Key Points
- Elon Musk’s 2018 pay package, still being decided in court, could have a massive impact on Tesla’s future profits.
- If Tesla’s appeal fails, the company could face a $26 billion hit to its profits over the next two years.
- This amount is more than half of Tesla’s total net income since it became profitable in 2019.
- Even Musk’s new, larger pay package could squeeze profits as he hits performance goals.
While everyone is focused on Elon Musk’s new, eye-popping $1 trillion pay package, a more immediate concern for Tesla is his old 2018 pay deal, which is still tied up in court. This old package could cost the electric vehicle maker years’ worth of future profits.
The Delaware Supreme Court is about to decide whether to overturn a lower court’s ruling that invalidated Musk’s previous record-breaking compensation package. If Tesla loses its appeal, it could face a massive $26 billion hit to its profits over the next two years. This is because the company would have to account for the replacement stock-compensation package it has promised Musk, but at today’s much higher stock price.
To put that in perspective, $26 billion is more than half of Tesla’s total net income since it first became profitable in 2019.
Even if Tesla wins in court, its profits could still be squeezed over the next decade if Musk hits the performance goals in his new trillion-dollar pay package. Each goal he reaches will trigger billions in payouts and accounting expenses.
The huge impact on profits shows the unique risks of Musk’s super-sized compensation. Most large public companies don’t have to worry about their CEO’s pay affecting their bottom line in this way, as the richest pay packages are usually in the hundreds of millions, not billions.
This profit uncertainty comes at a time when Tesla’s earnings are already falling due to declining car sales, the loss of electric-car subsidies, and the high costs of its ambitious projects, like humanoid robots.
Tesla’s board argues that Musk’s new pay package only rewards him for achieving “Mars-shot milestones” that include high profit goals. However, some of the easier goals in the package could still trigger payouts of tens of billions of dollars without dramatically transforming Tesla’s business or its profits.
If the Delaware court’s original ruling stands, Musk’s replacement package would give him fewer shares, but it would cost Tesla’s balance sheet far more than the original 2018 package. The company has even disclosed in a filing that a failed appeal could cause a “material adverse impact on our business and reported earnings.”
While these stock-based payments don’t hurt Tesla’s cash flow, they do dilute the value and voting power of other shareholders. But for a company like Tesla, whose stock value is largely based on Musk’s promises for the future, some experts say traditional financial fundamentals might not matter as much to investors. As one attorney put it, “nobody seems to care, because this company is in fantasy-land.”
