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Obscene Warner Music Executive Payouts
By Ritch Esra, Sat Dec 10th
In these times of major label mergers, downsizing, the slashingof label rosters, and thousands of record company jobs beinglost over the last three years--not to mention the enormous seachange and seismic shifts that technology has wrought--comes oneof the most disturbing reports we have come across. It furtherreveals just how profoundly out-of-touch certain companies TRULYare when addressing the problems within their own recorddivisions. The Financial Times reported 'Warner Music paid its top fiveexecutives more than $21m in salary and bonuses following lastyear's $2.6bn acquisition of the US music group by a privateequity consortium.' The article points out that Edgar BronfmanJr, the Chairman who led last year's buy-out, received a $1Msalary and $5.25M bonus. Lyor Cohen, head of the US recordedmusic business, received $1M and $5.24M in salary and bonus,respectively. Paul Rene Albertini, head of Warner'sinternational operations, was paid $1.25M in salary and a $3.15Mbonus. Departing Warner/Chappell CEO, Les Bider, received a$2.44M total payment. These payouts include further guaranteed bonuses or change ofcontrol payments. According to documents filed with the U.S.Securities and Exchange Commission, last year's total executiveremuneration was more than three times higher than WarnerMusic's $7M operating income for the 10 months to September30th. The management payments reflect Warner's success incutting costs following last year's sale of the Music Group byTime Warner. The company expects to deliver $250M of annualizedsavings by May this year, achieved mainly through 1,600 joblosses.
What is so truly disturbing here is that it speaks volumes aboutthe value system of an owner of a company that would pay itstop-five Record Executives more than three times the amount ofoperating income for a ten-month period while dismissing 1,600employees. What the article failed to mention was that in addition to theemployee layoffs, Warner Music Group also dropped 93 of the 193artists signed to Warner Labels in the US, approximately 47% ofthe artist roster during this same period. If the financialhealth of a company is truly so dire that it calls for thesekind of dramatic and severe cuts for the financial well being ofthe company, how does one justify the kind of staggering bonuspayouts to the top five executives in the company? Don't get uswrong, we have no problem with executive compensation when it'stied to actually rewarding performance, but in this case, one istruly hard pressed to grasp or to understand what is actuallybeing rewarded. The claim that the Warner Music Group will save$250M of annualized savings mainly through the decimation of1,600 jobs is not something that we think should be financiallyrewarded. On Feb 11th at the Grammy Foundation Entertainment LawInitiative luncheon in Los Angeles, WMG Chairman Edgar Bronfmanspoke to the 460 attendees of the luncheon, "We must employ ourcreative imagination - and we must resist the temptation toconduct business as we always have - by experimenting with newapproaches, new structures and new relationships, so that we canmove more quickly and appropriately respond to the ever-changingmarketplace." He went on to request that music attorneys bring a new level ofcreativity to the deals they forge. "Your willingness to joinwith us is critical to the success of our industry." If only he had "resisted the temptation to conduct business likewe always have" and not given so much to so few while so manywent without. In business, as in life, you lead through example.Mr. Bronfman, with all due respect, you need to have to haveyour own house in order before you have the credibility to makea request like that to the creative and legal communities. In an open letter to Warner Music Chairman Edgar Bronfman,Carlos Anaia, a five-year Warner Music Group employee in Londonwho was leaving the company wrote, "We understand that you tookon a huge task to turn around the ailing, forgotten division ofAOL Time Warner, but informing the already morale-drained staff(via a third party - The Financial Times) that the salary andbonuses that the top five executives took individually equalmore than 20 times my total lifetime salaried income (assuming Istarted at 18 and retired at 60), is somewhat more thaninsensitive. If you want to make us feel like maggots, yousucceeded. Paul-Rene Albertini gets paid $4 MILLION in total?Hello!!? The only deals we are all aware of have all LOST money.Walt Disney Records? It's still more than $15 millionunrecouped. Milan Records? A French turkey. Need I go on? Whatdeals has this guy done that actually MADE money?" Throughout my own career in the music business, and especiallyin the last ten years, I've always been fascinated by theextremely disproportionate amount of money paid to CEOs in theEntertainment Business. Being in the music business fortwenty-five years, we've seen Major Label CEO salaries/benefitpackages go from $200,000.00 - $500,000.00 in salary and bonuspayments in the mid 1980's to literally ten-times that amount,and more, just eight to nine years later for the same job. Throughout the 1990's, the amount of money and compensation paidto CEOs and other top executives at film studios and majorlabels continued to reach new levels of financial absurdity,especially in the area of severance packages (the part of theircontract that kicks in if they are fired or "leave the companyfor any other reason"). You want to know how absurd it's gotten?It's to the point now where if you really stop and think aboutit, there's no real incentive for CEO's to try and succeedanymore, other than ego (which we do not underestimate as anextremely powerful and driving force in this business). Why? Because today, we live in an era where more often than not,the consequences of failure for a CEO have become far toofinancially lucrative! If you don't believe me, look back overthe last ten years and think about all of the labels that havehad regimen changes such as when EMI made Charles Koppelman CEOof its music division only to have the entire EMI label closedown a few years later with over 135 employees losing their jobs(many with just a two week notice) while Koppelman exited withwell over $30M along with other contractual compensation. Consider also the revolving door of
