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Elon Musk could be on the cusp of a $700 million payday, and that's just the start.Getty Images

Elon Musk just cleared the first of 12 levels that end in a $55 billion payday. Here's how his elaborate Tesla compensation plan works.

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Tesla's board confirmed in an SEC filing on Thursday that the electric automaker has hit a pretty remarkable milestone: The company's average value on the stock market for the past six months is now above $100 billion for the first time.

That board certification is especially important to Tesla's CEO, Elon Musk. A sustained $100 billion valuation over a six-month period unlocks the first part of Musk's massive 2018 compensation package with the company — and the new SEC filing gives the board's seal of approval for that potential payout.

That agreement was valued at more than $2 billion in a company filing with the Securities and Exchange Commission, but Musk has actually realized no value from it yet, providing an excellent example of how complicated CEO pay has become.

In Tesla's own stated estimate in the proxy statement laying out the plan, the total package could end up being worth as much as $55.8 billion to Musk.

The compensation agreement between Musk and Tesla is structured around 12 "tranches" of stock options, each equivalent to roughly 1% of the total number of outstanding shares at the time of the agreement. Each tranche — basically, a financial treasure chest that will be unlocked should certain conditions be met — vests and becomes available to Musk once a certain number of operational milestones and stock market capitalization goals have been achieved.

In other words, Tesla has to massively increase its sales and profits, while also becoming one of the most valuable corporations in the US stock market, for Musk to get paid.

The operational goals are based on the company dramatically improving sales and profits and are tied to increasing levels of top-line revenue and bottom-line earnings before interest, taxes, and depreciation.

Here are those revenue and earnings milestones, per the agreement. According to the company's most recent annual proxy statement filed with the SEC, Tesla had officially achieved the first of the revenue and unofficially achieved the first of the EBITDA goals, meaning that two operational milestones have been achieved.

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Tesla needs to hit these revenue and earnings milestones for Musk to get paid.Business Insider/Andy Kiersz, data from Tesla

Each of the 12 tranches of stock options vests and becomes available for Musk to use when both of the above operating milestones and one of the market-capitalization milestones have been achieved. Below, we walk through how the market-cap milestones work and what each tranche could be worth to Musk.

The latter milestones start at a market capitalization, or the value of all outstanding Tesla shares combined, of $100 billion, and increase by $50 billion for each additional tranche. As mentioned earlier, that valuation needed to be maintained for six months before Musk's options vest.

So far, two of the operating goals have been met, while until this week, none of the market-cap goals had been hit.

Now, with the board's approval, the first of those market-cap milestones has officially been achieved, meaning Musk has the right to exercise the first batch of options.

According to Yahoo Finance, Tesla has about 185.37 million outstanding stock shares. Based on that, Tesla has a market capitalization of at least $100 billion once the stock price is above $539.46 a share, since market capitalization is just the number of shares times the price of each share. Tesla's recent bull run has kept it at a high-enough level to push the average market cap of the past six months over the threshold.

Each tranche of options, once vested, entitles Musk to buy up to 1,688,670 shares of Tesla stock at a price of $350.02 a share, or the closing price at the time of the agreement. So, if Tesla's stock is trading right at the $539.46 level needed to hit a $100 billion valuation, he'd essentially net a profit of $189.44 a share, making the overall first tranche worth just shy of $320 million.

At Tesla's price as of 10 AM Eastern Time Friday of about $809 a share, the total value of the first tranche would be about $780 million.

Of course, if Musk were to exercise his shares today at that price, his bank account wouldn't immediately jump up by three-quarters-of-a-billion dollars. The agreement stipulates that Musk has to hold his shares for at least five years after exercising any of the options that vest under the plan. That is, Musk's potential new wealth would be in the form of illiquid stock holdings in Tesla, rather than cash.

Following a similar logic, here's the value of each of the 12 tranches at the stock price needed at the current number of outstanding shares to hit each market cap milestone.

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Business Insider/Andy Kiersz

It's worth noting that the above table is a rough and simplified estimate of what Musk could make as a result of the compensation agreement. As an example of one caveat, the filing describing the agreement pointed out that the company regularly compensated other employees with stock or options, meaning there is likely to be some dilution in the value of Musk's shares, with somewhat lower stock prices triggering additional market-cap milestones as new shares are created and issued.

Still, that agreement estimates that the full package could be worth as much as $55.8 billion should all 12 tranches vest. That would vault Musk from being an already-wealthy person into the very top tier of billionaires.