Rivian Takes a Page Out of Tesla's Playbook – Is it the Right Move?

Tesla (TSLA +0.57%) has come incredibly far when you consider the company started out with its Roadster before turning into an electric vehicle (EV) maker that would revitalize a stale industry. So, a young EV company could certainly do worse than stealing a page out of Tesla‘s playbook. That said, this move might come with some standard controversy when it comes to sky-high CEO compensation.

Let’s dive into Rivian Automotive‘s (RIVN 7.81%) recent move to adjust its CEO compensation and what it means for investors.

What’s going on?

Recently, despite the objections of proxy advisory firms, Tesla shareholders approved CEO Elon Musk’s pay package that could potentially award him $1 trillion over the life of the 10-year deal.

The potentially lucrative deal calls for Musk to increase the company’s valuation from about $1.3 trillion to $8.5 trillion, and performance benchmarks include 20 million Tesla vehicles delivered, 10 million active “Full Self-Driving” (FSD) subscriptions, one million bots delivered, one million robotaxis in commercial operation, and $400 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) over four separate quarters.

While Rivian’s CEO compensation package is on an entirely different scale, the young EV maker has canceled the previous performance-based award for CEO RJ Scaringe from 2021 and replaced it with a new pay plan worth as much as $4.6 billion over the next 10 years.

The new award is “entirely at risk” and the 36.5 million shares underlying the stock options only become exercisable “upon the achievement of what the committee determined to be rigorous, challenging, pre-established performance goals over a multi-year period.”

In other words, Scaringe will have the ability to purchase the shares at an exercise price of $15.22 per share, depending on whether Rivian’s share price hits milestones ranging from $40 to $140 per share, in addition to operating income and cash flow targets.

What it all means

The share price milestones were part of the problem with the first pay package. The previous award package had share price milestones that ranged from $110 to $295, which the company stated is currently unfeasible.

For investors, while this may come across as bad optics as the company just laid off roughly 4.5% of its workforce, it’s worth noting Scaringe would only be receiving about 3% of Rivian’s shares if he met all his targets, which combine with what he already owns for a roughly 5% total stake. That compares to Musk owning a much more significant 25% of Tesla if he meets all the terms of his deal.

While the pay package might seem steep to some Rivian investors, it’s imperative that the CEO and founder is focused on growth and profitability as it gears up to launch its smaller and more affordable R2 SUV next year. The R2 is expected to compete with Tesla’s Model Y, expand the company’s addressable market, and significantly boost sales and deliveries.

Rivian might have stolen a page from Tesla’s playbook, but its compensation package is much more palatable and keeps Rivian on the right track.