Ovitz Severance Leaves Industry Reeling

Ninety million dollars.

Enough to buy 2,600 fully equipped Ford Explorers. Enough for half a million or so business dinners Morton’s. Enough to put 750 kids through four years at Stanford.

If that is indeed what Michael Ovitz will receive to end his ill-fated marriage with Walt Disney Co., then the amount begs a question: Just how outrageous is it for a man to get $90 million--and potentially more, if Disney stock appreciates further--after 14 months with no discernible achievements?

“I think it is outrageous,” said Gary Hourihan, chairman of SCA Consulting, a Los Angeles executive compensation firm. “But you can’t blame Ovitz. It was a bad hiring decision by Disney and a very expensive mistake. They made a high-risk decision, and it ended up costing them a lot of money. It looks bad, and it is bad from a management-decision point of view.”

Ovitz’s gilded “ta-ta” struck nerves all over Hollywood, the land of wretched excess and profligate spending. But few were as upset as Disney executives themselves. One insider was only half kidding when he remarked Friday morning that he and another top executive planned to quit their jobs because their financial compensation pales next to Ovitz’s, though their contributions to the company have been far greater.

To be sure, there have been bigger severance packages in American business, though generally in cases where executives rescued or otherwise changed the fate of their companies. Three years ago, appliance maker Sunbeam-Oster paid $3.9 million to oust the chief executive who had turned the company around and agreed to buy back his company stock for $173 million.

But the Ovitz package raises anew questions about the wisdom of companies’ use of stock options to reward key executives, especially when a bullish market is propelling many stocks upward regardless of executive performance. Ovitz could receive more than $40 million by exercising his options on 3 million Disney shares.

“It goes back to this whole issue of risk and reward,” said George B. Paulin, president in Los Angeles of Frederic W. Cook & Co., which advises companies on executive pay packages. Disney stock, he noted, has “frankly gone up with the market,” yet Ovitz stands to profit handsomely despite his arguably thin contributions.

Some insiders disputed the actual amount of Ovitz’s severance, with sources close to Disney, embarrassed by the disclosure, suggesting that the figure had been greatly exaggerated. But executive compensation experts said the number accurately reflects the terms of Ovitz’s contract. It’s still unclear when or if Disney will have to report details of the payments.

Industry analysts say Disney was willing to guarantee Ovitz such a rich package because at the time it was viewed as a coup for the company to land him. The super-agent, who turns 50 today, was regarded as a visionary who could add value to the Disney franchise.

“Michael Ovitz at the time he was brought on [by Disney] was the most powerful person in the industry,” said Stephen Unger, managing director of the communications and entertainment practice for the executive recruiting firm Spencer Stuart. “He had redefined the agency business. He was a real builder. These people are rare and highly valued.”

So is this the price shareholders must pay for their company’s decision to seek out a highly regarded executive?

“There is not an absence of logic in bringing the most powerful person in the industry in as a successor [to Eisner],” Unger said. “I don’t see any successors there [now].”

Ovitz also had to make some economic sacrifices to take the job. He had to sell his majority interest in the highly successful Creative Artists Agency that he founded.

But Hollywood was rife Friday with complaints that the payment was undeserved.

One executive called it “un-American” to “reward someone who has essentially failed on the job,” adding, “I thought success and hard work equals money.”

Then again, rewarding failure is arguably a Hollywood tradition. After a bad run as the chairman of Sony’s Columbia TriStar Motion Pictures, Mark Canton recently walked away with about $15 million when he was fired this year.

A number of other entertainment executives, including many from the top ranks of Sony Pictures and Warner Music, have received even higher settlements.

One of the largest recent settlements was an estimated $40 million to former Warner Music Chairman Robert Morgado, who was internally perceived as someone who saved the company money and expanded its music operation internationally. Ovitz had no such accomplishments.

His brief and unremarkable tenure was the flash point for many executives inside and outside Disney on Friday.

“In terms of human equities, it’s as outrageous as any sum paid for services not rendered that I can think of,” said the head of one entertainment company, who said Ovitz’s compensation package was the hot topic at an internal meeting he led Friday morning. “It’s indefensible on any level and is regarded as a complete industry joke.”

That source and a number of other prominent Hollywood figures contended that the payment to Ovitz underscored the injustice of Eisner refusing to settle up with former longtime Disney Studios Chairman Jeffrey Katzenberg, who spent 10 years helping build the once-moribund theme park company into a multibillion-dollar empire.

Katzenberg is suing Disney for $250 million he believes he is owed based on the profits generated from movies that he put into production or were acquired during his tenure. Despite several attempts, including one by Ovitz, the parties have been unable to reach a settlement. A trial is expected to begin late next year.

Entertainment attorney David Colden said, “The world is completely skewed. Executives of major multinational companies, many of which are larger than Disney, don’t get this level of compensation when they spend a lifetime at a corporation, much less 14 months.”

Another industry figure suggested, “For an executive to take out that amount of money is tantamount to corporate waste. In any other business, this would be grounds for a shareholder suit.”

“It’s really difficult to fathom and swallow,” said one top Disney executive. “Everybody is staggered. It’s been a ‘Twilight Zone’ day around here. The bombshell was that he got any compensation at all, let alone this kind of money.”

A number of Disney executives thought Ovitz would have a tough time persuading Eisner and the board to let him out of his contract. Forget collecting a fortune on his way out the door.

“Don’t think that Eisner, Roy Disney and Sid Bass [one of Disney’s largest shareholders] didn’t agree to this,” said the Disney executive, who lays the blame directly at Eisner’s door.

Eisner, Disney and Bass could not be reached for comment.

Sources say Disney executives might be further upset next week when they learn that their bonuses--which are handed out in January--will be less than last year’s.

Disney shares were unchanged Friday at $70.25 on the New York Stock Exchange. Ovitz’s 3 million shares have an exercise price of $57; his gain would be anything above that.

Times staff writer James Bates and researcher Jennifer Oldham contributed to this story.

* SOLO AGAIN

Michael Eisner is once again alone atop the Disney empire, and that may be just the way he wants it. D1

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Parting Gifts

Michael Ovitz will receive upwards of $90 million as a severance package. Neither he nor the company has revealed details, but here is a rough breakdown based on an analysis of his contract, published as part of SEC filings:

$40 million

Where it comes from: Anticipated profit from 3-million-share Disney stock option*.

$30 million

Where it comes from: For assumed bonuses over four years.

$10 million

Where it comes from: For money lost when he had to leave Creative Artists Agency.

$4 million

Where it comes from: Salary over four years.

$6 million

Where it comes from: Miscellaneous.

Total: $90 million

* Based on stock price rise from $57 “strike” price. Value of options could be higher if share price rises.

Sources: Executive Compensation Reports; Walt Disney Co.; Researched by JENNIFER OLDHAM and MARTHA GROVES / Los Angeles Times.