What’s the surest way for top Hollywood executives to get rich quick?
That’s the lesson taught most recently by the case of Frank Biondi Jr., whose ouster this week as chairman and chief executive of Universal Studios is expected to net him a severance package valued at about $30 million in cash. For Biondi, it is the second such settlement in the last three years, following a payout in excess of $15 million when he was fired from Viacom Inc.
The champion among Hollywood executives who left a top job with an eye-popping golden handshake is former talent agent Michael Ovitz, who ended an ill-starred 14-month term as president of Walt Disney Co. with a cash and stock package currently worth about $130 million.
Another dramatic payout is certain to go to former Disney Studios Chairman Jeffrey Katzenberg, who has won a lawsuit entitling him to damages for his 1994 ouster and is now negotiating a settlement that could run to the hundreds of millions of dollars.
But dozens of other top-level executives, including division heads who would be considered relatively low-ranking officers in most other industries, have carried off seven- or eight-figure severance deals after being terminated. Their contracts are typically so well wrought that only criminal conduct or serious wrongdoing might keep them from getting severance.
Although some of these packages are confidential or difficult to value, a rough compilation of severance that Hollywood is known to have handed out over the last few years well surpasses half a billion dollars. This is partly because a ferocious round of mergers in the industry has made top-level management reshufflings even more prevalent.
An Aura of Corporate Waste
To the average working American, this does little to change Hollywood’s reputation as a center of greed, frivolity and excess. And for shareholders of the major entertainment companies, lavish severance payments are becoming an increasingly hot issue because of their aura of corporate waste.
Disney’s payout to Ovitz, who had been granted a five-year contract and touted as a sterling corporate catch, provoked infuriated outbursts from shareholders in 1997 at their annual meeting in Anaheim, as well as a shareholders lawsuit that is still wending its way through the courts.
Biondi’s severance is certain to irk shareholders of Seagram Co., Universal Studio’s Canadian parent.
“We’d like management to explain how this benefits us,” said Tom Gunn, senior vice president of investments at the Ontario (Canada) Municipal Employees Retirement System, which holds about 4.5 million Seagram shares.
Executive severance clauses are common in virtually every industry, but several elements set Hollywood apart. For one thing, management talent is in short supply, so executives with proven track records have an exceptional ability to write their own tickets.
“It’s a question of supply and demand,” said Bertram Fields, one of Hollywood’s most powerful attorneys, who represents Katzenberg and has negotiated dozens of top executive contracts. “Very few people are qualified to run a studio. It’s a very short list and everybody on that list is generally making a lot of money doing something else, so you have to pay a lot to get them.”
Moreover, he said, running an entertainment business requires unique management and celebrity-relationship skills that do not translate easily from other industries.
“It isn’t like you can take the president of General Motors and say he can run Fox or Paramount,” Fields said.
A Perverse Incentive to Be Terminated
What rankles compensation experts and shareholder-rights advocates about the richest severance deals is the absence of so-called mitigation and offset clauses that require the recipient to actively seek new employment and that reduce the payout if he or she finds a comparable job within a certain period.
Some observers say that’s a serious cost in the entertainment business, where ousted executives often find new jobs within weeks or months. In Hollywood, it is almost an article of faith that fired executives don’t fade away--they just turn up elsewhere.
Biondi had been fired as chief executive at Home Box Office in 1984 before taking a top job at Coca Cola Entertainment and then being hired as Viacom’s No. 2.
“Hollywood contracts aren’t set up to deal with the fact that it’s easy to foresee that the executive is likely to leave before the contract term,” said Steven Schulman, an attorney with law firm Milberg, Weiss, Bershad, Hynes & Lerach, who brought the suit against Disney for the Ovitz severance. “It’s quite spendthrift.” (Last month, a Delaware judge rejected Schulman’s challenge, but his ruling is being appealed.)
But others say that the mobility of top executives is exactly what makes severance clauses so important to them.
