"What pay for performance looks like: the case of Michael Eisner" By Stephen F. O’Byrne, Stern Stewart & Co. Journal of Applied Corporate Finance 5 (summer 1992), pp. 135-136 It’s easy to think of Disney CEO Michael Eisner as a classic case of executive pay run amok. His total compensation in his first six years on the job exceeded $250 million. In reality, he is a classic example of what “pay for performance” looks like. When Eisner was hired in late 1984, he took over a troubled company. Disney had just been through a bitter takeover battle, theme park attendance was declining, and return on equity had fallen below 8%. When he joined Disney, Eisner agreed to a six-year employment contract with three main compensation provisions: a base salary fixed at $750,000, an annual bonus equal to 2% of Disney’s net income in excess of 9% of stockholders’ equity, and a tenyear option on two million shares exercisable at Disney’s current market price of $14. While Eisner’s contract provided for guaranteed payments with a present value of only $3.9 million, its expected value was, of course, much greater. The expected value of his options, based on the Black-Scholes option pricing model, was $16 million. I also estimate that the expected value of his total contract, including bonus and pension rights, was $22 million. The Disney directors were presumably willing to enter into a contract worth $22 million because it provided a tremendous performance incentive that could provide great benefits to Disney shareholders. The contract made Eisner’s wealth even more sensitive to Disney performance than the shareholders’ wealth. A 200% increase in Disney’s stock value – above the company’s CAPM-expected return – would increase the value of Eisner’s contract by 279%. A 67% decline in Disney’s shareholders’ wealth would reduce the value of Eisner’s contract by 71%. What happened? Eisner