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Key takeaways

  • A ruling by the Delaware Supreme Court regarding the compensation package awarded to Elon Musk in 2018 could have major consequences for Tesla’s profits.
  • According to analysts, Tesla may face lower profit margins over the next decade if Musk meets the performance targets set out in his $1 trillion (€868.6 billion) compensation plan.
  • Critics argue that the significant drops in net profit resulting from the CEO’s reward indicate that Tesla’s board failed to exercise proper oversight.

The current $1 trillion (€868.6 billion) compensation package for Elon Musk has overshadowed an urgent issue—his 2018 pay package, which is still under legal review. A decision from the Delaware Supreme Court could have a significant impact on Tesla’s future earnings.

If the lower court’s ruling invalidating the 2018 compensation is upheld, Tesla’s profits could fall by $26 billion (€22.6 billion) over a two-year period. This amount represents more than half of Tesla’s total net profit since the company became profitable in 2019.

Risks of the compensation package

Even if Tesla wins its appeal, profit margins could remain under pressure for the next ten years, Reuters reports, if Musk achieves the performance goals set out in the trillion-dollar package. Each milestone triggers billions in payments and accounting expenses. This highlights the exceptional risks tied to Musk’s massive compensation plan, which puts even the largest CEO rewards at other publicly traded companies in the shade.

While spending on stock-based compensation will not directly affect Tesla’s cash flow, some argue that shareholders could see them as nothing more than accounting entries. Critics, however, stress that the substantial drops in net income as a result of the CEO’s reward indicate that Tesla’s board did not exercise sufficient oversight. According to them, these huge transfers of value raise important ethical questions.

Ambitious profit targets

Tesla’s board defends the new package by arguing that Musk will only be compensated if Tesla achieves extremely ambitious profit targets, which in their view would limit the impact on profits. Yet reports show that even the least demanding targets could lead to payouts worth tens of billions of dollars, without any substantial improvement in Tesla’s operations or profitability.

Ruling on the 2018 package

The immediate risk lies in the Delaware Supreme Court’s decision over Musk’s 2018 compensation package. If Tesla prevails, Musk can keep his stock options without additional accounting costs. But if the earlier ruling is upheld, Musk would receive a new package with significantly fewer shares, but at a much higher valuation thanks to Tesla’s soaring share price. That scenario could put significant pressure on Tesla’s profits over multiple quarters.

Implications for shareholders

Although Tesla is allowed to issue new shares instead of cash payments for stock-based compensation, accounting rules still require these transactions to be recorded as expenses.

Critics argue that this dilutes the voting power of existing shareholders and ultimately harms them. They emphasize that a sharp profit drop would normally depreciate a company, yet Tesla’s market value hardly reacts to traditional financial fundamentals. This deviation is generally ascribed to investors’ faith in Musk’s vision for future products—even if those have yet to materialize.

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