Tesla's Market Cap Unlocks $3B In Potential Compensation For Musk

In 2018, Tesla shareholders approved a compensation package that could make CEO Elon Musk one of the wealthiest people in the world.

What Happened: The 2018 compensation plan is broken down in 12 tranches that cover market cap, trailing 12-month revenue and adjusted EBITDA.

On Tuesday, Tesla Inc TSLA hit a six-month trailing average market cap of more than $250 billion, unlocking the next market cap tranche for Musk.

Unlocking each tranche gives Musk options for roughly 1% of outstanding Tesla shares. This translates into around 8.44 million options to purchase Tesla shares for around $70.

Buying and selling the options would net around $3 billion in profit for Musk if exercised.

Tesla has already passed the six-month trailing market cap average thresholds of $100 billion, $150 billion and $200 billion. 

The operational metric of revenue starts at $20 billion and goes up to $175 billion.

Adjusted EBITDA starts at $1.5 billion and goes up to $14 billion. Payouts are based on milestones met by market cap and operational metrics.

Why It’s Important: Musk receives a minimal salary from Tesla;  his earnings are tied directly to the stock performance and the company's financial results. 

If the stock and company perform well, Musk is rewarded along with shareholders and employees, who also receive stock-based compensation.

Tesla has a market cap of more than $350 billion right now, but it has to maintain that level for six months to hit another milestone for Musk.

His compensation has been a hot topic that some believe could keep Tesla out of the S&P 500.

Companies need to have four straight quarters of profitability, and stock-based compensation could hurt profitability and keep the company from entry.

In the second quarter, Tesla reported net income of $104 million. When stock-based compensation for Musk and employees was factored out, net income totaled $451 million.

What’s Next: The company’s third-quarter earnings report will paint a clearer picture of what milestones were met and how much stock-based compensation Tesla paid in the quarter.

Piper Sandler analyst Alexander Potter thinks there is too much emphasis on Musk’s bonus payouts.  

Potter has an Overweight rating on Tesla and raised his price target from $480 to $515 in September.

Potter expects Musk-related compensation to hit $258 million in the third quarter and $330.5 million in the fourth quarter. These figures are expected to come down to $240 million in fiscal 2021.

TSLA Price Action: Shares of Tesla ended Wednesday's session 2.73% higher at $425.30. The stock is up nearly 400% year-to-date.

Photo by Steve Jurvetson via Wikimedia.