Warner Music's Outrageous Executive Bonuses

Warner Music's Outrageous Executive Bonuses

One of the most alarming findings we've seen comes out at a time when big record labels are merging, downsizing, and reducing label rosters. Thousands of record industry positions have been lost in the previous three years. It shows exactly how out-of-touch certain firms are when it comes to dealing with their own record divisions' concerns.

The Financial Times stated that the top five executives of Warner Music received over $21 million in pay and incentives after last year's $2.6 billion private equity consortium takeover of the US music firm. A $1 million salary and a $5.25 million bonus were awarded to Edgar Bronfman Jr., the chairman who oversaw the buyout last year, according to the story. It was reported that Lyor Cohen, CEO of the US recorded music industry, got a salary of $1 million and a bonus of $5 million. The head of Warner's foreign business, Paul Rene Albertini, received a salary of $1.25 million and a bonus of $3.15 million. Les Bider, the former CEO of Warner/Chappell, earned a total remuneration of $2.44 million.

Payouts include further guaranteed incentives or compensation for the transfer of ownership. It's estimated that Warner Music's operational profits for the 10 months ending September 30th were more than three times more than the $7 million in total CEO compensation paid out last year, according to SEC filings. Following Time Warner's sale of the Music Group last year, Warner's effectiveness in reducing expenses was reflected in the management compensation. By May of this year, the corporation hopes to have saved $250 million a year, mostly via 1,600 job losses.

The fact that a corporation's owner would pay its top-five record executives more than three times the amount of operational profits over a ten-month period while firing 1,600 workers says something about his value system is truly concerning.

93 out of the 193 US artists signed to Warner Labels, or around 47% of the roster, were dismissed by Warner Music Group at the same time as the staff layoffs, which were not mentioned in the story. If a firm's financial situation is actually so poor that drastic and harsh cutbacks are required for the financial well-being of the company, how can such astronomical bonuses for the company's top five executives be justified? This isn't the first time we've had an issue with executive remuneration, but it's the first time we've had a problem with executive salary that doesn't genuinely reward performance. We don't believe Warner Music Group's assertion that it would save $250 million a year by laying off 1,600 employees is something that should be monetarily rewarded.

The Grammy Foundation's Entertainment Law Initiative luncheon was held on February 11th, and WMG Chairman Edgar Bronfman spoke to the 460 attendees, saying, "We must employ our creative imagination—and we must resist the temptation to conduct business as we always have, so that we can move more quickly and appropriately respond to the ever-changing marketplace."

On the subject of creative contract negotiations, he urged music lawyers to go beyond the box. "The prosperity of our industry depends on your desire to join us."

If only he had "resisted the urge to do business as we always have" and not given so much to so few while so many went hungry. You lead by example in business and in life. With all due respect, Mr. Bronfman, before you can ask the creative and legal communities for anything like that, you need to get your own house in order.

Carlos Anaia, a five-year Warner Music London employee who was resigning from the company, wrote an open letter to Warner Music Chairman Edgar Bronfman. AOL Time Warner's forgotten, ailing, and largely ignored division is a huge undertaking, but informing the already morale-drained staff (via a third party-The Financial Times) that the salary and bonuses of the top five executives (assuming I started at 18 and retired at 60) equal more than 20 times my total lifetime salaried income is more than insensitive. You succeeded, if your goal was to make us feel like maggots. The total compensation for Paul-Rene Albertini is $4 million. Hello!!? The few transactions of which we are aware have all resulted in a loss of funds. Is there a Walt Disney Records catalog anywhere around here? More than $15 million remains to be recouped. Milan Records A turkey from France. Do you really need me to go on? Is there any agreement he's made that has truly brought in money for him? "

I've always been interested in the vastly disproportionate salaries awarded to CEOs in the entertainment industry, particularly in the past 10 years of my own career. After working in the music industry for 25 years, we've witnessed major label CEO compensation packages jump from $200,000.00-$500,000.00 in salary and bonus payments in the mid 1980s to practically ten-times that amount and more for the same position only 8 or 9 years later.

Severance packages for film studio CEOs and other senior executives continued to rise to new heights of financial ridiculousness during the 1990s, particularly in the area (the part of their contract that kicks in if they are fired or "leave the company for any other reason"). How ridiculous has it become? Because of this, CEOs are no longer motivated by anything other than ego when they attempt to achieve success (which we do not underestimate as an extremely powerful and driving force in this business).

Why? Why? Because these days, the financial ramifications of a failure for an executive have gotten much too attractive! EMI made Charles Koppelman CEO of its music division, only to have the entire EMI label close down a few years later with over 135 employees losing their jobs (many with just a two-week notice), while Koppelman exited the company with well over $30 million in contractual compensation. If you don't believe me, think back over the last ten years and consider all the labels that have undergone regime changes.

As a side note, Gerald Levin (then the CEO of AOL Time Warner) hired a succession of CEOs to head Warner's music business in the mid-'90s. Doug Morris, Bob Morgado, and Michael Fuchs all held executive positions in Warner's Music Division between 1994 and 1998. Between $15 million and $25 million was spent on each exiting CEO. As President of Warner Bros. Records at the time, Danny Goldberg also had disagreements with the label's top brass and left the company after just a few years on the job. This led to the formation of Artemis, which Goldberg left only three weeks ago.

As a side note, let's not forget about Michael Ovitz's public hiring (and public departing) at The Walt Disney Co. (under a multi-year contract, he departed with over $96 million in salary and stock options-a topic that became a public dispute last year when the stockholders brought Disney to court). After taxes, this comes out to $533,000 a month, or $213,000 a month for those who don't pay state and local taxes. If you can obtain it, it's not terrible for 18 months of effort.

