In human life, art may arise from almost any activity, and once it does so, it is launched on a long road of exploration, invention, freedom to the limits of extravagance, interference to the point of frustration, finally discipline, controlling constant change and growth. Susanne Langer (1895-1985)

Commentary

In these times of major record label mergers, downsizing, the slashing of label rosters, and thousands of record company jobs being lost over the last three years--not to mention the enormous sea change and seismic shifts that technology has wrought--comes one of the most disturbing reports we have come across. It further reveals just how profoundly out-of-touch certain companies TRULY are when addressing the problems within their own record divisions. The Financial Times reported Warner Music, paid its top five executives more than $21m in salary and bonuses following last year's $2.6bn acquisition of the US music group by a private equity consortium. The article continues that of the top management, Edgar Bronfman Jr, the Chairman who led last year's buy-out, received a $1M salary and $5.25M bonus. Lyor Cohen, head of the US recorded music business, received $1M and $5.24M in salary and bonus, respectively. Paul Rene Albertini, head of Warner's international operations, was paid $1.25M in salary and a $3.15M bonus. Departing Warner/Chappell CEO, Les Bider, received a $2.44M total payment. These payouts include further guaranteed bonuses or change of control payments. According to documents filed with the U.S. Securities and Exchange Commission, last year's total executive remuneration was more than three times higher than Warner Music's $7M operating income for the 10 months to September 30th. The management payments reflect Warner's success in cutting costs following last year's sale of the Music Group by Time Warner. The company expects to deliver $250M of annualized savings by May this year, achieved mainly through 1,600 job losses.

What is so truly disturbing here is that it speaks volumes about the value system of an owner of a company that would pay its top-five Record Executives more than three times the amount of operating income for a ten-month period while dismissing 1,600 employees.

What the article failed to mention was that in addition to the employee layoffs, Warner Music Group also dropped 93 of the 193 artists signed to Warner Labels in the US, approximately 47% of the artist roster during this same period. If the financial health of a company is truly so dire that it calls for these kind of dramatic and severe cuts for the financial well being of the company, how does one justify the kind of staggering bonus payouts to the top five executives in the company? Dont get us wrong, we have no problem with executive compensation when its tied to actually rewarding performance, but in this case, one is truly hard pressed to grasp or to understand what is actually being rewarded. The claim that the Warner Music Group will save $250M of annualized savings mainly through the decimation of 1,600 jobs is not something that we think should be financially rewarded.

On Feb 11th at the Grammy Foundation Entertainment Law Initiative luncheon in Los Angeles, WMG Chairman Edgar Bronfman spoke to the 460 attendees of the luncheon, We must employ our creative imagination and we must resist the temptation to conduct business as we always have by experimenting with new approaches, new structures and new relationships, so that we can move more quickly and appropriately respond to the ever-changing marketplace. He went on to request that music attorneys bring a new level of creativity to the deals they forge. Your willingness to join with us is critical to the success of our industry.

If only he had resisted the temptation to conduct business like we always have and not given so much to so few while so many went without. In business, as in life, you lead through example. Mr. Bronfman, with all due respect, you need to have to have your own house in order before you have the credibility to make a 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 London who was leaving the company wrote, We understand that you took on a huge task to turn around the ailing, forgotten division of AOL Time Warner, but informing the already morale-drained staff (via a third party The Financial Times) that the salary and bonuses that the top five executives took individually equal more than 20 times my total lifetime salaried income (assuming I started at 18 and retired at 60), is somewhat more than insensitive. If you want to make us feel like maggots, you succeeded. 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 million unrecouped. Milan Records? A French turkey. Need I go on? What deals has this guy done that actually MADE money?

