Tesla, the electric vehicle giant, is staring at a potential $26 billion blow to its profits over the coming two years, all tied to the ongoing legal battle surrounding CEO Elon Musk's controversial 2018 compensation package. Despite recently greenlighting a new, record-shattering $1 trillion pay plan for Musk, the company's immediate financial concerns revolve around the earlier package currently under scrutiny at the Delaware Supreme Court.
The $26 Billion Sword Hanging Over Tesla
The massive financial risk materializes if the Delaware Supreme Court upholds a previous lower-court decision that struck down Musk's 2018 compensation arrangement. Should Tesla lose its appeal, the automaker will be compelled to account for a replacement stock-compensation package promised to Musk, valued at today's significantly higher stock prices.
This substitute package carries an estimated value of $26 billion, which Tesla must record as an expense by August 2027. To grasp the magnitude, this staggering amount represents more than half of Tesla's total net income accumulated since the company first turned profitable in 2019.
If Tesla spreads this expense across eight quarters, as industry experts anticipate, the company's profit would shrink by $3.25 billion every quarter - a figure that surpasses Tesla's net income in nearly every quarter since 2019.
Double Whammy: The New $1 Trillion Package
Even if Tesla emerges victorious in the 2018 compensation dispute, the newly approved $1 trillion pay package continues to pose profit pressure over the next decade, provided Musk achieves his performance targets. Tesla's board of directors has consistently defended these enormous compensation packages as essential to retaining Musk's leadership and ensuring his dedication to the automaker's ambitious future objectives.
In a recent regulatory filing, Tesla openly acknowledged that losing the appeal on the 2018 package could trigger "a material adverse impact on our business and reported earnings." This candid admission underscores the seriousness of the situation facing the world's most valuable automaker.
Potential Silver Lining for Tesla
There remains a pathway for Tesla to avoid this financial tsunami altogether. If the Delaware Supreme Court rules in Tesla's favor, the company would face no additional accounting expenses, and the original 2018 stock options - currently valued at approximately $116 billion - would rightfully remain with Elon Musk.
The outcome of this legal showdown carries significant implications not only for Tesla's financial health but also for corporate governance standards concerning executive compensation across global corporations.