“I’ve been at meetings at Universal and CBS where the new head of production starts his first meeting with the words, ‘While I am here,’ ” said Stephen Unger, managing partner of the worldwide entertainment and communications practice of Heidrick & Struggles, a multinational executive search firm.
Given such a mind-set, Unger said, it is almost inevitable that “when people negotiate their [employment] deals, they spend the most time not on the function of their job, but on what will they get paid if and when they’re fired.”
To be sure, getting fired is no less painful and embarrassing in the entertainment industry than anywhere else--possibly more so in ego-sensitive Hollywood, where one’s employment history can be splashed across the pages of the trade and consumer press and broadcast on TV news shows.
“Being run out of a high-profile job is pretty demoralizing,” said Howard Stringer, who left the presidency of CBS Inc. in 1995 and is currently chairman of Sony Pictures Entertainment.
Yet Hollywood sometimes rewards executives more for failure than for success. One celebrated example occurred when ousted Sony Pictures Chairman Peter Guber was granted a lucrative production deal at the studio at the same time it was posting a $3.2- billion loss.
In many cases, the risk of failure is specifically anticipated in an executive’s contract.
Ovitz, for example, negotiated an exit package guaranteeing him a huge payout if he was forced out of Disney for almost any reason before his term expired--a so-called non-fault clause that resembles the “pay or play” deals granted the most prominent stars and directors. The clause guarantees their fees even if they are fired from a production or if the movie is canceled. Critics such as Schulman say such clauses often have the perverse effect of giving executives an incentive to get themselves fired.
Stock Options Fuel the Rise
Still, the main factor driving executive severance packages into the stratosphere today is the inclusion of stock options, which have inflated the value of many payouts in the wake of the ‘90s bull market. (One exception: Katzenberg’s contract, which was highly unusual in that instead of a large options grant, it rewarded him with a percentage of the profits of all the projects he was responsible for, which included such animated hits as “The Lion King.”)
The 3 million Disney stock options Ovitz received in his departure package were at one point worth so much that the entire package was valued at $200 million. Disney stock has declined by 25% from its peak, however.
Similarly, the $32-million package Doug Morris got from Time Warner Inc. when he was fired as president of Warner Music U.S. in June 1995--some 80% of it in stock options--is today worth more than $100 million, thanks to a run-up in Time Warner stock.
In Hollywood, stock options often work to the advantage of fired executives for an unusual reason. As important as they may be in the movie or music business, some of the best-paid executives are relatively far down in the ranks of the huge corporations that employ them.
Thus, a parent company’s stock might remain quite buoyant even though its record label or studio is lagging its rivals.
“If a company is firing its CEO, then the stock is probably doing lousy,” said Graef Crystal, an expert on executive compensation. That may not be the case if the manager being shown the door has been running a $750-million unit of a $10-billion conglomerate.
A similar phenomenon helps account for the unparalleled value of Ovitz’s severance deal. As Disney president, the former talent agent was criticized less for poor performance than for no performance: During Ovitz’s 14 months as the company’s putative second-in-command, Disney Chief Executive Michael Eisner continued to run the company as a one-man show (and, shareholders thought, superbly). That kept Disney shares rising and sent the value of Ovitz’s options soaring.
Conversely, the stock options in Biondi’s severance package at Universal suffer from the weak results at its parent, Seagram.
“Biondi’s package would have been much higher except for the incompetence of Edgar Bronfman,” Crystal said, referring to the Seagram CEO, who has been widely blamed for mismanaging Universal’s entertainment properties, which the company acquired in 1995. “If Bronfman had done a better job, Biondi’s pay package could have been $50 million.” (Seagram stock has declined by 15% over the last two years.)
Yet for all the shareholder concern and public misgivings about Hollywood’s methods of compensating its successful--and failed--executives, few in the industry see much potential for change, especially as long as those making the deals are concerned that they may need their own golden parachutes.
“That would require a revolution in thinking and a complete revamping of the economics of this industry,” Unger said. “One studio can’t say, ‘We’re not going to make these deals.’ It would require the people at all six [major] studios to vote against their own personal interests.”