Interesting Record Label Article

John Macy · From: Rockport TX/Denver CO

By Rick Ezra...

In these times of major 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? Don't get us wrong, we have no problem with executive compensation when it's 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 said to the 460 luncheon guests, "We must employ our creative imagination ñ and we must resist the temptation to conduct business as we always have ñ 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."

We truly wish 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 ñ 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 Ritch's own career in the music business, and especially in the last ten years, he has 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, we've seen Major Label CEO salaries/benefit packages go from $200,000.00 - $500,000.00 in salary and bonus payments 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 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 it's gotten? It's to the point now where if you really stop and think about it, there's no real incentive for CEO's 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, contractually the consequences of failure for a CEO have become far too financially lucrative! If you don't believe us, 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 Gerald Levin (CEO/AOL Time Warner) to run Warner's music division in the mid 90's. Between 1994 and 1998, Warner hired, promoted and fired Doug Morris, Bob Morgado and Michael Fuchs in that job capacity. Each outgoing executive cost the Warner Music Group between $15M ñ $25M to make a hasty departure. Danny Goldberg also clashed with Warner's brass when he was President of Warner Bros. Records during this time and exited the label after only two years on the job. Goldberg went on to form Artemis, which he then just exited three weeks ago.

Of course, let us 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 the enormous payout to Ovitz). Think about it ñ 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 million; 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 Sony's 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? It's a question we've been fascinated with for years. In 1982, that question was posed to then-CEO of Warner Communications Steve Ross by Ritch, who was the night manager of the Beverly Hills Hotel, where Ross was staying. Ross's answer has never been forgotten; he said, very assuredly, "In corporate leadership, what you're 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, we're 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. It's distorted because it stops being about compensation at a certain point and becomes a misguided sense of entitlement where, more often than not, there's absolutely no consequence for any financial losses to the company as a result of the CEO's performance. Today, more often than not, this is something contractually sanctioned by the corporation. It's destructive, we believe, because as we've 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? It's 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 executive rotation 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, we've never believed this, yet it's a very difficult view to change, especially at the highest levels of a company.
A few years ago at a party, Ritch 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, 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. They would often rather hire someone who's actually done the job rather than select someone they don't 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 at major labels today should be, "How do you inspire a level of dedicated commitment and accountability in top CEOs to grow the company when the consequences of failing to do so are so financially lucrative?"

In this day and age, all of our firmly held beliefs about the way things are in the music industry are continually being broken apart and we're repeatedly being challenged by the sobering new financial realities in the post-merger major label world now emerging: Viacom's $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. It's 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 again we use the classic definition of tragedy as "a fall from greatness due to an unseen flaw in one's own character," (and labels truly don't get much greater than Warner Bros., Elektra & Atlantic, historically speaking), is that the Warner Music Group truly does not get it! They don't see it. They still believe, "this is the way our business needs to be run."

This isn't so much a case of "corporate greed," but rather something that has become much more pernicious, especially in the last ten years, and that's this pervasive mentality of "I truly don't give a **** as long as I'm taken care of." The Enron & WorldCom scandals are absolutely classic 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. There's 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 compelled to do so. 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, they're going to have to reinvent themselves in a completely new way that reflects the world and times we live in today, not the past.

In closing, we're 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."

Kevin Hatton · From: Buffalo, N.Y.

Unregulated capitalism= Take the money from the workers and give it all to the owners.

Ken Lang · From: Simi Valley, Ca

I believe this kinda stuff happens all over in the corprate world. Fire the people who do the actual day to day running of the business and so load down the rest that they can't do the job properly. Then complain how you can't get good help anymore.

Give upper management high bucks to solve the problem, and when they can't, fire them too.

Eventually the company goes on the blocks for the highest bidder and when there are none, it resorts to selling off the chairs and cleaning room supplies for 10 cents on the dollar.

So long Warner. There are not enough Lee Iaccoca's in the world to save you.

Mark van Allen · From: Watkinsville, Ga. USA

Reads pretty much like business as usual in corporate America. I hear Halliburton's got another greatest hits package coming out..

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Stop by the Steel Store at: www.markvanallen.com

Donny Hinson · From: Glen Burnie, Md. U.S.A.

This is a common problem today. Companies first over-extend themselves by trying to buy out all the competition. In their whirlwind corporate expansion, all the executives and board members reap exaggerated salaries and bonuses, only to blame the ecomomy, some other industry, or some 12 year-old kid with a computer, for their own failure to maintain the company's profitability.

Executives revel in their own power, salaries and image, only to later bail out with all they can legally (or illegally) steal, leaving the lowly employees (the ones originally responsible for making the many companies a success) with nothing but excuses and pink-slips. As the other posters have stated, it's a truly sorry, but common, business model. But, when we have C.E.O.'s who set the Board's salary, and then Boards that set the C.E.O.'s salary, can we ever hope to have an uncorrupted corporation? I think not.

