Recently, Tesla stockholders made a striking decision. They agreed to compensate Elon Musk up to $1 trillion if he meets a series of ambitious performance goals. While this eye-popping figure might raise eyebrows, if Musk fulfills the necessary criteria, he could very well be an incredible bargain for the company.

The targets Musk must meet, set by Tesla's shareholders, are undeniably ambitious and might even seem unattainable at first glance. Over the next decade, Musk has a tall order ahead of him. He needs to produce and deliver a total of 20 million vehicles.

Currently, the company has delivered 7 million. Additionally, Musk is expected to roll out one million robots, which is a target that stands at zero sales today.

The challenges don’t stop there. He must achieve 10 million subscriptions to Tesla’s Full Self-Driving service and ensure that at least one million Robotaxis are in active commercial operation. Presently, there are fewer than two dozen Robotaxis operating under a pilot program.

By 2035, Musk is tasked with generating a staggering $400 billion in annual operating profit. For reference, last year's operating profit was just under $17 billion.

If these ambitious goals come to fruition, shareholders would see the market value of their equity soar from $1.5 trillion to a staggering $8.5 trillion.

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In this context, if Musk can successfully deliver on these metrics, the $1 trillion price tag could very well be justified. The deal essentially stipulates that if Musk boosts the shareholders’ value in Tesla by a remarkable $7 trillion, they’re willing to hand him approximately 14% of that increase. That sounds like a savvy investment to me.

Musk is probably the only person on earth that could reach these goals.

This arrangement encapsulates the very essence of our economic system. Each employee’s worth is assessed based on the value they bring to their company, and compensation is aligned with the output they produce.

This principle is most palpable in professional sports, where athletes can command lucrative contracts, especially if their performance directly contributes to the success of their team. Progressing to the playoffs can generate millions in additional revenue and winning a championship can be worth even more.

In essence, teams assess the contribution of each player and compensate them accordingly. This practice extends to all sectors; companies evaluate employee performance and reward them relative to the value they create.

However, problems arise when workers demand compensation that exceeds the value of their output. Take, for instance, a scenario in which an employee requests a 3% raise without any corresponding increase in productivity. Such situations create inflationary pressures that ripple through the marketplace, leading to further distortions in compensation.

For example, consider a worker earning $100 per day, producing 100 units of output. At a cost of $1 per unit, everything seems balanced. Next year, maybe due to perceived increases in the cost of living, the worker demands a raise to $103 yet still produces 100 units daily. The result? The employer now faces a cost of $1.03 per unit, leading to inevitable cost push inflation.

There is also demand-pull inflation caused by increasing wages more than the increase in productivity. The higher wages increase demand.  With no increase in productivity, there is no corresponding increase in supply.

Conversely, if the same worker enhances their productivity to 103 units and then receives the $103 wage, the cost per unit remains at $1. And there is no inflationary impact.

Furthermore, as workers in one industry receive a raise without increasing output, others often feel compelled to follow suit.  This creates a cascading effect in wage demands based on peer outcomes, rather than on individual productivity metrics.

Tesla serves as a case study in how a well-functioning economic system should operate. When the structure is correctly aligned, both labor and ownership can prosper together.

In this lens, Tesla shareholders have asserted a clear philosophy: if Elon Musk's remarkable ingenuity can grow the company’s value by $7 trillion, the $1 trillion payment as his compensation is a bargain worth making. It’s a bold move that embodies the principle of rewarding exceptional performance with a slice of the success!

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Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.