CEOs appointed by GeraldLevin (then CEO of AOL Time Warner) to run Warner's musicdivision in the mid 90's. Between 1994 and 1998, Warner hired,promoted and fired Doug Morris, Bob Morgado and Michael Fuchs torun the Music Division. Each outgoing executive cost thembetween $15M - $25M. Of course, let's not forget the very well-documented hiring (andvery public exiting) of Michael Ovitz, who after eighteen monthsas President of The Walt Disney Co. (on a multi-year contract)left with over $96M in compensation and stock options - a matterthat became a very public battle last year when the stockholders took Disney to court over this enormous payout toOvitz). Think about it - this works out to about $533,000 amonth, or maybe only $213,000 a month after taxes. Not bad foreighteen months' work, if you can get it. Today, more often than not, this is something contractuallysanctioned by the corporation. It's destructive, I believe,because as we've seen over and over, especially in the last fouryears in other industries, the consequences of these types ofcompensation packages DO NOT promote any sense of commitment,devotion or loyalty to a company, its growth, financialwell-being or even in the most extreme cases (e.g. Worldcom,Enron) its very survival. So what could possibly be the primary reason corporationscontinue to do this? It's driven, we believe, by a core yetcompletely misguided fear that no one else is capable of doingthe job -- NO ONE!! Consequently, these executives have to begiven whatever they ask for! Nothing reflects this mentalitymore clearly than the often-obscene severance packages you seeCEOs carrying away when leaving or being fired from a company. A further manifestation of this mentality in the business isreflected in the hiring of the same CEOs and executives over andover again regardless of their track records or past performancelevels. As we always say, "the names in this business neverchange, just the addresses underneath them." This practice of rotating top executives further creates thevery powerful perception that there are very few people who canactually do the job. In 25 years of being in this business,we've never believed this, yet this deeply held belief is verydifficult to change, especially at the highest levels of acompany. A few years ago at a party, I asked a CEO of a major label whythis practice seemed so prevalent at the top executive levels ofthe music & film industries and the response was astounding. Hesaid, "What you have to understand about the decisions to hireexecutives at that level is that very often the boards of thecompany hiring them are much more comfortable with someone who'salready had the position and done the job regardless of theirpast track record than someone they don't know regardless oftheir ability!" It was a sobering statement to say the least from someone whoreally understood this process and the mentality that goes intothese choices. It also provided real insight into why so fewcompanies today have any executives that go up all the way inthe ranks. There are a few, such as Jason Flom, Sylvia Rhone andJordan Katz, but not many. So, the question in the boardroom today needs to be, "How can weinspire a level of dedicated commitment and accountability inour top CEOs to grow the company we've made the consequences offailing so financially lucrative?" In this day and age, when so many of our firmly held beliefsabout the way things are in the music industry are continuallybeing broken apart and we're repeatedly being challenged by thebrutally sobering new financial realities in the post-mergermajor label world now emerging: (Viacom's $18 billion decreaseon their radio station valuations; Sony and BMG merging theirrecorded music operations worldwide; the fracturing ofpowerhouse NYC law firm Grubman, Indursky & Schindler, once oneof the largest and most powerful law firms in the musicbusiness, who recently had one of its name partners, PaulSchindler, depart to a competing law firm as well as laying offseveral attorneys), it's a very powerful statement of just howout of touch and destructive corporate values like the financialcompensation packages at Warner Music are to even their ownfinancial well being and survival. The tragedy, and I use the classic definition of tragedy as "afall from greatness due to an unseen flaw in one's owncharacter," (and labels truly don't get much greater than WarnerBros., Elektra & Atlantic, historically speaking), is that theleadership at the Warner Music Group in the most profound sensejust does not get it! They truly don't see it. They stillbelieve, "this is the way our business needs to be run." This isn't so much a case of "corporate greed," but rathersomething that has become much more pernicious, especially inthe last ten years, and that's this pervasive mentality of "Itruly don't care as long as I'm taken care of." The Enron &WorldCom scandals are absolutely classic text book examples ofthis mentality on a grand scale in every respect! As Bob Lefsetz, a leading music industry consultant and writerso aptly said recently, "To be this out of touch is todemonstrate you should not be running this enterprise." And in acreative industry like music that has always thrived oninnovation (radio, TV, CDs, the Internet, iPods, satellite &internet radio), and in a time where such rapidly developing andemerging technologies are creating dramatic changes in theculture at an alarming pace as well as creating incredibleopportunities and challenges, what great artists starting theircareer in music would want anything to do with a company thatcares more about itself and its own survival than it does aboutthe artists and music on the label? Is it any wonder the Major Labels Market share continues tostagnate? Or that their ability to break new artists has reachedan all time low? This is exactly why major labels in theircurrent state have no future in this New World Order. If theyare to be a part of it, they're going to have to reinventthemselves in a completely new way that reflects the world andtimes we live in today, not some fantasy of the past. In closing, I'm reminded of a quote that a brilliant man namedBreck Costin once said: "Always remember that your fantasieshave to die before your dreams can come true." Ritch Esra 818-995-7458 ritch@musicregistry.com About the author:Ritch Esra is the publisher of the Music Business Registries.
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