Disney Chairman and CEO Michael Eisner’s pay is appropriate for his position and responsibilities. The Walt Disney Company is a diversified worldwide entertainment company, operating in 4 segments: Media Networks, Parks and Resorts, Studio Entertainment and Consumer Products. In 1984, Disney was struggling to turn a profit, and its stock price was very low. Many people felt that Disney had lost its vision and position in the entertainment as a leader in animation. Mr. Eisner was hired to give the company a jumpstart. Not only did he successfully do that, he turned the company into a media powerhouse. Under Eisner's management, Disney saw its market capitalization grow from less than $2 billion back in 1984 to over $61 billion today.[1]
In 1997, Michael Eisner signed a new employment contract with the company that runs through 2006. Under this agreement, he is paid a yearly base salary of $1 million and is eligible for bonuses of up to almost $19 million a year. The annual bonus is based on growth in earnings per share above 7.5 percent. In addition to this, he also received stock options on 24 million common shares of Disney stock.[2]
Many people claim Eisner's payouts have been massive, but executive compensation experts frequently defend his pay package because it is so closely tied to the performance of Disney's stock. Because the bulk of his potential income is through company stock, this gives Eisner great incentive to take actions which result in increasing share price. Each dollar that Disney shares increase is worth millions of dollars to Eisner. The gains he is reaping now were earned over a nearly nine year period even though he is realizing them on a single day.
Stock options are financial incentives that allow an executive to buy stock at a set price at a future date. As the company's stock price increases, the options increase in value because the executive can still buy them at that set price. If the company performs poorly and the stock lags, the options may have no value at all.
To briefly summarize the structure of Eisner’s 24 million stock options, he received shares at exercise prices between $21.10 and $42.41 with expiration times from September 2008 though September of 2011, and which must be held for one to three years after being exercised. This arrangement means that he is rewarded only by long-term stock price increases, because after exercising his options, he is required to continue holding them for a significant amount of time. Also, many of the shares can only be exercised at prices that are 150% to 200% above the exercise price set in 1997; this means that there must be a substantial increase in the value of the shares before they are worth anything to him.[3] These barriers were designed to prevent Eisner from being able to take short-term actions that would benefit him, and then allow him to quickly cash out, without having to worry about long term issues.
There are four main reasons as to why the compensation Michael Eisner receives is appropriate. First, as already noted, his pay is largely tied into the performance of company stock; if the company does well, he is rewarded. Second, it is exceedingly difficult for a board of directors to arrange an attractive pay package for a boss who already has incredible wealth. Third, Disney is a huge company, with highly diversified operations around the globe. As the CEO of the company, Eisner is the one person who is ultimately accountable for the performance of the company, and the one who must answer to the board of directions and Disney shareholders when problems arise. It is only fair for large responsibilities to have great rewards. Finally, although there was been some resistance from small groups of shareholders, with endorsement from the board of directors, Disney shareholders overwhelmingly approved this compensation package.
When Walt Disney stock did poorly in 1999, and also in 2001, Chairman and Chief Executive Michael Eisner was penalized with no annual bonus, and received only his relatively modest base salary. In 2000, Eisner received about $9.3 million in total compensation, not including stock options exercised. The company said $3 million of Eisner's bonus will be deferred until January 2004. In 2000, Eisner also exercised about $48 million dollars worth of stock options. Now, just how well did Disney do in fiscal 2000? The entertainment giant reported a profit of $1.9 billion on revenue of $25 billion, a complete turnaround from a 28% drop in profits from 1998 to 1999. At the time, Eisner said Disney's recent performance "represents a return to the kind of growth we have enjoyed for most of the past 16 years." Disney's stock rebounded in fiscal 2000 as well. At the end of September 2000, the company's shares traded around $37.50, compared to slightly under $27 at the same time the year before. Along with Eisner, Disney shareholders also benefited during this time.
However, as the company suffered a net loss the next year, Eisner had a paper loss of $266 million as share prices plunged.[4] A portion of the blame of 2001 can be deflected away from Eisner by blaming the terrorist attacks of September 2001, which severely affected the economy and consumer spending. I believe that that this helps prove that Eisner does not unfairly benefit from his compensation package; namely, when the company and its shareholders do not make money, neither does he. In fact, Eisner even stands to lose money, at least on paper, along with the company.
Michael Eisner has become a very wealthy man during his tenure at the helm of Disney. If he wanted, he could leave the company at any time and never have to work again. Obviously, it’s in the benefit of the company to keep Eisner from suddenly stepping down without advance notice, as that would panic investors. So, the board of directors has to create a lucrative plan which appeals to Eisner in the long run. ``It's at the high end of the scale, but the company's performance is at the high end of the scale,'' said Nell Minow, principal at Lens, a Washington-based activist money manager. Ken Hugessen, executive compensation consultant for William M. Mercer Inc., noted that it is very difficult for a board of directors to arrange an attractive pay package for a boss who already has incredible wealth. ``How do you deal with a boss if he has $500 million stashed away?'' he asked. ``The usual levers just don't exist.''[5] I believe that the compensation package that Disney has created for its CEO has successfully accomplished this. Because the compensation package for Eisner is dependant on the performance of company stock, Eisner’s interests are aligned with that of shareholders. And, as shareholders profit, Eisner stands to gain large amounts of money by exercising his stock options.
Michael Eisner is continually under tremendous pressure and has huge responsibilities, being the Chairman and CEO of an enormous entertainment company such as Disney. Disney has very diversified assets ranging from movie and animation studios, television networks, Broadway productions, sports franchises, theme parks around the world, cruise lines, and numerous other product lines. It is difficult to find the type of talented and dedicated person with great vision which is required to run such a company. According to the Disney’s financial data available on their website, they had gross revenue of over $25 billion in 2002. When looked at in this perspective, Eisner’s pay package looks considerably more reasonable.
If shareholders were not pleased with the performance of the company, or if they felt that Mr. Eisner’s compensation package was excessive, shareholders have twice had the opportunity to vote on proposals to change or limit his pay. Both times, however, the proposals were overwhelmingly defeated. This goes to show that the majority of Disney shareholders are pleased with the company’s performance.
No one should expect Michael Eisner to be a perfect CEO. Everyone, including him, makes mistakes on the job. However, during his time as the head of Walt Disney Company, he has led a transformation, from a small, struggling company, into a dominant global entertainment network. During this time, he has brought incredible wealth to company shareholders and himself as well. Mr. Eisner does not benefit unfairly from his compensation package; when the company performs well, he is rewarded, when it fails to reach financial goals, he is penalized. Although he stands to make millions of dollars, people must remember that the paydays he earns are cashed in on a single day, not earned on a single day. Mr. Eisner has had to work hard for many years, ensuring the long-term success of Disney, before he is able make his fortunes. Michael Eisner’s pay is appropriate.
