Tesla shareholders are set to vote on a groundbreaking compensation package for CEO Elon Musk, which could potentially make him the first CEO in history to receive a trillion-dollar pay package. This pivotal decision will be made during the company's annual meeting in Austin, Texas, determining whether to grant Musk enough stock to significantly increase his ownership stake.

Tesla's board has vigorously advocated for the approval of this substantial pay package, asserting that such an incentive is essential for motivating Musk to exert even greater effort in his role. Furthermore, the company has warned that a failure to approve the package could lead to Musk stepping down from his position. Tesla Chair Robin Denholm, in a message to shareholders on October 27, emphasized Musk's indispensable role, stating, "Without Elon, Tesla could lose significant value, as our company may no longer be valued for what we aim to become: a transformative force reimagining the fundamental building blocks of mobility, energy and labor." Musk himself has indicated that he might withdraw or take a less active role if his ownership share is not increased sufficiently to afford him the desired influence over Tesla's future trajectory.

However, the underlying premise that higher pay invariably translates into increased effort and better performance is a subject of considerable debate among economists and psychologists. While the general economic axiom often assumes that monetary rewards are the primary motivators for human beings, research suggests that the reality can be more complex, sometimes even contrary to this notion.

Nobel Prize winners and MIT professors Esther Duflo and Abhijit Banerjee, as cited in a New York Times report, have critically evaluated the impact of financial incentives, suggesting that their benefits are often exaggerated. Abhijit Banerjee specifically expressed skepticism regarding the narrative often espoused by affluent business leaders who believe they are "the key fulcrums of the economy, and if we leave everything will collapse." Banerjee noted, "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."

Empirical research provides little evidence to support the idea that companies retaining their leaders with exorbitant paychecks consistently achieve superior long-term stock performance. A study referenced by The New York Times, which analyzed the 10 most valuable firms on the Nasdaq stock exchange between 2017 and 2022, found no increase in profitability for companies that paid their executives or employees above the average. Conversely, another decade-long study involving 429 of the largest U.S.-based firms revealed that companies compensating their CEOs less than the sector average tended to demonstrate better financial performance. Additionally, some psychologists suggest that the immense pressure associated with high-stakes financial rewards can, paradoxically, increase an individual's propensity to underperform or "choke" under pressure.

The outcome of Thursday's proxy vote will be announced at the annual shareholder meeting. If approved, the package could significantly raise Musk's holding in Tesla to over 25% of shares, a substantial increase from his current stake of more than 12%. To secure this approval, Musk requires a majority vote from the company's voting shareholders, a process aided by his ability to cast votes for his own shares, which represent 15% of the company.