The Jeffrey Katzenberg-Disney lawsuit is turning out to be just as theatrical and as bitter as one might have expected. Witnesses telling lawyers “Don’t go there,” attorneys standing up and attempting to shout each other down, giant mice carrying hand-painted anti-Katzenberg signs (well, there may as well be): This is exactly what the press was hoping for when it petitioned the judge in the case to open the proceedings to the media.
At the heart of the case is a provision in the contract Katzenberg signed in 1988 that entitled him to 2 percent of the profits from any movies and TV shows put into production while he ran Disney’s studio and from ancillary revenues from those products. Disney seems to be trying to argue that “ancillary revenues” stop at licensing fees, while Katzenberg also wants the profits earned by music, toys, video games, and other products spun off from movies like The Lion King.
In 1997, in the first phase of this trial, Disney agreed that it owed Katzenberg something. This phase will determine just how many tens of millions Katzenberg gets. As has been much remarked on, one of the things the trial has already demonstrated is just how complicated motion-picture accounting can be. Disney has filed an exhibit showing that live-action films lost $231 million for the company while Katzenberg was there, between 1984 and 1994. Katzenberg’s attorney in turn produced numbers showing that the same division had made $400 million by 1998. Movie revenues are back-loaded: You pay a ton up front, but you don’t reap the real rewards (if any) until years later. So that makes a bonus tied to profits somewhat complicated, especially when the executive in question leaves before all the revenues have been realized, as Katzenberg did.
What hasn’t been much remarked on, though, is what a bad idea for Disney the bonus itself was. I have no idea whether Disney is trying to rook Katzenberg out of money he really deserves (and, since I also write for a magazine owned by Disney, it’s probably better that I don’t). Regardless, Disney should have not put itself into this position. Pay for performance is, in general, a good idea. But the Katzenberg bonus took a good idea and messed it up. It gave Katzenberg too much individual credit for what necessarily was, especially at a company like Disney, a collective enterprise. And it gave him too big a stake in the success of his division as opposed to that of the company as a whole.
It’s understandable that Eisner and Katzenberg negotiated this kind of contract. They basically rescued Disney from destruction and transformed it into a money-making machine. (If Katzenberg is right, then the movies, TV shows, and ancillary products made under his tenure earned $12.5 billion in profits between 1988 and 1998–2 percent of $12.5 billion is $250 million.) But they should have recognized that the real measure of that transformation was that the Disney brand became more important than any individual member of the corporation, and that every Disney product got an enormous boost precisely from its association with the brand. Katzenberg’s bonus, in that sense, represents the ne plus ultra of the great-man theory of corporate management. Not coincidentally, it represents the ne plus ultra of bad thinking about corporate pay.