WSJ News Exclusive | Elon Musk Made an Unusual Request in Fallout With a Top Lieutenant

As their long relationship broke down, Mr. Musk made a strange request: He asked Mr. Guillen to forfeit some of his unvested equity in the car maker, people familiar with the matter said. Soon after, Mr. Guillen left Tesla.

Exactly what went wrong between the two leaders couldn’t be learned. But some of the people familiar with the matter said one issue of broader concern for Mr. Musk has been that some employees were making more from Tesla than he thought their contributions merited.

Attorneys say that asking executives to give up stock compensation is highly unusual.

Neither Mr. Guillen nor Mr. Musk responded to requests for comment.

The dust-up reflects a point of tension in Tesla’s stratospheric rise: Who should reap the rewards of its stock price? Mr. Musk has paid his top executives predominantly with stock awards, securities filings show.

Employee stock options have been at the heart of several controversies at Tesla over the years, including a dispute with one of the company’s co-founders, a court battle over the schedule by which employee equity vested, and a shareholder lawsuit over Mr. Musk’s pay package that is headed for trial next week.

Photos: Elon Musk Bought Twitter. Here’s How He Made His Fortune

How Mr. Musk manages and compensates senior officials is now being scrutinized at Twitter Inc., which he recently bought for $44 billion. Upon taking over, Mr. Musk fired top Twitter executives and said he wasn’t required to pay them multimillion-dollar severance packages because he concluded they were fired “for cause,” people familiar with the departures have said.

As of early November, Tesla was valued at around $600 billion. Mr. Musk, who doesn’t take a salary from the car maker, owns around 14% of the company. He has become the world’s wealthiest person thanks largely to Tesla’s stock price and a pay package that affords him a larger cut of the company if it hits certain milestones.

Mr. Musk’s latest pay deal, approved in 2018, is worth around $51 billion at recent prices. It sparked a shareholder lawsuit in Delaware’s business-law court, the Court of Chancery, alleging that certain current and former Tesla board members breached their fiduciary duties in approving it. That case is scheduled for trial Monday.

Lawyers representing current and former Tesla board members have said in court filings that Mr. Musk’s pay package has been a success and was implemented in a valid manner.

Stock options also played a role in a dispute more than a decade ago between Mr. Musk and Tesla co-founder Martin Eberhard, who was pushed out of the company as it struggled to produce its first model.

Mr. Eberhard sued Mr. Musk and Tesla in 2009 over issues including how the company revoked 250,000 stock options he claimed he was owed. Tesla had said Mr. Eberhard had violated a nondisparagement agreement, forfeiting those options. The two sides eventually settled the case. Mr. Eberhard declined to comment on the settlement.

Years later, more than 40 former employees sued Tesla, claiming the company wrongfully refused to allow them to vest in stock options. Tesla denied the former employees’ claims, and the two sides spent years in litigation, which opened a window into how some people who left the company were allowed to vest early while others claimed they were let go just before they vested. Tesla moved early board member Simon Rothman into an advisory position to allow him to vest his options after being removed from the board, court records show. Mr. Rothman didn’t respond to requests for comment.

This spring, a California appeals court overturned a lower-court ruling against Tesla in that case.

Mr. Guillen joined Tesla in 2010 from then-car and trucking giant

Daimler AG

. Among his most important contributions was helping Tesla work through production problems in 2018, when the company was struggling to make enough of its Model 3 cars. In September 2018, he was promoted to president overseeing the automotive division.

“Jerome was pulling some pretty incredible rabbits out of the hat. That was amazing,” Mr. Musk said in August 2018.

In 2020, after the spread of Covid-19 forced Tesla to shut down what was then its lone U.S. car plant, in Fremont, Calif., Mr. Musk grew frustrated with people, including Mr. Guillen, over the speed at which Tesla was prepared to restart production, according to people familiar with Tesla’s operations.

Come year-end, Mr. Guillen was vesting more than $12 million worth of equity monthly, according to an Equilar analysis using the year-end closing stock price. His unvested equity was valued at around $600 million.

By spring of the following year, Mr. Musk had grown dissatisfied with Mr. Guillen’s performance, some of the people familiar with the matter said. Mr. Guillen was offered what many viewed as a demotion—a role overseeing Tesla’s efforts to produce an electric semitrailer truck—and Mr. Musk asked Mr. Guillen to forfeit millions of dollars’ worth of unvested equity.

Mr. Guillen assumed his new role in March 2021 but declined to give up his rights to the unvested equity. Within three months of changing jobs, he was gone. In Mr. Guillen’s telling, he was fired, according to people familiar with the matter.

Mr. Musk’s recent focus on pay has been rooted at least in part in his perception of fairness, people familiar with the issue said. Mr. Musk stood to receive additional stock options under his 2018 package only if Tesla met certain goals.

The recent grants of other top executives whose compensation is publicly disclosed generally haven’t been tied to specific performance benchmarks, securities filings show.

Unlike with paychecks already deposited in the bank, employees typically lose unvested stock rights when they leave a company.

Requests for employees to consider giving up unvested equity even without leaving are rare, but a company could be within its rights to make them, attorneys said. More often, companies fire employees they think aren’t performing. Demanding unvested equity be returned under threat of dismissal could run afoul of contract laws, the attorneys said.

“What would raise my concern here on behalf of either party would be whether the company is violating promises it made to the employee with respect to his compensation,” said Scott Raber, a partner at Rimon PC who works on employment law and doesn’t represent Tesla.

After Mr. Guillen left in June 2021, Tesla said, in a securities filing: “We thank him for his many contributions and wish him well in his future career.”

In the weeks that followed, securities filings show, Mr. Guillen sold hundreds of millions of dollars’ worth of Tesla stock.

—Jim Oberman and Elisa Cho contributed to this article.

Write to Rebecca Elliott at [email protected], Emily Glazer at [email protected] and Tim Higgins at [email protected]