Earlier this year, Tesla shareholders approved what is likely the largest compensation package ever awarded to a CEO — for a CEO who clearly doesn’t need the money. Elon Musk is already incredibly rich, and also doesn’t seem particularly motivated by further wealth. The psychologist Daniel Pink describes the primary sources of human motivation for people who have covered their most basic needs, such as food and shelter, as being autonomy, mastery, and purpose — and Musk seems like a prototypical example of that. He enjoys the autonomy to pursue moon shot projects, constantly strives for mastery in what he does, and has a strong sense of purpose. And yet this contradiction of motivations has mostly been absent from discussion of Musk’s pay.
In fact, much of the discussion to date misses the point. The design of the compensation plan and its announcement were not about compensation at all. They were about signaling a credible commitment to Tesla’s purpose: to become a clean energy giant that helps address climate change by transforming mobility. To get there, Musk needs not only the normal sort of investor confidence, but also for investors to buy into his radical vision for the company.
The only reason Tesla is still alive — it has struggled to make a profit (much like Amazon) — is that investors still believe it will be able to pull off what it was meant to do: revolutionize mobility.
Tesla is not exciting for investors purely as a normal car company; it’s exciting because it could be one of the world’s most valuable companies in a low-carbon future. Musk’s compensation plan, which will give him close to $56 billion in stock and awards if Tesla’s market cap reaches $650 billion, is designed to communicate a particular value proposition to Wall Street. You invest in Tesla not for safe returns, but for the possibility that it could become one of the century’s most important companies.
If, by contrast, Tesla’s target was merely a $100 billion market capitalization — frankly, a great target for most companies, as it projects a 7% return annually for the next 10 years — then investors might quickly lose their appetite to continue financing the company. They signed up for transformation, not steady returns.
Musk knows that one of Tesla’s biggest competitive advantages is the patience and long-term thinking not only of management but also of its investors. Maintaining that patience requires constant focus on that north star of a half-a-trillion market value. By tying his compensation to that vision, he is telling Wall Street where his focus will be.
Why does that future require more than simply another great car company? The future of mobility will see a convergence of three trends that only a few years ago people saw as independent: autonomous vehicles, shared vehicles, and electrified vehicles. Such a future would help decarbonize the sector, which would contribute to the climate change challenge; dramatically improve health outcomes, due to fewer accidents and lower pollution; provide more-affordable mobility; and reduce traffic, contributing to better quality of life.
The reason why these trends are not independent is that autonomous vehicles will make sharing vehicles cheaper. And more sharing and more autonomy in turn feed more electrification as the total cost of ownership goes down with higher vehicle utilization. When I presented that thesis to a room of executives, including in the automotive industry, four years ago, most of them said that this scenario is at best 20 years away, that “Tesla would never be able to produce a solid car,” and that “Lyft and Uber are just for Millennials.” Of course, the tide has shifted, and now all automobile manufacturers are in a race toward that future. General Motors has made significant progress with its autonomous technology; Mercedes and BMW have partnered for shared mobility solutions; and all manufacturers have announced plans for electrification of their models.
Musk’s compensation plan, with its ambitious targets for market capitalization, focuses the mind on exactly this vision. For Tesla to reach a $650 billion valuation by 2028, the market will have to shift dramatically, with electric vehicles becoming the overwhelming percentage of all new sales. That would boost Tesla revenues from both vehicles and batteries. Such a future would also likely require that Tesla’s autonomous pilot technology becomes state-of-the-art, allowing it to be used safely and widely in Tesla vehicles but also potentially through licensing by other players.
Putting such ambitious targets front of mind is a strategic move to keep investors’ eyes on the ball. Musk continuously does that when he communicates with investors. Comparing the conference call transcripts of different automobile manufacturers during earnings calls, it is clear that he is the only one who keeps emphasizing the long-term disruptive potential of Tesla. He also keeps focusing investors on the S-curve of growth that Tesla is on.
For example, responding to an analyst question during an earnings call on how investors should be thinking about Tesla’s plan to ramp production up, Musk said, “…production ramps look like an S-curve. It’s extremely difficult to predict with precision the early part of the S-curve. So — because in the early part of the S curve, you have — it sort of starts off very slow and then it increases exponentially, it moves to a linear, and then moves to a logarithmic. So it’s terribly difficult to predict exactly what the shape of that S-curve is. And that’s where things get tricky because you end up putting quarterly results, kind of bracketing somewhere on that S-curve, and depending from where you are on that S-curve, it can actually look like a big difference. But actually, it could be a shift of a few weeks because of the exponential nature of the beginning of the S-curve.”
Tesla also receives more questions that other automobile manufacturers on the topic of disruption. Unsurprisingly, autonomous driving technology and where Tesla stands relative to competitors are frequently discussed. Disruption beyond the auto industry has been discussed as well, with analysts asking about the possibility of major disruption in the auto insurance market if the reported claim that Tesla vehicles may be 90% safer than current vehicles is proven true. Tesla’s impact on shaping the evolving landscape of transportation is never far from the foreground; Ford’s investor questions focus primarily on the impact on margins, sales, and other financial metrics.
Tesla’s future is uncertain. But in periods of transformational change, purpose-driven organizations might be better able to weather the change than organizations that are reactive and that face a lot of resistance within the ranks. Convincing middle managers and other people inside the organization to learn new skills, adopt new processes, and embrace new business models is a challenge when the organization is not aligned around a common vision. But we now have evidence that doing so is key for driving performance. It seems that most automobile manufacturers are reacting to the changing market dynamics rather than being driven by a sense of purpose to improve peoples’ lives. To win, a leader’s role is to change that.
from HBR.org https://ift.tt/2FwSwxc
