Tesla's soaring stock price qualified CEO Elon Musk for a payday of $2.1 billion this week, but there are many more payouts in store if Tesla's stock continues to climb.
Based on Tesla's average market capitalization over the past few months, Musk earned the second of twelve potential payouts tied to financial and operational milestones. The payouts are tranches of stock options that, if exercised, would amount to billions: Each tranche gives Musk the option to buy 1.69 million Tesla shares at the discounted price of $350.02 each; if exercised today at Tesla's closing price of $1,568.36 per share, the total stock he's earned would be worth $4.2 billion, or $2.1 billion per tranche.
The stock options are part of a performance plan that Tesla's board approved in 2018, which links Musk's compensation to meeting certain milestones, including increasing Tesla's total market capitalization.
He qualified for the first payout in May, at which point Tesla had been worth more than $100 billion for the six months prior. Tesla shares are up 264% year to date.
As of Tuesday, Tesla's market cap was just shy of $300 billion. But because the average market cap in the preceding six months exceeded $150 billion, Musk earned the second tranche of 1.69 million Tesla shares.
To qualify for the third tranche of stock, Tesla has to sustain an average market capitalization above $200 billion for six months. A $200 billion market cap is equivalent to about $1,078 per share, a price that Tesla initially reached at the end of June. Tesla also has to continue increasing its revenue and adjusted EBIDTA in escalating increments for Musk to receive the full potential payout, which could be worth tens of billions if Tesla's share price continues to grow.
Assuming the revenue and EBITDA goals are met, Tesla shares could simply trade flat and still deliver Musk his next payout by the middle of September.
Tesla reports its second quarter earnings on Wednesday after the close of trading.
If Tesla posts a profit for the second quarter, the first that overlapped entirely with the COVID-19 pandemic, Tesla will qualify for the S&P 500 index. Inclusion in the index will likely trigger a wave of new activity from index funds.
To prepare for Tesla earnings, follow Tesla Daily on TheStreet as the innovative auto company reports earnings after the bell Wednesday.