In 2018, Tesla’s Board approved the grant of 304 million options in 12 tranches to the firm’s CEO, Elon Musk, at a strike price of $23.34. Vesting depended on Tesla achieving various milestones which it did, rewarding Musk over $50 billion. However, a Delaware court disallowed the award, arguing that the Board had not been sufficiently independent when grating the options.
So, the option grant was put to a shareholder vote at the annual meeting on Jun13, 2024. In advance of the meeting, there was disagreement on what the accounting effect should be. On the one hand, the Board argued that there would be no effect as an expense had already been recorded at the original grant date under grant-date accounting for options. Others argued the Musk would be receiving “in-the-money” options on shares worth $180 in 2024 at a strike of $23.34 which, for 304 million shares, is $47.6 billion and that (minus the original amount of $2.3. billion recognized) should be booked as compensation expense.
The resolution probably is a legal question of whether the options are the original options of a new award. But the whole mess is due to the messiness of the accounting rules. Grant-date accounting only records the option value at grant date as compensation expense, ignoring any appreciation of option value and the resulting loss on exercise, the cost which shareholders actually bear. Under the alternative (appropriate) exercise-date accounting, the real cost of what Musk ultimately received would be recorded. Indeed, if a liability had been booked as the options went into the money, shareholders would have been on notice of the impending compensation and thus could assess whether what Musk had done to create significant value should be rewarded with such high compensation.
Shareholders approved the award on June 30, 2024. However, the Delaware Court overruled, with the judge saying that the shareholder vote did not override her previous ruling. As of December 2024, Telsa’s board had the option of appealing to the Delaware Supreme Court or to take the hit to earnings with a charge for in-the-money options now with the stock price at $480. That means a $122 billion charge against earnings. And it means Musk would have to pay a huge tax bill on the compensation. At least that would be transparent about what Musk is being paid. GAAP accounting for options is not.