Mouse topper re-ups in rich 10-year deal

NEW YORK – Walt Disney Co. chairman Michael Eisner signed a rich new 10-year employment contract with the House of Mouse earlier this week, Disney revealed Thursday. The pact is worth at least $300 million.

The deal guarantees that by the time Eisner retires in 2006, he will be a billionaire with a significant shareholding in the company. Before the latest deal was signed, Eisner had stock and options worth roughly $500 million.

Details of Eisner’s new contract, which was finalized Wednesday, came in Disney’s proxy statement for its annual shareholder meeting scheduled for Feb. 25 in Anaheim. The proxy also revealed that Eisner saw his 1996 bonus halved to $7.9 million from $14 million in 1995, reflecting a slowdown in Disney’s profit growth.

A key component of the new deal is the award of another 8 million stock options to Eisner, valued by Disney today at $195 million, but which could easily end up being worth several times that much. When added to Eisner’s existing stockholding of 2.9 million shares and 8 million stock options awarded when his last contract was signed in 1989 (and valued today at more than $300 million), the Disney chairman could retire with as much as 2.6% of the outstanding stock. The Bass family, the biggest shareholder in Disney, currently owns about 4.4%.

Eisner’s base salary will continue at its level, set in 1984 when he joined the company, of $750,000. With annual bonuses likely to be at least $10 million thrown in, the total value of the deal is roughly $300 million. That makes Eisner one of the three or four highest-paid CEOs in the country, according to compensation expert Graef Crystal, who advised Disney on the contract. He said the deal was worth “substantially more” than Eisner’s old deal.

‘Substantial contributions’

Disney said Eisner’s new contract, negotiated two years before his existing contract was due to expire, reflected Eisner’s “substantial contributions to the company in the course of its growth since he first became CEO, the increased challenge of sustaining the company’s growth through the coming decade in view of its greater size … rapidly evolving technology and increasingly competitive global environment.”

Ovitz deal confirmed

As expected, Disney also confirmed in the proxy widely reported details about the payout of its former president, Michael Ovitz, who left Dec. 27 with a cash payment of $38.8 million and 3 million options, which are today worth $30 million but could end up being worth several times that by the time Ovitz has to exercise them.

The only comment offered by Disney for the payout was that it had induced him to “relinquish his ownership position” at Creative Artists Agency by including in the employment contract “a number of provisions” concerning how he would be paid if he quit before the contract expired. As has been reported (Daily Variety, Dec. 23), Disney noted that these included the failure of the company to assign Ovitz duties that were consistent with the position of president.

While Ovitz walked away from last year with a healthy payout, other Disney execs had their bonuses cut to reflect the slowdown in Disney’s profit growth caused partly by the acquisition of Capital Cities/ABC. Senior exec VP Sandy Litvack’s bonus fell from $1.6 million to $1.1 million. Eisner’s bonus would have fallen even further below the $7.9 million he received, but Disney changed the way his payout was calculated, to exclude the effects of the ABC acquisition. Unlike other Disney execs, Eisner’s bonus was calculated in a formula tied to Disney’s earnings as a percentage of stockholder equity, which dipped sharply in 1996 as a result of the ABC acquisition. Eisner would have earned no bonus without the adjustment, which Disney said “was appropriate and would yield … an equitable and comparable result” for 1996.

New formula sought

Disney wants to permanently alter the way Eisner’s bonuses are calculated and will ask shareholders at the annual meeting to approve a new formula that ties the bonus to Disney’s growth in earnings per share rather than return on stockholder equity. The Mouse House said it believes earnings per share “will provide a more efficient measure of performance and create an incentive directly related to the company’s growth in the years ahead.”

Analysts on Wall Street say the change may ensure Eisner continues to receive more generous bonus payments than he would have received under the old formula. One noted that he “would have made no money under the old contract in 1997 or 1998” because the ABC acquisition increased Disney’s stockholders’ equity from $6.6 billion in 1995 to $16 billion in 1996. Net income, however, fell in 1996 and in future years will be hurt by the huge goodwill charges related to the acquisition that Disney will have to write off over the next 40 years.

Schroder Wertheim analyst David Londoner estimates that Disney’s earnings per share are likely to average 17%-18% in future years, as they have in recent years. Under the new bonus formula, Eisner needs EPS growth of more than 7.5% annually.

None of his new 8 million stock options can be exercised immediately – 5 million become exercisable in 2003 at a price of $63.31 and the rest can be exercised over the following three years at escalating prices. Disney’s stock dropped 37¢ to $67.50 Thursday.

‘Bleeding stanched’

Separately, in Disney’s 1996 annual report released Thursday, Eisner assures company shareholders that the bleeding at ABC network has been “stanched” and it is “making slow but steady progress toward better ratings” despite competitive results in the season to date, which he calls “mixed.”

And he promised that Disney would “make substantial contributions to the success” of the network, singling out Disney’s plans to broadcast its theatrical features on the re-launch of the “Wonderful World of Disney” starting next fall. Eisner said the films to be run will include “Toy Story,” “Pocahontas” and “The Hunchback of Notre Dame” as well as Disney-made movies for television.

“We fully expect that airing these films … will give ABC a giant boost in the ratings,” he added.

Eisner said his strategy for rebuilding ABC’s primetime schedule was “to create one new hit every season and over time build a No. 1 schedule.” He acknowledged that network programming was “harder and more expensive” than when he last worked in television in the 1970s, however, adding: “I am unhappy about computers as another competitor in entertainment.”

Developing inhouse

His prescription for turning the web around includes developing “great ideas” inhouse, avoiding “the shark frenzy of panicked buying” and maintaining “management stability.” This last point is one the network has not succeeded in, given this week’s resignation of entertainment division chairman Ted Harbert this week in the wake of last year’s controversial hiring of Jamie Tarses.

Eisner also made clear that he is unlikely to pursue any big acquisitions. Disney plans to use its cash paying down the $12.3 billion debt load resulting from the ABC acquisition “in a reasonable amount of time” and investing “in extensions of our current business and to repurchase our own shares.” He said, however, that “I doubt we will use our excess cash for the other possibilities available – namely a large acquisition or a huge dividend. We’ve made our large purchase for the time being.”

Referring to Ovitz’s departure, Eisner said, “We do not plan to name a successor to Michael but will continue to operate organizationally as we did prior to his arrival.”

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