Rank and File Are Smarting Over Ovitz’s Severance Deal

It’s been a given in Hollywood for years that Walt Disney Co. is tight with a dollar and generally pays its employees less than the competition.

This long-felt sore spot has been made particularly raw for the rank and file at Disney lately with the company’s short-term president, Michael Ovitz, walking away with the richest golden parachute Hollywood has ever known.

A week after Ovitz and Disney parted ways and it was divulged that the former super-agent would be receiving no less than $90 million in cash and stock after little more than an unimpressive year on the job, not only Disney and Hollywood but also mainstream America--where it was the subject of talk radio--are still buzzing.

Inside Disney, it’s the issue foremost on the minds of everyone, from those in the top executive suites to the offices of lower-level workers. Learning, as The Times reported last week, that Ovitz’s big payout will coincide with lower year-end bonuses in Burbank just made feelings harder.

“The internal workings of this company have been turned inside out,� said a senior Disney executive. “It used to be thought of as the happiest place on Earth; now it’s the weirdest place on Earth. People [are] totally outraged.�

The outrage extends beyond the walls of Disney. After reading about Ovitz’s huge compensation package, a landlord of a 12-unit apartment building in Garden Grove called to say she felt bad for having to ask one of her tenants--a Disney employee--to leave two years ago because she couldn’t make her $820-a-month rent on the two-bedroom, two-bath unit.

“She was three months behind in her rent and she was trying to catch up but was not able to,� complex owner Pat Rodriguez said. She said the woman had worked in Disney’s accounting office for at least six years and was a divorced woman who provided the sole support of two young children.

“The inequity is that here’s someone making $90 million and here’s a worker who’s been with the company six or seven years who couldn’t make a living wage--it’s unfair,� said Rodriguez, who noted that the woman eventually paid her the back rent.

A former Disney executive estimates that the company generally pays its employees 10% to 20% less in cash compensation than other Hollywood studios.

“If they want someone at a certain level, like Ovitz, they’ll overpay. But, historically, they pay less,� said the source. “If you have three job offers, Disney will be the lowest. And there are tons of situations where people get huge offers from other places.�

Disney’s compensation for many executives is performance-driven, which is the way many investors and compensation experts like it. That includes the pay for Eisner, who has been one of the highest-paid executives in America for the last decade. His base salary of $750,000 a year is the same as it was when he joined the company in 1984. Where he has cleaned up--to the tune of hundreds of millions of dollars--is in stock options.

If Disney pays less in salary than the industry average, the company does give employees at a certain level a performance bonus and stock as part of the compensation package.

Bonuses are based on a division’s performance. Therefore, executives in animation and home video--the company’s most successful units--typically get paid more than their counterparts at other studios because of how much money is generated.

“The company has a plan where they minimize their own risk,� explains a senior executive at the studio. “The bonus is discretionary, and stock is the public market rewarding people, not the company. It’s not the same as being guaranteed $1 million or whatever.�

But Disney insiders doubt that the three components of the compensation package over a five-year period of the standard company contract add up to what other studios pay.

Many at Disney and throughout Hollywood believe that the Ovitz compensation controversy will continue to reverberate, possibly in the form of a backlash by institutional investors and suits brought by angry shareholders.

While most of the country is expressing outrage, Hollywood insiders have been debating whether Ovitz is really getting that amount or whether people close to him are hyping it.

Executives and journalists also were speculating wildly about the separation terms in Ovitz’s contract, which is puzzling given that the entire text is in a Disney 10-K public document filed with the Securities and Exchange Commission and can be accessed on the Internet by anyone with a modem and the ability to type https://www.sec.gov on a keyboard.

The latest spin is that gullible journalists were being “spun� by Ovitz’s press people to embarrass Eisner, and that the amount Ovitz got is only about $25 million.

But someone must have pointed out to Disney that you can spin a significant event--either overtly or tacitly--only so far before the SEC starts asking questions. Sources close to the company have now quietly started putting out the word that Ovitz indeed gets what’s called for in his contract.

Those sources say there is no question that he gets options to buy 3 million Disney shares--worth more than $40 million now. Where they say they differ with published reports is in calculating the cash amount he’s getting. They estimate it at $10 million to $15 million lower than the $50 million reported. In other words, instead of $90 million in cash and stock, it’s only a lowly $75 million to $80 million.

But, as is the case in all executive compensation situations involving a public company, there is no one correct figure because there’s always a subjective aspect to the calculations. That’s why the numerous magazines and newspapers that publish executive compensation reports each year often come up with substantially different numbers for the same executives.

In other words, one person’s $90 million is another person’s $80 million or $75 million. If you include the year-end bonus Ovitz presumably gets, you have a number closer to $90 million. If you don’t, you’re in the low $80s. If you discount the expected bonuses he’d get over four years because you have to write him a check now, you can tweak the numbers down a few million more.

What’s absurd about trying to devalue the package is that it assumes that Walt Disney stock, one of the best performers on Wall Street over the last 10 years, stays where it is now. Ovitz already is up an additional $6 million in the week since it was announced he would leave because those options are worth that much more.

Executive pay expert Graef “Bud� Crystal, without any spin to contend with, in September evaluated Ovitz’s golden parachute for The Times at $90 million to $100 million. He has no quarrel with press reports that if Ovitz gets what’s in his contract, as Disney seems to be quietly conceding now, the $80-million to $100-million estimate is on the mark. Crystal should know: He helped design the package.

The more disturbing thing about the Ovitz Did-He-Get-It-or-Not? debate is that it confirms once again how out of whack Hollywood’s priorities are in relation to anyone living outside the 310 area code.

In places like St. Louis, Cleveland and Garden Grove, people who worry about paying the mortgage or rent are debating on talk radio and in elevators the morality of paying $90 million to someone who worked 14 months with little to show for it.

In Hollywood, they’re debating over San Pellegrino at lunch whether the guy is really getting $20 million, $75 million, $90 million or $100 million. That’s because in Hollywood, the number of zeros in a paycheck is still how you keep score.

Refund due?: Disney may be taking a lot of heat over the contract it negotiated with Ovitz, but just a year ago it thought it was getting such a good deal that it rewarded one of its directors with a tidy sum for signing him.

In the company’s 10-K filed a year ago it was noted that the company’s board of directors rewarded director Irwin Russell with $250,000 as special compensation “for extraordinary services rendered over an extended period of time in connection with his position as chairman of the compensation committee. These services related to circumstances arising after the death of Frank G. Wells, the company’s former president and chief operating officer, in April 1994, and concluded with Mr. Russell’s key role in securing for the company the services of Michael S. Ovitz as president.�

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Ovitz Rising

A large part of Michael Ovitz’s severance package is in the form of options to buy 3 million shares of Disney stock at $57 per share. As the stock price has risen in the last week, the value of Ovitz’s options has risen more than $6 million:

Total severance package (in millions)

$96 million, +$6.375 million