Elon Musk's new pay structure: What you need to know

Tesla has announced a radical new compensation structure for its CEO Elon Musk. The billionaire's compensation will no longer include salary or benefits, and will be contingent upon Tesla's market capitalisation rising.

For Musk to fully vest the stock options, the Palo Alto-based company has set a 10-year market capitalisation target of USD 650 billion. This ambitious target shows that Tesla, currently valued at about USD 59 billion,  expects its market capitalisation to increase by a 1000 percent over the next ten years.

The proposal also seals Musk's involvement in the company in leadership roles. According to a Forbes report, long-term investors will view this as a positive sign of commitment from Musk.

According to a Reuters report, Musk is currently Tesla's biggest shareholder, owning about a fifth of the company's outstanding shares.

Here are the highlights of the new compensation structure of Tesla's CEO, as mentioned in the company's press release.

• The plan includes a 10-year stock option that can be vested in 12 tranches.
• The compensation is contingent on Tesla's market cap and operational milestones. Tesla's market cap must grow in USD 50 billion installments. Revenue and EBITDA must increase.
• The first tranche can be vested when the company hits a market capitalisation of USD 100 billion.
• Elon Musk will have to continue as Tesla's CEO, or serve as both Executive Chairman and Chief Product Officer.
• Unlike Musk's previous compensation structure, the milestones do not include vehicle production targets.
• The proposal is pending shareholder approval.

This "bold" new compensation structure is not without its flaws.

A column by Business Insider journalist Mathew Debord has called the proposal "delusional". Debord points out that the company has rarely made money in 14 years.

The column also highlighted that the new pay structure could mean that Tesla does not have enough money to keep production going.

"I'm not going to be the only one to read the news of Musk's new pay package with the understanding that Tesla doesn't have enough cash in the bank to keep the lights on through 2018."

Since the new compensation plan excludes vehicle production targets, it won't provide Musk any motivation to achieve production targets.

Could the new scheme make him the World's richest man?

Musk's current net worth is about USD 21.5 billion. The company has said that if he fully vests the stock option tranches at the end of 10 years, Musk could earn USD 55.8 billion, owning about 28.3 percent of Tesla. According to a report by Fortune, Musk's net worth could grow to USD 184 billion in stock options alone.

It is worth pointing out that the Tesla CEO has never drawn a salary, according to the Fortune report. He earns the minimum California wage but refuses the cheques.

The world's current richest person is Amazon's CEO Jeff Bezos, whose net worth is about USD 108 billion.