Tesla faces multi-billion profit hit as Musk’s 2018 pay deal looms over earnings

Tesla’s striking $1 trillion executive-compensation package for Elon Musk has overshadowed a more immediate financial threat, as the CEO’s 2018 pay deal — still tied up in court — stands to consume years of the company’s future profits. As per a report by Reuters, The Delaware Supreme Court is set to determine whether to overturn a lower-court ruling that invalidated Musk’s previous record-breaking compensation plan. If Tesla’s appeal fails, the company could face a $26 billion profit hit over two years to account for a replacement stock-compensation package promised to Musk at today’s significantly higher share price, and the sum would represent more than half of Tesla’s total net income since the firm first became profitable in 2019.

Even if Tesla succeeds in court, the company’s profitability over the next decade may be strained if Musk meets the performance targets tied to his $1 trillion pay package, as each milestone would trigger further multi-billion-dollar payouts and associated accounting expenses. The potential profit impact underscores the risks inherent in Musk’s unprecedented compensation structure, at a time when Tesla’s earnings are already falling due to weakening vehicle sales, shrinking EV subsidies and rising costs linked to ambitious projects such as humanoid robotics, as per Reuters report.

While stock-compensation charges do not affect cash flow, experts said the scale of net-income declines linked to CEO pay suggests the company’s board is not practising reasonable fiduciary oversight and is effectively funnelling substantial wealth from shareholders to Musk, who remains Tesla’s largest individual shareholder. Tesla’s board has argued that Musk’s latest pay deal awards him nothing unless the company achieves what it described as Mars-shot milestones, including exceptionally high profit goals, and noted that hitting those elevated targets would reduce the proportion of earnings absorbed by the CEO’s compensation.

However, the easier milestones within the package could still activate payouts running into tens of billions without materially transforming Tesla’s business or profitability, according to previous reporting. The maximum potential payout to Musk stands at $878 billion, reflecting the reduction of the original $1 trillion value by the share price at the time the board approved the plan in September.