Mike Ovitz Got Away With Murder

Mike Ovitz Got Away With Murder

Mike Ovitz Got Away With Murder

Dec. 22 1996 3:30 AM

Mike Ovitz Got Away With Murder

... And I helped him.

When Walt Disney Co. and its short-time President Michael Ovitz announced they were parting company a couple of weeks ago, observers may have been surprised by reports that I had been involved in designing the contract that will reportedly give Ovitz a $90 million goodbye gift. After all, in 1989, I set aside my highly successful career as an executive-compensation consultant and became a fierce critic of the size and manner in which many companies in America pay their CEOs and other senior executives.


My switch from henchman to gadfly incensed many CEOs, some of whom called me a Judas and asked where they should deliver the 30 pieces of silver. In a sense, though, those CEOs and I were operating on the same wavelength. They were quoting from the Bible, while I was beginning to think seriously about the need to save my immortal soul.

For the next six years--until mid-1995--I stayed away from work with major corporations. Then the phone rang, and on the other end was Michael Eisner, the by-then legendary CEO of the Walt Disney Co. I had twice helped to design Eisner's own pay contracts--the first time in 1984 and again in 1989--and I had long admired him as one of the few CEOs who take risks and play the pay game as it should be played. Eisner wanted me to suit up and help Disney's board compensation committee forge a deal with Michael Ovitz that would make him the No. 2 executive at Disney.

After some agonizing, I told Eisner that I would help out as a personal favor to him, but that when documents were released on Ovitz's pay, I would review them as a critic. If I felt so inclined, I might well attack what I saw. His reply: "You would have done that anyway. So I don't see that I'm losing anything." (As I've learned over the last few days, my boast of independence was an empty one. It's very hard, in practice, to take money as a compensation consultant and then be openly critical of the outcome without either violating confidentiality or inviting the inference that your clients ignored your good advice--all of which underscores my original notion that if you want to be a corporate critic, you shouldn't get involved in corporate decisions, no matter how flattering the invitation.)

A lot of my criticism of executive pay is centered around the fact that there is no real market operating out there. Many CEOs decide on what they perceive to be a fair level of pay, add $10 million to give themselves some maneuvering room, and then present their outsized demands to a board of directors that they hand-picked. Typically, some 60 percent of these directors are CEOs of other companies, and none has a known aversion to greed. "Whatever Lola Wants, Lola Gets!" sings the devil's assistant in Damn Yankees. Substitute a different--and, almost invariably, male--name for Lola, and you'll get a good picture of what ensues in the boardroom.


But the Michael Ovitz deal was of a different, better kind. It met all the tests of a true free-market transaction.

First, you had an informed buyer of talent, the compensation committee of Disney's board. Not only were its members well versed in the arcana of executive compensation, but I was along for the ride to point out the shortcuts and pitfalls. Second, you had an informed seller of talent, Michael Ovitz, who was also armed with his own advisers. Third, you had vigorous arm's-length negotiations. Indeed, the negotiations between Disney's compensation committee and Ovitz were so tough that the deal almost collapsed several times (and, in light of more recent events, one wishes it had).

Finally, though the Disney board might have been hand-picked by Michael Eisner, it certainly had not been hand-picked by Michael Ovitz. And it was certainly not in Michael Eisner's interest to pay Ovitz any more than he had to. Eisner is himself a huge holder of Disney stock who, after clearing an ambitious hurdle (Disney has to earn an 11 percent after-tax return on shareholders' equity), also receives an annual bonus equal to 2 percent of Disney's above-hurdle profits.

So I can't criticize the way in which the Ovitz deal was reached. And, in fact, there was virtually no criticism at the time. On the day the deal was announced, Disney's share price rose sharply, suggesting that the investment community was well pleased that a person almost universally acknowledged to be "The Most Powerful Man in Hollywood" had decided to cast his lot with Michael Eisner.


