Shoot-the-moon goals: Would Musk work harder for $1 trn than $1 bn?

Whether or not you believe Tesla should grant Elon Musk a trillion-dollar pay package if he hits shoot-the-moon goals over the next decade, the company’s proposal to shareholders is based on the idea that the greater the monetary reward, the greater the effort.

Of course, financial incentives are enormously powerful. But is their ability to motivate infinite? Would Musk not work as hard if he were offered, say, $100 billion or $1 billion? What about $1?

The assumption that human beings are most forcefully motivated by money is a fundamental axiom of economics that is baked into most policy and business decisions. It anchors arguments for ever-rising executive compensation, lower capital gains taxes, work requirements for Medicaid recipients, and so much more.

But research from economists and psychologists has presented a much more complicated picture of how monetary — and other — rewards affect effort.

Esther Duflo and Abhijit Banerjee, Massachusetts Institute of Technology professors who shared a Nobel Prize in economics, argue that the impact of financial carrots has often been exaggerated.

Rich businesspeople like to think “we are the key fulcrums of the economy, and if we leave, everything will collapse,” Banerjee said. “That kind of narrative is very tempting for the rich in particular — and they say that willy-nilly — but I don’t think there is much evidence for this.”

There is scarce proof that the companies led by the highest-paid CEOs have the best long-term stock performance. One recent study looked at the 10 most valuable firms on the Nasdaq stock exchange between 2017 and 2022, a period that included the COVID-19 pandemic. It concluded that paying CEOs significantly more than the company president, other top executives or average employees did not increase a firm’s profitability.

Another study that looked at 429 large American firms over a decade found that total shareholder returns in companies where CEO pay was below the median for their sector did better than companies where pay exceeded it.

High compensation can sometimes lead to overconfidence that results in bad decisions. Some psychologists have found that high-stakes pressure can increase people’s tendency to choke.

Tesla has proposed giving Musk a stock-based compensation plan that would be worth nearly $1 trillion if he achieved ambitious goals that include producing a million humanlike robots and raising the company’s stock valuation by about six times, to $8.5 trillion.

Dan Ariely, a behavioural economist at Duke University, suggested a thought experiment: “Imagine a day in the life of Elon Musk, where he gets $1 trillion versus $1 billion. He wakes up, and he does what differently? He drinks more coffee, he sleeps less, he sleeps more, he exercises less, he talks to people, he thinks harder. What exactly would he do?

“At this level, I don’t see any way for them to do anything differently,” Ariely said of using additional financial incentives to get the ultrarich to work harder.

Research has found that other motivations can also be extremely powerful. An inner drive to achieve, help others or leave a mark; a desire for personal fulfilment, to be the best; a need for connection, societal approbation, respect and fame; a wish to control, vanquish, wreak revenge or reciprocate; a fear of rejection.

Consider that Olympic athletes, many of them record-holders, don’t get paid for their feats on the field.

Musk, who has been paid no salary as Tesla CEO for several years, has said he is more interested in power than money. The package of stock options is the way to get it. The bundle would ultimately give him command over roughly 25% of Tesla’s stock after taxes. That would be big enough that he would be tough to beat in any shareholder vote.

Musk, who now owns about 15% of Tesla’s stock, has threatened to leave Tesla if he doesn’t get his way.

Tesla’s board of directors, which includes Musk’s brother and several friends, argue that the pay package is crucial to the future of the company and will keep him focused on hard-to-achieve goals.

Musk deserves the compensation, said Robyn Denholm, the board’s chair, because he is doing things “that no one else has done before, doing things that further humankind.”

Perhaps. But the question is, would humanity’s great innovators — Johannes Gutenberg, Isaac Newton, Albert Einstein, Louis Pasteur, Thomas Edison, Alexander Graham Bell, Steve Jobs or even Nikola Tesla — have done more if only the pay had been better?

@The New York Times