Throughout my own career in the music business, and especially in the last ten years, Ive always been fascinated by the extremely disproportionate amount of money paid to CEOs in the Entertainment Business. Being in the music business for twenty-five years, weve seen Major Label CEO salaries/benefit packages go from $200,000.00 - $500,000.00 in salary and bonus payments in the mid 1980s to literally ten-times that amount, and more, just eight to nine years later for the same job. Throughout the 1990s, the amount of money and compensation paid to CEOs and other top executives at film studios and major labels continued to reach new levels of financial absurdity, especially in the area of severance packages (the part of their contract that kicks in if they are fired or leave the company for any other reason). You want to know how absurd its gotten? Its to the point now where if you really stop and think about it, theres no real incentive for CEOs to try and succeed anymore, other than ego (which we do not underestimate as an extremely 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 too financially lucrative! If you dont believe me, look back over the last ten years and think about all of the labels that have had regimen changes such as when 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 with well over $30M along with other contractual compensation. Consider also the revolving door of CEOs appointed by Gerald Levin (then CEO of AOL Time Warner) to run Warners music division in the mid 90s. Between 1994 and 1998, Warner hired, promoted and fired Doug Morris, Bob Morgado and Michael Fuchs to run the Music Division. Each outgoing executive cost them between $15M $25M. Danny Goldberg also clashed with Warners brass when he was President of Warner Bros. Records during this time and exited the label after only few years on the job. Goldberg went on to form Artemis, which he then just exited three weeks ago.

Of course, lets not forget the very well-documented hiring (and very public exiting) of Michael Ovitz, who after eighteen months as President of The Walt Disney Co. (on a multi-year contract) left with over $96M in compensation and stock options - a matter that became a very public battle last year when the stock holders took Disney to court over this enormous payout to Ovitz). Think about it this works out to about $533,000 a month, or maybe only $213,000 a month after taxes. Not bad for eighteen months work, if you can get it.

Finally, who among us could ever forget the all-time greatest, most stunning expensive CEO hirings in the history of Hollywood? How stunning, you ask? So stunning that a three-hundred page book has been written about it called Hit & Run: How Jon Peters &Peter Guber Took Sony for a Ride in Hollywood. This non-fairy tale involves the powers that be at Sony Corporation, who were convinced by then-CEO of Sony Music Walter Yetnikoff that Peters and Guber were the only executives in the world who could run Sony Pictures, despite the inconvenience of Warner Bros. having both men under contract. Sony HAD to have them and ONLY THEM! The initial cost was somewhere in excess of over $100,000,000.00; because in addition to the over-the-top executive compensation packages that both Peters & Guber received, Warner Bros. was able to get a substantial ownership percentage of Sonys Record Club (Columbia House) as part of the deal to release Guber & Peters from their contracts. By the time both Peters and Guber left Sony Pictures only a few years later, after a long series of failed movies and expensive studio cost overruns, Sony would write off hundreds of millions of dollars (if not more) in one of the most staggeringly expensive hires ever made by an entertainment company.

So what is it that drives otherwise fairly intelligent and rational business people to make these irrational compulsive and often insane decisions about executive compensation at entertainment companies? Its a question weve been fascinated with for years. In 1982, I asked that question to then-CEO of Warner Communications Steve Ross. Ive never forgotten his answer; he said, very assuredly, In corporate leadership, what youre really being paid for is your ability to make the right decisions for the direction and growth of the company. To a 21 year old kid just entering the music business, that seemed to be a very simple, yet logical, answer that made perfect sense. The response has probably been imbued with a greater sense of importance over time, especially since it came from such a legendary captain of industry in the entertainment business. Reflecting on that conversation twenty-four years later, Im saddened by how distorted and truly destructive executive compensation has become at many of the major labels and the very damaging effects it has had on the companies. Its distorted because it stops being about compensation at a certain point and becomes a misguided sense of entitlement where, more often than not, theres absolutely no consequence for any financial losses to the company as a result of the CEOs performance. Today, more often than not, this is something contractually sanctioned by the corporation. Its destructive, I believe, because as weve seen over and over, especially in the last four years in other industries, the consequences of these types of compensation packages DO NOT promote any sense of commitment, devotion or loyalty to a company, its growth, financial well-being or even in the most extreme cases (e.g. Worldcom, Enron) its very survival.

So what could possibly be the primary reason corporations continue to do this? Its driven, we believe, by a core yet completely misguided fear that no one else is capable of doing the job -- NO ONE!! Consequently, these executives have to be given whatever they ask for! Nothing reflects this mentality more clearly than the often-obscene severance packages you see CEOs carrying away when leaving or being fired from a company.