Key executives negotiating from outside the company they are considering joining usually have a great deal of leverage. After all, the company wants them badly. In Ovitz's case, the leverage was compounded, because he had been enjoying a fabulously successful career as Hollywood's top agent; rumor had it he was pulling down between $25 million and $35 million per year. So it was understandable that Ovitz wanted some assurance that he would have the opportunity to earn a great deal of money at Disney.

Companies use a variety of goodies to lure a senior executive from the outside. Often, they will give the executive a large one-time front-end bonus when he signs his contract. In other cases, the company might give the executive an upfront--again, large--grant of free shares of company stock. In still other cases, the company might guarantee that the executive will receive big bonuses in future years, poor profits notwithstanding.

The Ovitz deal, however, contained none of these goodies. They seemed too expensive. For example, if Ovitz's five-year deal was worth, say, $100 million, and if the compensation committee had added to that a front-end grant of free Disney shares worth, say, $50 million, then--assuming that Ovitz finished his five-year contract period--the cost to Disney would be $150 million.

Instead, to provide the comfort needed to induce Ovitz to give up his marvelous career as an agent, the compensation committee offered him a severance agreement. This seemed a far cheaper--indeed probably costless--alternative to a front-end bonus. Of course, the overall costs of the package would go up sharply in the event of Ovitz's termination (and I wish now that I'd made a spreadsheet showing just what the deal would total if Ovitz had been fired at any time). But the probability of that happening was deemed to be exceedingly low. After all, if you think the person can't make it, why hire him in the first place?


But then the unthinkable happened. Michael Ovitz, only 16 months into his five-year agreement, was out in the cold. That brought to life those sleeper in his contract.

Or have they come to life? If Ovitz walked out of Disney under his own power, his contract guaranteed him precisely nothing in the way of severance. Only if he were fired would the severance provisions come into play. Given that Ovitz and his allies have been retailing the notion that he resigned, rather than being fired, Disney might not end up having to make good on the full value of Ovitz's severance package. Perhaps there was one final negotiation that reduced what Ovitz was to receive.

But if Ovitz was truly fired, then his severance pay will be nothing short of awesome. Different analysts have placed values on his severance pay ranging from $80 million to $100 million, and if he gets the full-bore severance package, I wouldn't care to dispute those analysts.

Can you blame Disney's board for what happened? I don't think so. They played by the current rules and, consistent with landing Michael Ovitz, behaved as prudently as they could.


How about Michael Eisner? You might blame him to the extent that it was his idea to bring Ovitz to Disney. On the other hand, he is paid to make gutsy decisions, most of which cost a lot of money, and some of which have the capacity to turn out disastrously. And, viewed over his long tenure as CEO of Disney, Eisner has been an absolutely brilliant performer. With the exception of Roberto Goizueta at Coca-Cola, there is, in my opinion, no other CEO in America who has been as successful in running a truly major company. So, though Eisner is at fault, his shareholders need to cut him some slack.

Can you blame the system? Absolutely. Large severance packages are the dirty little secret of executive compensation, not merely at Disney, but at scores of companies. CEOs talk with great bravado about how their job is like crossing Niagara Falls on a high wire. But what they don't tell you is that there is a safety net 6 inches under that wire, stocked with their favorite beverages.

What Michael Ovitz's unparalleled severance package (assuming it is paid in full) has done is to shine a huge spotlight on that dirty little secret. Perhaps now, boards of directors will toughen up: If you get fired, they'll tell their top executives, you get two weeks' pay, or whatever else it is that we give to ordinary workers who get fired.

Of course, had Disney's board taken that stance, Michael Ovitz would almost certainly have refused to join the company. And then the board might have had to entice him by offering a huge--and very likely much more costly--front-end bonus. Still, in the light of the fury that has erupted over Ovitz's severance package, that front-end bonus would have had better optics. As my wife Sue said: "A large front-end bonus is for coming to the company. That's something positive. But a huge severance package is for failing. And that's incomprehensible." I couldn't have put it better.