How Disney dealt with the Principal - Agent Problem: In 1984, the Walt Disney Company brought in Michael Eisner, a Paramount executive as CEO. The firm's board of directors agreed to pay Eisner a salary of $750,000, plus a $750,000 bonus for signing on, plus an annual bonus equal to 2 percent of the dollar amount by which the firm's net income exceeded the 9 percent return on shareholder's equity. In addition, he received options on 2 million shares of Disney stock, which meant that he could purchase them from the firm at any time during the five year life of the contract for only $14 per share. (15 Points)
a. At the end of 1984, shareholders' equity was about $1.15 billion. How much would Eisner's 1985 bonus have been if Disney's net income that year were $100 million? If it were $200 million?
b. In 1997, the price of Disney stock rose to about $20 per share. What was the capital gain value of Eisner's stock options?
c. Eisner's bonus was $2.6 million in 1996 and $6 million in 1987. Including the stock options he exercised, his compensation in 1988 was about $41 million, a record at that time for any U.S. executive. In 1993, his total compensation was about $202 million, again a record. Had Disney's owners provided a substantial incentive for Eisner to work hard to increase the firm's profit?
d. A shareholder who invested $100 in Disney stock at the beginning of Eisner's tenure would have seen its value rise to $ 1,460 in 1994. Was this why there was no substantial outcry from the firm's owners about Eisner's compensation?