Eisner Reaps $197.5 Million With Disney Stock Options : Finance: Analysts say action presages rush by many top executives to cash in before anticipated tax hikes.

Walt Disney Co. Chairman Michael D. Eisner cashed in a whopping $197.5 million in stock options on Tuesday, a move that would avoid corporate and personal tax hikes widely expected under the incoming Clinton Administration.

The Eisner payout is believed to be the biggest amount ever reaped by a corporate chief executive in a single day. The Disney chairman, in a prepared statement, conceded that the move would be controversial, but said it could also save the company as much as $100 million.

Eisner, 50, defended the payment on grounds that it is tied to his performance at Disney, which has enjoyed phenomenal growth during his eight-year tenure.

Experts foresee other executives also cashing in huge amounts in stock options before the end of the year, though no one is certain how much money is potentially involved.

“You’re going to see a stampede when executives look at what Eisner did. They’ll say, ‘Let’s exercise all these options before the end of the year because God knows what we are going to face in 1993,’ ” said Graef S. Crystal, one of the country’s leading executive pay experts.

The anticipated executive scramble says a lot about changes they foresee in the nation’s tax structure, even though no legislation has been written and Clinton’s inauguration is seven weeks away.

Already, the New York investment house Morgan Stanley has offered to speed up the payment of bonus checks this year to help its brokers and other high-income employees beat an expected tax increase. And several recording stars have asked Los Angeles music publishing house Warner/Chappell Music Inc. to renegotiate their royalty payments so they can receive more income in 1992 to lessen their expected 1993 tax bite.

Of most concern to wealthy executives are two Clinton proposals discussed during the presidential campaign, one affecting corporations and the other individuals. Clinton has suggested capping at $1 million the tax deduction companies can take in a single year for an executive’s compensation.

Raymond L. Watson, a Disney director who chairs the board’s executive committee, estimated the move by Eisner and a similar one by Disney President Frank G. Wells--who reaped about $60 million by exercising options on Tuesday--will allow Disney to retain $80 million to $100 million in profit that would otherwise vanish assuming Clinton’s proposals are enacted.

“All over corporate America as we talk executives are planning to do this” Watson said.

In its public disclosure on Tuesday, Disney sought to emphasize the sizable savings for shareholders. But Eisner himself clearly benefits as well.

Clinton has suggested boosting taxes for wealthy individuals such as Eisner by about 8%--a 5% straight tax increase and what some are calling a “millionaire’s surcharge.” That means Eisner saves nearly $16 million in taxes by exercising his options now, assuming Clinton’s plan becomes law next year.

“He undoubtedly saved shareholders a considerable amount of money that would have been sent to Washington, but I wouldn’t put him in the quarterfinals of the ‘Altruistic Act of the Year Award,’ ” said Crystal, who devised Eisner’s compensation package in 1984. “It’s a win for Eisner as well as a win for Disney.”

As big as Eisner’s gains were on Tuesday, it is unlikely he will even come close to setting the record for executive compensation for a single year. That honor still belongs to imprisoned junk bond financier Michael Milken, who earned $550 million in 1986 while working for Drexel Burnham Lambert.

Eisner and Wells were granted the options when they were hired in 1984 as an incentive to turn around what was then an ailing company and potential takeover victim. Both helped engineer during the 1980s what is often cited as one of the most successful corporate recoveries ever, boosting the market value of Disney’s stock from $2 billion then to $22 billion today.

This isn’t the first time Eisner’s compensation has drawn attention. In 1988, he earned $40.1 million, largely due to bonuses and stock-related gains.

Ironically, several Disney executives were among the biggest supporters of Clinton in the election. Although Eisner himself kept a relatively low profile during the campaign, Wells was one of a handful of top business leaders who endorsed Clinton early.

In a statement to be included at Disney’s upcoming annual report, Eisner said that while it may be positive for the country that taxes will be raised to pay the federal deficit, Disney as a company will be hurt by some of the proposals.

“Like reasonable people, we must accept new taxes, but we must also protect our shareholders whenever possible,” Eisner said.

Eisner also said he wanted to extend his options beyond their 1994 expiration date, but was unable to do so, purportedly because the company’s profits would have suffered. Eisner still has options for about 8 million shares that expire in 1998.

Here’s how Tuesday’s transaction worked: In exercising his options, Eisner early in the day took advantage of his right to buy 5.4 million shares of Disney stock for $3.59 a share, at a time when it was selling at about $40. That price, adjusted for splits in Disney’s stock over the past eight years, was agreed to when Eisner was hired to salvage the troubled company back in 1984.

Eisner then sold 3.5 million shares to the Goldman, Sachs & Co. investment bank at $40, keeping the remaining shares. Sources familiar with the deal said Eisner sold the shares to help pay for the options, to help cover his expected tax bill from the deal and to diversify his personal portfolio.

