As the new $1 trillion Musk compensation plan makes headlines, it is indeed the previous one, from 2018, that now threatens to weigh heavily on Tesla's financial results. The issue is an imminent decision by the Delaware Supreme Court that could validate or overturn this controversial plan, already invalidated at first instance.
If Tesla loses on appeal, the automaker would have to record a $26bn accounting charge over two years to offset the issuance of shares promised to Musk in place of those deemed invalid, at a much higher share price than in 2018. In comparison, this would represent over half of Tesla's cumulative net earnings since it returned to profitability in 2019.
Even if Tesla were to prevail in court, the company would not be finished with the accounting risks tied to the CEO's compensation. Its new plan, adopted in September, calls for large payments at each target reached and could erode a substantial portion of future profits if thresholds are met.
Unlike most listed companies, where executive pay runs into the hundreds of millions at most, Musk's extraordinary arrangement represents a unique threat to Tesla's profitability, according to specialists. Brian Dunn, director of the Institute for Compensation Studies at Cornell University, says these charges reflect a "massive transfer of wealth from shareholders to their principal shareholder," Musk himself, outside any reasonable fiduciary practice.
Tesla says Musk would not receive anything without hitting "moonshot" targets, including ambitious profitability thresholds. But according to documents obtained by Reuters, even the most attainable targets could trigger payments of tens of billions, without fundamentally changing the company's core activity or results.
The immediate risk: the decision on the 2018 plan
Yet the fate of the 2018 plan pose s the most pressing threat. This plan was initially valued at $2.3bn at adoption. However, with Tesla's stock surge, the options granted to Musk are now estimated at $116bn. A Delaware judge, however, voided the plan, finding that negotiations were tainted by conflicts of interest between Musk and members of the board.
If this decision is upheld, Tesla would have to implement a replacement plan that is far more costly. The new plan, based on the August stock price, would require the company to record a $26bn charge by August 2027. Spanning eight quarters, this would amount to a $3.25bn quarterly hit, more than the net profit achieved in 21 of the last 25 quarters.
In a regulatory filing, Tesla acknowledges that an appellate loss could have a "significant negative impact" on its results.
The company would not be required to pay this sum in cash, as it could issue new shares. But under accounting rules, such issuance constitutes a charge because the company could have sold those shares on the market. It would also dilute other shareholders, mechanically increasing Musk's influence.
Massive dilution and uncertain profits
"Undoubtedly, this hurts shareholders," says Schuyler Moore, a corporate-finance lawyer. He notes that in a typical company, such a charge would lead to an immediate devaluation by investors. However, in his view, Tesla "escapes the logic," since its valuation rests on Musk's technological promises autonomous robotaxis, humanoid robots rather than on its financial fundamentals.
Tesla's paradox persists: a company whose results are eroding, vehicle sales are declining, public subsidies are waning, and industrial bets are becoming more expensive. Yet the stock continues to attract parts of the markets, more attached to Musk's vision than to the company's actual profitability.
