Tesla Motors Inc.'s compensation plan for CEO Elon Musk is aggressively focused on long-term incentive pay. The plan requires the company to hit difficult targets that will benefit Tesla's shareholders and workers. In order for Musk to fully vest, Tesla's market cap would have to grow substantially, and important revenue and profitability goals would also have to be achieved. In other words, Musk's pay is entirely dependent on the company's performance. He receives no base salary, no cash bonus, and no stock that vests simply by the passage of time. Because all Tesla employees are also provided stock options, this also means that Elon's compensation is tied to the success of everyone at Tesla. The CEO compensation plan was designed to be an incentive for future performance that will take many years to be achieved, however, it is very expensive for the company to maintain and was estimated to be worth $2.5 billion at the time it was granted. 1. Consider the "sorting effect". What type of CEO is attracted by this type of pay plan? 2. What are the advantages and disadvantages, from the perspective of the firm and its shareholders, of this type of CEO compensation plan? 3