In our country, while many struggle to make ends meet, the term "millionaire" has become one of disgust for many Americans. Millionainres are seen as the ones who rob companies blind, and then leave them wallowing in a sea of debt or bankruptcy. They're seen as sports stars who garner millions each year, and then fail to perform to expectations. They're seen as spoiled Hollywood movie stars who rate 20 million dollar contracts for a single movie made in a just few months. They're seen as polititians who play global games and dole out other people's money, only to fail to bring about any significant improvement or change. Indeed, the millionaires, these mogul rulers of our world, are growingly seen today with a contempt that is only exceeded by that the French people had for their own monarchy during that country's famous revolution. Their pompous demeanor and greed for money and power permeates their very soul and being. It's drips from their persona like sweat from a day-laborer's brow. It reeks throughout the newscasts and newspapers on a daily basis, such that few people really believe there's such a thing as an honest millionaire, or one who truly earns and deserves their fortune.

With the rich people in our society's lack of humility and conscience being constantly exposed to everyone around the world, is it any wonder why so many people of other countries have come to hate the American, and all he represents? I think not. The problems of the music business are the problems of our entire society, and they aren't getting any better.

(Thanks for the article, John, and thanks to Rick Ezra, for telling it like it is.)

Kevin Hatton · From: Buffalo, N.Y.

Right on Donny. I hope Ken Lay and the rest rot in jail for the rest of their lives for all the working people they destroyed.

Bill Hatcher · From: Atlanta Ga. USA

When is the last time a poor person provided you a job by opening a business?

This "class warfare" stuff is a tired topic.

[This message was edited by Bill Hatcher on 24 March 2005 at 03:55 AM.]

Kevin Hatton · From: Buffalo, N.Y.

I'm not rich, I own a business, and employ two people, treat them like family, and put food on their table every week. The wealthy have been screwing their workers since the country started. The only thing thats tired are the consevative lap dogs that support that kind of immoral mentality. Their time is coming because everyone is losing their jobs while the corporate executives walk away with the workers money. Warner Music is a perfect example. Ask Travis Tritt what he thinks of Warner. You'll get an ear full.

[This message was edited by Kevin Hatton on 24 March 2005 at 07:41 AM.]

[This message was edited by Kevin Hatton on 24 March 2005 at 07:43 AM.]

Donny Hinson · From: Glen Burnie, Md. U.S.A.

Thank you Kevin, I agree!

Bill, open your eyes and look around! This is a Forum of musicians, most of whom work playing music for someone of limited means. This is not a country club, or the downtown athletic club, where most of the members are well up into 6 and 7 figure income brackets. The percentage of musicians here working regularly for "mega-stars" and "mega recording companies" is probably quite small, and even those sidemen who work for the "megas" are not rewarded equitably, in my humble opinion. Let me elaborate.

The way I see this business, most local musicians are working for a local singer who's making maybe $100-$200 a night. That local singer is probably paying their steelman $50-$100 a night.

Follow me so far?

Now, let's get up into the "big leagues". Here the "mega-star singer" is making many thousands per night, and what are they paying their steeler??? Maybe $200 a night. Well, if you don't see something seriously wrong with that picture, that's unfortunate. The rich go to great lengths to maintain an ever-increasing proportion of the profit (wealth) for themselves. Then, they feed people like you a "Pay no attention to the man behind the curtain!" line, and you fall for it, hook, line and sinker.

I'm not stupid enough to think that poor people employ anybody, but average people of average means employ a lot of people. I've worked for dozens of people who have no more than I do. Indeed, I've never played music for a "mega" star or large recording company, and probably never will. That doesn't mean that I will turn a blind eye to the inequities in the music system, inequities that are only enhanced and proliferated by people who don't care how many millions so-and-so makes.

I'm glad you're doing well and don't care. A lot of people aren't doing well, and they do care.

Bill Hatcher · From: Atlanta Ga. USA

The tirade against the "evil" rich is a liberal losing argument.

Your not doing good---do something else, don't blame it on rich people.

You don't have a job--get some training in a field that is not being outsourced or taken over by Mexicans and get you a new job--don't blame it on rich people.

You want to work for a star and only accept $200 a night--quit or don't gripe and don't blame it on rich people. There are plenty of steelers who will do this--it's called supply and demand.

I have made a living playing music now for 40 years. That is all I do. I don't play--I have NO money, so no need to instruct me to "look around".

My wife and I own three homes, all the cars are paid for, I have all the gear I need and nobody ever gave me anything. When musical situations dried up, I got my butt out and learned another style and improved my playing and got me another gig. When the disco craze hit in the 70s, I worked on my jazz chops and played in jazz clubs for 5 years. When the drinking age laws ran the young kids out of clubs and the WWII generation quit going out I learned to read shows and worked in the theatre world and slogged it out in the recording studios in the 80s.

