In 1984, Walt Disney brought in Michael Eisner, a Paramount executive as CEO. Th
ID: 1242181 • Letter: I
Question
In 1984, Walt Disney brought in Michael Eisner, a Paramount executive as CEO. The firm's board of directors agreed to pay Eisner a salary of $750,000 plus a $750,000 bonus for signing on, plus an annual bonus equal to 2 percent of the dollar amount by which the firm's net income exceeded the 9 percent return on shareholder's equity. In addition, he received options on 2 million shares of Disney stock, which meant that he could purchase them from the firm at any time during the five year life of the contract for only $14 a share. A. At the end of 1984, shareholder's equity was about $1.15 billion. How much would Eisner's 1985 bonus have been if Disney's net income that year were $100 million? If it were $200 million? B. In 1997, the price of Disney stock rose to about $20 per share. What was the capital gain value of Eisner's stock options? C. Eisner's bonus was $2.6 million in 1996 and $6 million in 1987. Including the stock options he exercised, his compensation in 1988 was about $41 million, a record at that time for any U.S. executive. In 1993, his total compensation was about $202 million, again a record. Had Disney's owners provided a substantial incentive for Eisner to work hard to increase the firm's profit? D. A shareholder who invested $100 in Disney stock at the beginning of Eisner's tenure would have seen its value rise to $1,460 in 1994. Was this why there was no substantial outcry from the firm's owners about Eisner's compensation?Explanation / Answer
The 2005 annual meeting of shareholders of The Walt Disney Company will be held ..... in the Corporate Governance Guidelines, with the exception of Michael Eisner, ... of the dollar amount of business transactions during fiscal 2004 between the ...... equal to the present value of the remainder of the salary and to the bonus If shareholders want to stop an executive pay package they can sue the board -- but must proved that the compensation package is "so irrational that no reasonable person could approve it and ... therefore constitutes `waste`." [1] They can vote against the package in the proxy -- an uncommon occurance ("Only 1 percent of option plans put to a vote in the past have failed to obtain shareholder approval." [2]) but one that the company generally warns stockholders that it will disregard, and if it does follow it will simply replace with other forms of compensation (appreciation rights or cash grants). shareholder resolutions are also advisory not compulsory for corporate boards which commonly decline to implement resolutions with majority shareholder support. [3] How Do CEOs influence boards? managers' influence over director appointment, managers' ability to reward cooperative directors, the social and psychological forces leading directors to favor managers, the limited costs to directors of favoring executives, and directors' lack of sufficient time and information ... " [4] The CEO can use company funds to donate to charities that employ or are headed by a director (for example, Verizon contributed hundreds of thousands of dollars annually to the National Urban League, whose head sat on Verizon's board." [5] by having more information than their putatively overseeing board of directors and its compensation committee Directors and compensation committee members Sympathetic to management As one anonymous CEO of a Fortune 500 company told a business journalist interviewer, in negotiation of CEO pay package, "there's no one representing shareholders. It's like having labor negotiations where one side doesn't care." [6] Is a link between managerial power and managerial pay? Evidence In 2002, 41% of the directors on compensation committees were active executives, 20% were active CEOs, another 26% of the members of compensation committees were retirees, most of them retired executives." (p.33) [7] .. the presence on the compensation committee of well-paid executives is likely to lead to higher pay." Researchers have found that in companies with diverse ownership and no controlling shareholders, factors that strengthened management's position (no large outside shareholder, fewer institutional shareholders, protection from hostile takeover) or weaken the board's position (larger boards, interlocking boards, boards with more directors appointed by the CEO, directors who serve on other boards, etc.), are associated with high CEO pay and/or low incentives to perform. Larger boards — where it's harder to get a majority to challenge the CEO, and where each director is less responsible — are correlated with CEO pay that's higher[8] and less sensative to performance[9]. Boards with directors who serve on three or more other boards (giving them less time and energy to devote to the problems of any one company) have CEOs with higher pay, all other things being equal[8]. CEOs who serve as chairman of the board are more likely to have higher pay [10] [11] [12] [13] and be less likely to be fired for poor performance [14]. The more outside directors are appointed by a CEO, the higher the CEO pay and more likely they are to get a "golden parachutes"[15][16][17] The appointment of compensation committee chairs of the board after the CEO takes office — when the CEO has influence — is correlated with higher CEO compensation. [17][18] On the other hand, CEO pay tends to be lower and more sensitive to firm performance when the members of the compensation committee of the board of directors hold a large amount of stock [19]. (Unfortunately for shareholders this has not been the norm[20] and not likely to become so[21] The length of the CEO's term — the longer the term the more opportunity to appoint board members — has been found correlated with pay that's less sensitive to firm performance.[22] Interlocking directorates -- where the CEO of one firm sits on the board of another, and the CEO of that firm sits on the board of the first CEO (a practice found in about one out of every twelve publicly traded firms[23]) — are associated with higher CEO compensation[24]. Having a shareholder with a stake larger than the CEO's ownership interest is associated with CEO pay that's more performance sensitive [25] [26][27] and lower by an average of 5% [28][15]. The ownership of stock by institutional investors is associated with lower and more performance-sensitive executive compensation stock [29], particularly if the institutional shareholders have no business relationships with the firm (such as managing the pension fund) that management might use as leverage against "unfriendly" shareholder acts by the institution.[30] Protection against hostile takeover of management is associated with more pay[31] a reduction in shares held by executives [32] less value for shareholders [33][34][35], lower profit margins and sales growth[35].