Elon Musk's 2018 Compensation Plan May Hurt S&P 500 Inclusion

Shareholders of Tesla Inc. TSLA approved a compensation plan for CEO Elon Musk back in 2018 that may complicate future inclusion in the S&P 500.

What Happened: The Wall Street Journal recently reported that Tesla could be disqualified for a long time from S&P 500 inclusion as the accounting of Musk’s payday hurts the company’s profits. Tesla shares have fallen after not being included in the S&P 500. 

Why It’s Important: The 2018 compensation plan tied Musk’s earnings to the performance of Tesla’s financials and stock performance. Musk is eligible for twelve payments tied to the market capitalization, revenue, and adjusted EBITDA of Tesla.

A 2012 compensation plan helped Tesla increase 17-fold in five years after hitting all market cap milestones and nine of ten operational metrics.

The 2018 market cap milestones start at $100 billion and go up in $50 billion increments to $650 billion. The operational metric of revenue (TTM) starts at $20 billion and goes up to $175 billion. Adjusted EBITDA (TTM) starts at $1.5 billion and goes up to $14 billion. Payouts are based on milestones met in market cap and operational metrics.

Musk received his first payment after boosting the market cap of Tesla past $100 billion. He was closing in on hitting the second part in July, which could hit the next quarter’s earnings report.

Tesla reported second quarter GAAP Net Income of $104 million and $451 million in non-GAAP Net Income. “These positive contributions were offset by significant costs related to factory shutdowns, as well as a sequential increase in non-cash SBC (stock based compensation) expense primarily attributable to $101 million related to 2018 CEO award milestones,” the earnings report said.

What’s Next: One of the qualifications for S&P 500 inclusion is having four straight quarters of profitability. Tesla could struggle to meet this last requirement depending on how the non-GAAP metrics and compensation factors are weighed.

Price Action: Shares of Tesla were down 1% to $367.47 on Friday. Shares hit a split-adjusted 52-week high of $502.49 back in late August. The market capitalization of Tesla is $346 billion.

Courtesy image Tesla media kit