Now there are no sessions because of computer generated music/sampling, and no club work to speak of, and the Broadway shows out of New York are mostly self contained. So what now?? I could sit around and blame it on the evil rich people--I found me a church gig playing guitar that pays about 30K a year and still leaves me all my weekends free to do other gigs. I got me some recording gear and learned how to operate it and joined in with the legions of others doing overdubs and such for custom projects. I bought me a banjo and a mandolin and a steel and some harmonicas and even some ethnic percussion stuff and learned how to play them so folks will call me for gigs.
I could have sat around and just blamed Ken Lay and Enron and now I guess I could blame Warner Brothers on the demise of the music business.

I have consistantly made decent money in the music business for all these years, through several stock market downturns, S@L scandles, couple of wars, disco music, Rap idiocy, Martha Stewart going to jail, on and on, because I focused on and adapted to what was happening and not on who I could blame things on.

If I was ONLY a pedal steel player and that is all I was capable of doing, I would be one terrified fellow. You better do some looking around. The pedal steel guitar is only utilized to any degree in ONE kind of music coming out of ONE city. There are plenty of cats there who do it REAL well. Where does that leave the rest of the steel community?

The liberal mindset is to ALWAYS blame someone else--especially those evil rich people. Wake up.

John Poston · From: Albuquerque, NM, USA

It's probably the same liberal mindset which gave us the 40 hour work week, child labor laws, OHSA, minimum wage, family and medical leave, protection against age discrimination, etc.

Some people would have the market decide everything, but the government has instituted several laws, taxes and regulations which help promote business so I believe they should be equally obligated to look out for the little guy.

I agree people need to adapt to changing times and go where the work is, but that doesn't let companies off the hook for unfair and immoral practices.

Bill Hatcher · From: Atlanta Ga. USA

There was a time when putting in more than 40 hours a week into your profession was respected.

All developing countries have used child labor up to a certain point, the US not excluded.

OSHA is a political joke.

The minimum wage is like working for scale. If your skill is such, then that is all you deserve.

Why should an employer be forced to pay you to take time off and have a baby or whatever you do with your family?

I watched "American Idol" last night--someone needs to speak to them about the age discrimination thing.

The government should stay out of all business in America. Every time a restriction is put on business, the last person to feel the restriction is usually the "little guy" you refer to in the way of a job loss or a benefit loss. All those costs of government restrictions are just passed on to consumers and to the labor force.

There you go with the liberal thinking--"the Gov. is obligated to do something for me".
Read the Constitution and the Bill of Rights and you will see what the gov. is obligated to do for you.

Wake up.

seldomfed · From: Colorado

Interesting article. But yes, all to common in corp. America.

The question is still open. How is it that CEO's, movie stars, pop singers, and genetically-modified ball players all obtain this percieved, individual high-value?

The article says...

Donny Hinson · From: Glen Burnie, Md. U.S.A.

Bill Hatcher · From: Atlanta Ga. USA

The Gov. was never set up to run on an income tax that taxes productivity and rewards non productivity.

I was working a hotel in Atlanta when the divestiture of the Bell system came down. I used to talk to the attorneys who were litigating the case for Bell. It was never in the plan for you to have a lower phone bill. It was done in order to take the regulations off of Bell so they could compete in the market place with the new upstart (at the time) cable companies who were forcing Bell to allow the use of the phone poles that Bell owned in order to string new cable and basically undercut Bells service. Bell was regulated by the Gov. in their pricing structures and the only way to compete was to break up the company--I am sure you knew all this right?
If you knew anything about this at all before you used the Bell analogy, you would know that your long distance service is actually cheaper than it has ever been due to competition--your local service charge is the part that has risen after the regulations were lifted. With the advent of the internet, you can get that service cheap if you want to. Check it out.

And as for as your comment about the money I make that is not mine. It's mine after I work for it, do a good job and fulfill all the obligations that come with the job. That is what is required of me and as long as I do that, they continue to hire me. I don't do it, and some one else comes along and takes my job. Your mentality is that because I do have a job and own some property, that I am now not in the ditch so now I am one of the priviledge few, lucky, fortunate, silver spoon fed, evil RIIIIICCCCHHHHH people that you despise simply because they have something and of course they are not supposed to according to liberal thinking.

Maybe you also don't know that according to gov. stats, anyone earning over about 100K a year is pretty much considered as part of the evil rich class, so you need to start disliking a LOT more people. This top 1% of Americans account for over 25% of all the taxes paid to fund the gov and also it's give away programs. After all, these people are just lucky right. That's why they have these jobs. Somebody just gave them these good paying gigs, so since they don't really deserve them the gov certainly should come and take their money from them and redistribute it to those who didn't do anything for it right??? Surely the gov should do this---right???

Wake up.

[This message was edited by Bill Hatcher on 24 March 2005 at 07:37 PM.]

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