Shared-based payments and dilution
This is an unofficial, artificial and lightly edited translation of the original piece of The Bear of Rathgar. To receive additional content every Friday, you can register here
‘Far too many executives are more concerned with the “four Ps” – pay, perks, power and prestige – than with generating profits for shareholders.’ - T. Boone Pickens
International accounting standards are designed to give a true and fair view of a company's performance and, like the police who are always one step behind the thieves, they are adapted to the new tricks found by companies to present a more favourable picture than is actually the case.
Among these standards is the one about share-based payment – ASC Topic 718 for the United States and IFRS 2 for the rest of the world.
Although these standards were written by a committee of experienced accountants from around the world, the accounting treatment of share-based payments remains subject to interpretation and is one of the favourite adjustments of management and analysts. It is indeed an easy target: the subject is complex and, as it does not involve cash outflow, not taking this expense into account often significantly improves the result without raising too many questions.
To understand that this is indeed a cost, imagine you are the sole shareholder of a company that makes 100 in profit. You earn 100. You now promise your director 50% of the shares if he achieves his profit target of 200. Of that 200, you no longer earn 200, but only 100, with half now going to the manager. This has indirectly cost you 100. As a shareholder, you are diluted, which is the same as if the same manager had received a 100 cash bonus.
In practice, the lengthy scenarios set out in the above-mentioned standards are justified by the determination of the expense, which often requires estimates and calculations based on the vesting period of the financial products granted and the probability of achieving various targets.
On November 6, 2025, Tesla shareholders decided to approve the share-based compensation plans for its Chief Executive Officer, shareholder and Technoking, Elon Musk.
The proposed compensation, which could be as high as one trillion, prompted a reaction from some shareholders who understood the deception, notably the Norwegian sovereign wealth fund.
As a reminder, Elon Musk already owns 13.5% of Tesla, worth nearly £100 billion at today's price. And any improvement in the share price would allow him to rake in several billion more, at least on paper and as long as his cult of small shareholders continues to buy the stock despite declining sales and promised products that do not exist.
However, this is not enough for Musk, who has preferred to spend his time creating chaos without achieving any results in the US government and creating new companies that lose money rather than focusing his efforts on the car manufacturer (any other CEO who did anything other than work full-time for a company valued at over 1 trillion would be fired on the spot).
With this new package, the actual cost to Tesla should be limited, as the targets are such that most of them will certainly not be achieved, given that Tesla's sales are in free fall and the promises of robots resemble those made about autonomous driving: lots of talk, lots of fraud, very few results.
On the other hand, as Lawrence Fossi brilliantly points out, what could hurt Tesla and its shareholders very, very badly is the other compensation proposal also approved to compensate Elon Musk for the compensation that was deemed illegal because it was not granted independently in 2018.
If Musk and his co-defendants lose the appeal, not only will the voiding of the 2018 Grant stand, but Tesla will also owe attorneys fees which, with about $93,000 of interest accruing each day, now stand at about $360 million.
But the consequences of defeat are much, much worse than just that. In August, the Tesla board said that if Musk loses the Tornetta appeal, it will award him 96 million restricted stock units, which will result in a $26 billion compensation expense.2 An expense, that is, of such a magnitude that it will wipe out all of Tesla’s historical profits, plus any profits for years to come.
And it gets even worse. The board is asking shareholders to approve the so-called Proposal 3 at the upcoming Nov. 6 shareholder meeting [now approved]. Again, contingent on failing to prevail in the Tornetta appeal, Proposal 3 would give the board the ability to award Musk another 208 million shares (or share equivalents), thus restoring all of the shares underlying the options voided in Tornetta.
The problem is that Tesla will incur an even more massive compensation expense when it awards those shares. From page 53 of the proxy statement:
For illustrative purposes only, the Special Committee’s advisors assessed that if a Musk Award of 207,960,630 shares were to have been issued on August 19, 2025, based on the closing stock price of $329.31 on that date, the accounting grant-date fair value of such a Musk Award would have been approximately $56.2 billion.
At the $431 share price as I write this, the compensation expense would be $87 billion. In other words, enough to assure that even if Tesla arrests the downward slide of its deliveries and margins, the additional award of shares is certain to wipe out all of Tesla’s future GAAP profit for years to come (and probably forever).
The result of this vote, aside from being a corporate governance scandal that will undoubtedly be studied in detail for many years to come, will at least have the merit of generating the largest adjustment between the reported result and the restated result, which will please analysts:
Reported loss: (90 billion)
Reversal of share-based payments: 91 billion
Restated profit (Adjusted EBITDA): 1 billion
The icing on the cake is that shareholders, who will have paid already a lot for a part-time CEO, also approved item 7 on the agenda: to allow the board to come to the rescue of XAI, which is racking up losses month after month without differentiating itself from its competitors, except for being offensive in addition to producing mediocre content.
Let's hope for their sake that the wheel turns quickly, because before being diluted, it would have taken them more than a lifetime to hope for a return on their investment.
But in the Kingdom of Meme Stock, that doesn't matter.
