This week, Tesla Inc (Nasdaq: TSLA) announced a new CEO compensation plan tying the financial fortunes of charismatic leader Elon Musk to key financial targets for Tesla over the next decade. Tesla must now hit those targets or Musk works for free, but one particular target matters the most.
Musk’s paycheck will now be tied to 12 new financial targets for Tesla, including earnings, market capitalization and revenue goals. While revenue and market cap are important parts of Tesla’s long-term growth process, Tesla already has a long history of delivering impressive revenue growth and huge stock market gains.
What it has failed to do so far is actually turn a profit on a large scale.
In the most recent quarter, Tesla’s net income loss swelled to a record $619.4 million, making targets tied to earnings before interest, taxes, depreciation and amortization the most important of all.
The first of these earnings targets is set at just $1.5 billion in EBITDA, a relatively modest amount for a company currently valued at $58 billion. The $1.5 billion mark may be an arbitrary number, but Tesla proving it can consistently turn a profit could trigger a major relief rally in the stock.
“If TSLA achieves the profitability targets outlined in the CEO compensation plan (which we believe will be a focus for investors), we think shares will significantly appreciate,” Baird analyst Ben Kallo says.
Tesla investors have tremendous faith in Musk even after the company missed several Model 3 production targets. Nevertheless, Morningstar analyst David Whiston says Tesla investors shouldn’t jump to conclusions about how long Musk will remain CEO.
“We do not think he wants to be CEO for the next 10 years, but he has said he will remain involved with Tesla for the rest of his life,” Whiston says. “Musk has many interests beyond Tesla, so we expect he will not be CEO for the length of this award plan.”
Despite uncertainty about Musk’s future, Morningstar says the new compensation plan is “great news for shareholders.”
Kallo is optimistic that Tesla will soon get back on track with the Model 3 as well. “We believe TSLA now has better visibility into its production bottlenecks,” Kallo says.
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