In 2025, Tesla shareholders approved a compensation package for CEO Elon Musk reportedly worth up to $1 trillion, but only if significant valuation targets, ranging from $2 to $8.5 trillion, are met over the next decade. Structures of this scale may seem exclusive to large public companies, but the underlying concept is universal. Musk’s package reflects a shift toward “pay-for-performance” compensation, linking executive incentives directly to company growth and profitability.

Performance-based compensation is increasingly common across all business sizes, as private businesses move beyond fixed compensation to reward executives when the business succeeds. This is particularly important as artificial intelligence reshapes industries and leadership capable of driving and adapting to change remains critical. Those considering a performance-driven model have several alternatives.

ORDINARY INCOME ALTERNATIVES

Phantom stock and stock appreciation rights (SARs) provide recipients with cash payments (taxed as ordinary income at payout) tied to company value without transferring actual equity. The key distinction is the payout metric: phantom stock delivers “full value” equal to the per-share value at payout (e.g., if the company is worth $100 per share, the recipient receives $100 regardless of value at grant), whereas SARs pay only the appreciation over a set base price (e.g., if the base price is $60 and the company is worth $100, the recipient receives $40). Phantom stock’s full-value feature creates a stronger retention hook because walking away means forfeiting immediate value. By rewarding upside participation without full-value economics, SARs work well for companies anticipating significant growth or preparing for a transaction.

EQUITY ALTERNATIVES

Restricted stock and profits interests each grant actual equity ownership, carrying incentive power that synthetic instruments cannot replicate, while offering meaningful tax advantages. Restricted stock is an equity interest granted subject to vesting requirements. If the recipient timely files a Section 83(b) election, all future appreciation is taxed as long-term capital gain (rather than ordinary income), making it particularly powerful for emerging companies with low valuations, as upfront tax costs are minimal. Profits interests serve a similar function for entities taxed as partnerships. A profits interest entitles the recipient to future appreciation only, has zero value at grant regardless of current company worth (meaning no taxable event when granted), and gain upon a future liquidity event is generally treated as long-term capital gain providing favorable tax treatment without diluting existing owners’ current equity.

Regardless of which structure a company selects, these are not simply compensation tools – they are invaluable business planning instruments. Private companies routinely pair them with restrictive covenants, and vesting schedules to protect value. As businesses compete for experienced leadership and plan for growth or transition, performance-based compensation is a critical component of long-term strategy.