officer Compensation
Historically, our Chief Executive Officer has made recommendations to our Board of Directors and Compensation Committee regarding compensation for other executive officers and our Board and Compensation Committee have generally adopted the Chief Executive Officer’s recommendations.
As indicated above, our Compensation Committee has begun to develop an overall set of compensation recommendations for our executive officers. However, the process is ongoing and is expected to be completed during calendar year 2010. Goals of the review include:
In the third quarter of 2009, we completed performance reviews for our employees and executive officers, and in some cases as a result of these reviews, executive officers received additional stock option grants. Additionally, in the fourth quarter of 2009, based on recommendations from our CEO to the Compensation Committee, the Compensation Committee reviewed certain officers’ overall contribution and recommended additional equity option grants as a first step in modifying executive officer compensation—especially those with longer tenures with us— consistent with the goals above. Specifically, the stock option grant to Mr. Straubel in December 2009 was awarded partially to reflect his recent performance, including the completion of key technical milestones related to the battery and charging system for the Smart fortwo electric drive for Daimler and the Tesla Roadster powertrain, and partially factoring in the length of his tenure with us and the substantial number of shares subject to his outstanding options that had previously vested. The stock option grant to Mr. Ahuja in December 2009 was awarded as result of his recent performance, including achievement of project milestones related to the execution of the DOE loan commitment letter and the successful closure of additional rounds of equity financing. The stock option grants to Messrs. Walker and Sobel in October 2009 were made in connection with the commencement of their employment with us, in accordance with the terms of their offer letters, and took into account their new executive positions with us, including the size of their base salaries and other compensation.
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• / 4 of the shares subject to the option are scheduled to vest upon the completion of 10,000 Model S Production Vehicle.
• Establishing a compensation program structure to attract and retain the most highly qualified executive officers.
• Developing compensation guiding principles, including a comparative peer group and targeted market positioning for different compensation elements.
• Harmonizing salary, equity awards, and other compensation benefits for executive officers hired under significantly different circumstances.
• Continuing to align executive officer compensation, both in individual cases and as a team, to the long-term interests of stockholders. • Developing a flexibility that permits the accommodation of appropriate individual circumstances.
•
Emphasizing clear, easily-measured performance goals to help align executive officer compensation with the long-term interests of stockholders.
The following table sets forth the stock option grants we made to our named executive officers in the third and fourth quarters of 2009:
In the second quarter of 2010, we made additional stock option grants to certain members of our management team, including two of our named executive officers, each with a vesting schedule based entirely on the attainment of the following performance objectives which are identical to those performance milestones included in the stock option we granted to our Chief Executive Officer in December 2009:
If one or more of these milestones is not achieved on or prior to December 4, 2013, each executive officer will forfeit his right to the unvested portion of the option. The following table sets forth the stock option grants to our named executive officers:
(1) In each case, vesting remains subject to continued service through each vesting date.
In June 2010, Mr. Straubel was granted an additional option to purchase 2,450 shares of common stock at an exercise price per share of $14.17. This option vests as to 1/48th of the shares subject to the option each month over the next 48 months, subject to Mr. Straubel’s continued service through each such vesting date.
Name Date of Grant Number of Shares Underlying Option Exercise Price ($) Vesting Start
Date Vesting Schedule(1)
Elon Musk 12/4/2009 3,355,986 6.63 12/4/2009
/ 4 vested immediately upon grant, / 48 per month over the subsequent three years
12/4/2009 3,355,986 6.63 — Vesting upon the achievement of milestones as described above Deepak Ahuja 12/4/2009 54,166 6.63 8/16/2009 / 48 per month
Jeffrey B. Straubel 12/4/2009 117,083 6.63 8/16/2009 / 48 per month John Walker 10/21/2009 83,333 6.15 8/17/2009
/ 4 vested immediately on vesting start date, / 48 per month over the subsequent three years
Jon Sobel(2) 10/21/2009 133,333 6.15 9/28/2009
/ 4 one year after the vesting start date, / 48 per month over the subsequent three years
(1) In each case, vesting remains subject to continued service through each vesting date. (2) Mr. Sobel resigned as our General Counsel in December 2009.
• / 4 of the shares subject to the option are scheduled to vest upon the successful completion of the Model S Engineering Prototype; • / 4 of the shares subject to the option are scheduled to vest upon the successful completion of the Model S Validation Prototype; • / 4 of the shares subject to the option are scheduled to vest upon the completion of the first Model S Production Vehicle; and • / 4 of the shares subject to the option are scheduled to vest upon the completion of 10,000th Model S Production Vehicle.
Name Date of Grant Number of Shares Underlying Option Exercise Price ($) Vesting Start
Date Vesting Schedule(1)
Deepak Ahuja 6/12/2010 83,300 14.17 —
Vesting upon the achievement of milestones as described above Jeffrey B. Straubel 6/12/2010 116,650 14.17 —
Vesting upon the achievement of milestones as described above 1 th 1 th 1 th 1 th 1 th 1 th 1 th 1 th 1 th 1 th 1 th 1 th
The review of executive compensation is ongoing, and the Compensation Committee, Chief Executive Officer, and Board of Directors anticipate additional modifications in 2010 as a result of aligning executive compensation with the goals described above. See “Executive Compensation—Chief Executive Officer Compensation” above for additional information regarding the grants made to our CEO.
Elements of Compensation
Our current executive compensation program, which was set by our Compensation Committee, consists of the following components:
We combine these elements in order to formulate compensation packages that provide competitive pay, reward achievement of financial,