Wells exercised options on 1.64 million shares, selling them all to Goldman Sachs, a company spokesman said.

Disney was the most actively traded issue on the New York Stock Exchange, sinking $1 to $40.375 as nearly 10 million shares changed hands. Although they involved huge numbers, the moves by Eisner and Wells show how year-end tax planning has taken on a special urgency this fall for the nearly 1 million Americans who stand to be affected by Clinton’s pledge to raise taxes on the wealthy.

The President-elect has promised to slap a 10% surcharge on people making $1 million or more, and boost the top federal income tax rate for individuals with adjusted gross incomes of more than $150,000 and couples making more than $200,000 annually.

To avoid paying more taxes next year if a tax increase is approved, wealthy Americans such as Eisner are cashing in their stock options and accelerating their income into this year. A recent study by the National Bureau of Economic Research in Cambridge, Mass., found that the top one-half of 1% of wealthy taxpayers who managed to defer their income in the two years after the passage of the Tax Reform Act of 1986 increased their after-tax income by 44%

Some business leaders have warned that the use of stock options, a common incentive given to executives, could be cut back by businesses should the Clinton proposals become law.

Stock options allow executives to buy stock at a set price. If they are successful in boosting the company’s stock price, they can buy at the old price and reap a big gain because the shares are worth more.

Eisner’s salary, for example, is frozen at $750,000 a year until 1998, putting him at risk of earning relatively low compensation should Disney have a bad year. But his incentive options have allowed him to reap some of the biggest paychecks in corporate history because Disney has performed well.

The proposed tax increases, which Clinton estimates will raise $90 billion long-term, may prompt a round of artful dodging unlike anything seen since 1987, accountants and other tax experts say. That year, many Americans sold assets and shifted income in an effort to minimize the impact of a pending increase in the top income tax rate and the tax on capital gains.

While, few experts predict a repeat of the 1987 experience, the threat of tax increases next year already has many wealthy Americans scurrying for cover. Huddled in accounting and investment offices from Beverly Hills to Palm Beach, they are boning up on everything from the best places to invest during a Democratic Administration to how to shelter more of their income from taxes.

“Normally we have to take the initiative and force our clients to think about year-end tax planning but this year . . . clients are calling us after they read in the papers that there’s the possibility of a tax increase,” said Gregg Ritchie, an accountant in the Woodland Hills office of KPMG Peat Marwick.

David Burnham, author of “A Law Unto Itself: Power, Politics and the IRS,” added although it’s usually middle-class Americans who protest the most about tax increases, “the rich have traditionally been most effective in minimizing their taxes.”

Bates reported from Los Angeles and Shiver from Washington.

Taxing Times for the Rich

President-elect Bill Clinton has pledged to boost income taxes for the wealthiest Americans. Clinton wants to increase the top federal income tax rate from 31% to 36% for couples with adjusted gross incomes above $200,000 and individuals making more than $150,000. He also wants to slap a 10% tax surcharge on those making $1 million or more. Those plans are prompting wealthy people to calculate ways to minimize the tax damage. Some of the strategies:

Deferring tax deductions into next year: Accountants generally are urging high-income taxpayers to put off big deductions--such as home purchases, with their resulting large mortgage interest and property tax payments--to help offset the impact of a tax increase next year. Similarly, some business people are delaying purchases of personal computers and other equipment in hopes that Clinton will follow through on plans for a new investment tax credit to stimulate business expansion.

Shifting income into this year: Because tax rates are expected to rise in 1993, accountants are reversing their usual advice, which is to postpone income where possible until the next tax year. Instead, they are advising the wealthy to accelerate as much income as they can into the 1992 tax year. The result is moves such as Walt Disney Co. Chairman Michael D. Eisner’s decision Tuesday to collect $197 million by exercising stock options. According to an analysis by KPMG Peat Marwick, the only way it would not be advantageous for someone in the 31% tax bracket to accelerate income into this year would be if the taxpayer could find an investment paying 15% a year--and if the tax rate in 1993 would be 34% or less.

Making tax-favored investments: Clinton has indicated he will not tamper with the tax-free status of municipal bonds, among the few tax shelters left--and investors seem to have taken note. Investments in 670 municipal bond funds tracked by Lipper Analytical Services Inc. rose to $172 billion in the third quarter of 1992, from $146 billion at the beginning of the year.

Looking for “Democratic” investments: Other wealthy taxpayers are trying to figure out how best to invest under a Democratic Administration. Because of Clinton’s pledge to improve the nation’s infrastructure, some analysts are recommending investments in concrete concerns, road builders and steel manufacturers.