Tesla faces significant financial turbulence as CEO Elon Musk's monumental compensation packages threaten to consume substantial portions of the electric vehicle maker's future profits. The looming Delaware Supreme Court decision on Musk's 2018 pay package could trigger a staggering $26 billion hit to Tesla's earnings over the next two years.
The $26 Billion Sword Hanging Over Tesla
The Delaware Supreme Court is preparing to rule on whether to reverse a lower-court decision that invalidated Musk's record-breaking 2018 compensation package. If Tesla loses this appeal, the company would need to account for a replacement stock-compensation package valued at $26 billion - a massive amount that equals more than half of Tesla's total net income since the company became profitable in 2019.
This potential financial impact comes at a challenging time for Tesla, which is already grappling with declining car sales, disappearing electric-vehicle subsidies, and rising costs from ambitious projects like humanoid robots. The company disclosed in regulatory filings that an unsuccessful appeal could cause "a material adverse impact on our business and reported earnings."
How Musk's Compensation Could Devour Profits
Even if Tesla prevails in court, the company's profits remain vulnerable to Musk's newer compensation arrangements. His latest pay package, valued at up to $1 trillion, includes performance milestones that could trigger billions in payouts and accounting expenses over the next decade.
Brian Dunn, director of the Institute for Compensation Studies at Cornell University's School of Industrial and Labor Relations, noted that while stock-compensation expenses don't affect cash flow, massive net-income declines from CEO compensation signal that Tesla's board isn't following "reasonable fiduciary practices." He emphasized that the arrangement effectively creates "a massive transfer of wealth from the shareholders to the single largest shareholder."
The maximum potential payout to Musk reaches $878 billion because the $1 trillion in stock would be reduced by the value of shares when Tesla's board approved the package in September.
Shareholder Impact and Market Reality
The unprecedented scale of Musk's compensation creates unique challenges for Tesla shareholders. When Tesla issues new shares to fulfill compensation obligations, it dilutes the voting power of existing shareholders by increasing the total pool of outstanding shares.
Schuyler Moore, an attorney specializing in corporate financing and tax law at Los Angeles firm Greenberg Glusker, stated unequivocally that "without question, you are hurting the shareholders" through such arrangements. Typically, such massive profit impacts would cause investors to devalue a company for "running at a loss."
However, Tesla's stock-market valuation has traditionally relied more on Musk's promises of future products like self-driving robotaxis and humanoid robots than on current financial fundamentals. As Moore observed, "nobody seems to care, because this company is in fantasy-land."
The timing of the potential $26 billion charge adds another layer of concern. Tesla would need to book this expense by August 2027, when Musk becomes eligible to collect the shares. Spreading this amount over eight quarters would reduce profit by $3.25 billion each quarter - more than Tesla's net income in all but four of the last 25 quarters dating back to 2019.
Tesla's board has defended the compensation packages by arguing that Musk receives nothing unless the automaker achieves "Mars-shot milestones" including ambitious profit goals. The board also contends that failing to replace the 2018 package could prompt Musk to leave Tesla entirely.