A further manifestation of this mentality in the business is reflected in the hiring of the same CEOs and executives over and over again regardless of their track records or past performance levels. As we always say the names in this business never change, just the addresses underneath them. This practice of rotating top executives further creates the very powerful perception that there are very few people who can actually do the job. In 25 years of being in this business, weve never believed this, yet this deeply held belief is very difficult to change, especially at the highest levels of a company.

A few years ago at a party, I asked a CEO of a major label why this practice seemed so prevalent at the top executive levels of the music & film industries and the response was astounding. He said, 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 whos already had the position and done the job regardless of their past track record than someone they dont know regardless of their ability! It was a sobering statement to say the least from someone who really understood this process and the mentality that goes into these choices. It also provided real insight into why so few companies today have any executives that go up all the way in the ranks. There are a few, such as Jason Flom, Sylvia Rhone and Jordan Katz, but not many.

So, the question in the boardroom today needs to be, How can we inspire a level of dedicated commitment and accountability in our top CEOs to grow the company weve made the consequences of failing so financially lucrative?

In this day and age, when so many of our firmly held beliefs about the way things are in the music industry are continually being broken apart and were repeatedly being challenged by the brutally sobering new financial realities in the post-merger major label world now emerging: (Viacoms $18 billion decrease on their radio station valuations; Sony and BMG merging their recorded music operations worldwide; the fracturing of powerhouse NYC law firm Grubman, Indursky & Schindler, once one of the largest and most powerful law firms in the music business, who recently had one of its name partners, Paul Schindler, depart to a competing law firm as well as laying off several attorneys), its a very powerful statement of just how out of touch and destructive corporate values like the financial compensation packages at Warner Music are to even their own financial well being and survival. The tragedy, and I use the classic definition of tragedy as a fall from greatness due to an unseen flaw in ones own character, (and labels truly dont get much greater than Warner Bros., Elektra & Atlantic, historically speaking), is that the leadership at the Warner Music Group in the most profound sense just does not get it! They truly dont see it. They still believe, this is the way our business needs to be run.

This isnt so much a case of corporate greed, but rather something that has become much more pernicious, especially in the last ten years, and thats this pervasive mentality of I truly dont care as long as Im taken care of. The Enron & WorldCom scandals are absolutely classic text book examples of this mentality on a grand scale in every respect!

Ultimately, this just illustrates how Warner Music (and the other labels who subscribe to this mentality in this day & age) still have a real commitment to maintaining & keeping a broken, malfunctioning business in place rather than seeing what can be done to creatively re-invent it in a new way. Their solution is to reduce personnel and cut the amount of artists of the roster, while continuing to pay themselves and their top executives as if they had just had the greatest year of their history. Theres absolutely nothing creative about that! The real tragedy here is not that Warner Music spent $21M on five executive salaries and bonuses, (while letting 1600 people go as well as a drop a significant percent of the Artist roster), but that they felt they had to.

As Bob Lefsetz, a leading music industry consultant and writer so aptly said recently, To be this out of touch is to demonstrate you should not be running this enterprise. And in a creative industry like music that has always thrived on innovation (radio, TV, CDs, the Internet, iPods, satellite & internet radio), and in a time where such rapidly developing and emerging technologies are creating dramatic changes in the culture at an alarming pace as well as creating incredible opportunities and challenges, what great artists starting their career in music would want anything to do with a company that cares more about itself and its own survival than it does about the artists and music on the label?

Is it any wonder the Major Labels Market share continues to stagnate? Or that their ability to break new artists has reached an all time low? This is exactly why major labels in their current state have no future in this New World Order. If they are to be a part of it, theyre going to have to reinvent themselves in a completely new way that reflects the world and times we live in today, not some fantasy of the past.

In closing, Im reminded of a quote that a brilliant man named Breck Costin once said: Always remember that your fantasies have to die before your dreams can come true.

Ritch Esra 818-995-7458 ritch@musicregistry.com