On January 30, 2024, Chancellor Kathaleen McCormick of the Delaware Court of Chancery, struck down Elon Musk’s multibillion-dollar pay packageLinks to an external site. at Tesla (NASDAQ: TSLALinks to an external site.) after finding the process for securing its approval “deeply flawed.” New media used titles such as “Elon Musk’s $55.8 Billion Tesla Pay Package Struck Down by JudgeLinks to an external site.” when reporting on the lawsuit. Musk’s pay package in question, which consisted of 12 tranches of stock options, has fully vested, though he has yet to exercise any of those options. Shareholders voted overwhelmingly in favor of the package in 2018. For all the options to vest, Tesla—valued at less than $60 billion at the time—needed to reach a market capitalization of at least $650 billion while also hitting various revenue and profit targets. The company cleared the last of those hurdles in 2022.
Equity securities such as stocks and stock options have been used in executive compensation packages for a long time in the U.S. Before FASB revised SFAS 123R in 2004, stock options were usually measured at intrinsic value, which resulted in very little to no compensation expense recognized in the company’s financial statements. SFAS 123R required companies to use fair value to measure options and recognize compensation expense during the service period.
In this individual writing assignment, you are asked to write a report of up to 6 pages using Word, double-spaced, size 12 Times New Roman font, to address the following required questions about the accounting for stock-based compensation. Your report should reflect your own research and writing. At the end of your report, you need to provide a list of references used, including generative AI apps such as ChatGPT and Gemini, which does not count toward the page limit. You may also include any exhibits or graphs in an Appendix, which also does not count toward the page limit.
Required:
Briefly describe stock options as used in executive compensation. Why would a company use stock options to pay its executives and employees? Which features of stock options may make them challenging to accountants? Explain.
Briefly summarize the current accounting practice for employee stock options. Which topic(s) and subtopic(s) in the FASB Accounting Standards Codification (ASC) apply to stock option-based compensation? Include numeric citations of the ASC in your discussion.
Describe the effects Elon Musk’s 2018 pay package has had on Tesla’s income statements between 2018 and 2024. You should consult Tesla’s SEC filings including 10-K’s and proxy statements, for the years affected.
Assume you were a shareholder of Tesla in early 2018, would you vote in support of the pay package? Why or why not? Explain.
Assume you were a shareholder of Tesla in early 2024, would you support the Delaware court’s decision to void Elon Musk’s 2018 pay package? Why or why not? Explain.