Finally, who can forget the greatest, most astonishing, and most costly CEO hires in Hollywood history? How awe-inspiring is this, you wonder? How to Hit and Run: Jon Peters and Peter Guber Took Sony for a Ride in Hollywood, is a three-hundred-page book on the subject that has been published. Despite Warner Bros. having both men under contract, Sony officials were persuaded by former Sony Music CEO Walter Yetnikoff that Peters and Guber were the only executives in the world who could oversee Sony Pictures. They were a must for Sony, and only Sony! The original investment was in excess of $100 million since Warner Bros. was able to get a significant ownership stake in Sony's Record Club (Columbia House) in exchange for releasing Guber and Peters from their contracts, on top of the lavish pay packages each got. It was only a few years later, when both Peters and Guber departed Sony Pictures, that Sony would write off hundreds of millions of dollars (if not more) in one of the most staggeringly costly hires ever made by an entertainment corporation.

When it comes to CEO remuneration at entertainment firms, what motivates ordinarily competent and sensible business professionals to make irrational, obsessive, and sometimes crazy judgments concerning executive pay? The question has captivated us for a long time. Steve Ross was the CEO of Warner Communications at the time. "In corporate leadership, what you're truly getting compensated for is your ability to make the proper choices for the direction and future of the firm," he informed me. I've never forgotten his response. To a 21-year-old who was just starting out in the music industry, it looked like a sensible and straightforward solution. Since it came from such a well-known entertainment industry tycoon, the remark may have taken on additional significance over time. When I think back on that talk now, twenty-four years later, I'm dismayed by how skewed and destructive CEO remuneration has become at many large labels and by the extremely detrimental repercussions the firms have suffered as a result of this compensation distortion. A false feeling of entitlement when, more often than not, there is no repercussion for the company's losses as a result of the CEO's performance is at the root of this erroneous view of remuneration.

A lot of the time, this is a contractual agreement between the employer and employee. These types of compensation packages, as we've seen over and over again in other industries, do not promote a company's growth, financial well-being, or even its survival in the most extreme cases (e.g., Worldcom, Enron). In fact, they are destructive, as we've seen time and time again, especially in the last four years.

So what may be the key reason for businesses to keep doing this? Fear that no one else can perform the job — NO ONE! — is behind this behavior, we think. As a result, every request made by these executives is granted!You can obviously see this mindset in the exorbitant severance payouts CEOs get when they leave or are fired from their companies.

The employment of the same CEOs and executives time and time again, regardless of their track record or prior success, is another example of this corporate culture in action. In business, "the names don't change, only the addresses," as we usually say.

There is a tremendous sense that only a few individuals are capable of doing the work because of this practice. Even though we've never thought this for the last 25 years, this deeply ingrained notion is very difficult to modify, particularly at the top levels of a corporation.

For some reason, this approach has become so commonplace among music and film industry executives, and I recently questioned the CEO of a major label why this appeared to be the case. "What you have to understand about the decisions to hire executives at that level is that very often the boards of the company hiring them are much more comfortable with someone who's already had the position and done the job regardless of their past track record than someone they don't know regardless of their ability!" he said.

A disturbing revelation, to say the least, came from someone who had a deep understanding of this process and the mindset that goes into making these decisions. As a result, I gained a better understanding of why there are so few firms today with leaders that make it to the very top. One or two stand out among them, such as Jason Flom; Sylvia Rhone; and Jordan Katz.

It's time to ask ourselves, "How can we inspire a degree of focused dedication and responsibility in our top CEOs to build the business that we've made the repercussions of failing so financially lucrative?"

When so many of our long-held beliefs about how the music industry works are being shattered by the brutally sobering new financial realities of the post-merger major label world (Viacom's $18 billion drop in radio station valuations; Sony and BMG's global merger of recorded music operations; the fracturing of powerhouse NYC law firm

Warner Music Group's failure to see what is going on is tragic, and I use the traditional meaning of tragedy as "a fall from greatness owing to an undetected defect in oneself," (and labels genuinely don't get much greater than Warner Bros., Elektra, and Atlantic, historically speaking). In their minds, it doesn't exist. "This is the way our company has to be conducted," they insist.

Rather than being a case of "business greed," this is a prevalent mindset of "I honestly don't care as long as I'm taken care of," which has become more corrosive in the previous 10 years. Classic textbook instances of this thinking on a big scale are the Enron and WorldCom scams.

What this ultimately demonstrates is that Warner Music (and the many other record companies that still operate under a mindset like this in today's world) is unwilling to look for ways to creatively re-invent their ailing company. Because of this, they have decided to cut down on staff, but they will continue to pay themselves and their top executives as if it had been the best year of their career. That's a complete lack of originality! As a result of the firing of 1,600 employees and the loss of a substantial portion of the company's artist portfolio, Warner Music spent $21 million on five CEO salaries and incentives.

"To be this out of touch is to suggest you should not be operating this organization," said Bob Lefsetz, a veteran music industry expert and writer. When it comes to the creative industries like music, where innovation is a necessity and where new technologies are advancing at an alarming rate at an ever-increasing rate, what great artists starting their music careers would want anything to do with a company that cares more about itself and its own survival than it does about its customers?

Is it any surprise that the market share of the major labels has remained stagnant? It might also be that their ability to break new musicians is at an all-time low. In the New World Order, big brands are doomed to failure because of their existing status. An entirely new way of doing things is required for them to be a part of it if they are going to be a part of it now, not in the past.

A wise man called Breck Costin once remarked, "Always remember that your imaginations have to die before your aspirations can come true." That thought has been with me ever since.