Elon Musk’s 2018 Pay Deal Could Wipe Out Tesla’s Profits for Years — Court Ruling Now Critical

Forget Elon Musk’s latest trillion-dollar pay package — it’s his previous compensation plan that could erase years of Tesla’s earnings.

Tesla’s 2018 executive compensation package for CEO Elon Musk, which is still tied up in court, poses a major financial threat to the electric-vehicle maker. The Delaware Supreme Court will soon decide whether to overturn a lower court ruling that struck down the record-breaking plan. If Tesla loses its appeal, the company could take a profit hit of $26 billion over just two years — the cost of issuing Musk a replacement stock-compensation package at today’s elevated share price.

For context, $26 billion is more than half of Tesla’s total net income since it first turned profitable in 2019.

Even if Tesla wins the case, its long-term earnings could still shrink if Musk meets the performance milestones tied to his new trillion-dollar pay plan — each milestone triggers billions in payouts and large accounting expenses.

The potential earnings impact highlights the deep risks embedded in Musk’s extraordinary compensation structure. Most public companies never face this level of exposure: CEO pay packages typically run in the hundreds of millions, not hundreds of billions.

As Tesla already battles shrinking profits amid falling vehicle sales, reduced EV subsidies, and rising spending on big-bet projects like humanoid robots, Musk’s accelerating compensation has added another layer of uncertainty.

Brian Dunn, director of the Institute for Compensation Studies at Cornell University’s School of Industrial and Labor Relations, noted that while stock-based compensation doesn’t affect cash flow, it can still heavily depress reported earnings. Such a large hit to net income, he said, raises questions about whether Tesla’s board is following “proper fiduciary practices.”

“They’re effectively transferring huge sums from shareholders to the largest shareholder through the back door,” Dunn said.

Tesla’s board argues that Musk’s new pay package gives him nothing unless the company achieves “Mars-shot milestones,” including extremely ambitious profit goals. If Tesla reached those profit levels, Musk’s compensation costs would consume a smaller share of earnings.

But Reuters has reported that even the easiest milestones in the package could trigger massive payouts without materially improving Tesla’s operations or profitability. The maximum payout of $878 billion is possible because the stock was valued below $1 trillion at the time the board approved the deal in September.

Neither Tesla’s board nor Musk responded to Reuters’ requests for comment.

The Court Decision Ahead

The biggest immediate risk comes from the next legal turning point in the 2018 compensation case. A Delaware judge invalidated the package last year in response to a shareholder lawsuit, ruling that negotiations were compromised by Tesla board members’ close personal and financial ties to Musk.

If the Delaware Supreme Court sides with Tesla, Musk keeps the stock options from the 2018 plan, and the company avoids further accounting charges. When Musk met the plan’s performance targets in 2022, those options were valued at $56 billion — but they would be worth $116 billion today.

If the lower court ruling stands, Musk would receive far fewer shares under a replacement package — but Tesla would have to record far greater compensation expenses because its stock price is now much higher.

Based on the valuation at the time Tesla’s board approved the replacement package in August, the cost would be $26 billion, expensed over eight quarters until Musk becomes eligible to exercise the shares in August 2027.

Spread over eight quarters, Tesla’s profit would drop by $3.25 billion per quarter — more than the company’s net income for all but four quarters since 2019.

Tesla warned in a filing that a failed appeal “could materially harm our business and reported earnings.” The board has also argued that Musk might leave the company if the 2018 deal is not replaced.

Tesla won’t need to pay cash for the stock — it can simply issue new shares — but accounting rules require the cost to be recorded as an expense because those shares could have been sold on the open market.

“Shareholders Are Being Harmed”

Issuing stock also dilutes other shareholders by reducing their voting power and ownership stakes.

“There’s no question shareholders are being harmed,” said Schuyler Moore, a corporate financing and tax attorney at Greenberg Glusker in Los Angeles.

Typically, such a major decline in profits would force investors to mark down the company’s valuation because it would be “running at a loss,” Moore added. But Tesla’s stock has long traded at valuations driven less by financial fundamentals and more by Musk’s promises of future products — including robotaxis and humanoid robots — that remain unavailable today.

“In Tesla’s case,” Moore said, “nobody cares, because the company exists in a world of imagination.”