Disney Trial Witness: Ovitz Was Paid 'Unreasonable' Amount

The compensation package granted to former Walt Disney Co. (DIS) president Michael Ovitz (search) was "unreasonable" and not in the interest of the entertainment giant's shareholders, a compensation expert testified Monday in a shareholder lawsuit.

Kevin J. Murphy, an economics and law professor at the University of Southern California (search), testified that Ovitz's annual base salary and bonus were well above what was paid to similarly situated media executives, as well as presidents who didn't hold the title of chief executive in Fortune 500 companies.

The median combined salary and bonus for presidents who weren't CEOs in Fortune 500 companies was $540,000, Murphy said. Ovitz's annual salary and bonus was $8.5 million, he said.

Murphy is an expert witness for a group of shareholders suing Disney over an estimated $140 million severance package paid to Ovitz when he left the company after 14 months.

"The initial contract was one of the most generous — if not most generous — ever offered to a non-CEO level in corporate America," Murphy said.

The shareholder derivative lawsuit, which has been in progress for more than seven years, claims Disney's board failed in their fiscal responsibilities by not properly scrutinizing Ovitz's employment contract when he joined the company in 1995 and then granting him a non-fault termination in 1996 that entitled him to the massive severance package when he left in December 1996.

Murphy said Ovitz, when he was hired by Burbank, Calif.-based Disney in October 1995, received a five-year contract that paid him $1 million a year in salary, an annual bonus of $7.5 million and granted him 5 million stock options that Murphy valued at $107.1 million.

It also granted him an additional payment of $10 million, in addition to his salary and bonus through September 2000 and immediate vesting of all of his stock options, if he was given a non-fault termination by Disney, Murphy said.

In particular, the option grant at the time was the largest grant ever to an executive at a public company, Murphy said. The next closest was an option grant valued at $71 million given to Disney chief executive Michael Eisner (search) in 1989, Murphy said.

Ovitz ultimately exercised less than half of his options, Murphy said.

Murphy said he saw no evidence that Disney's board reviewed any comparison of Ovitz's compensation package to similarly situated executives before approving his employment contract — other than a cursory presentation made to two members of its compensation committee.

At the same time, Murphy said Ovtiz's contract was architecturally different from the 1989 employment agreement for Frank Wells, Disney's former president and chief operating officer. Wells died in a helicopter crash in 1994.

Wells' base salary was $400,000, compared with Ovitz's $1 million base salary, Murphy said. Eisner's base salary at the time was $750,000, he said.

Ovitz's annual bonus was set at the discretion of the board of directors and chief executive, Murphy said. Wells' annual bonus was equal to 1 percent of Disney's net income, he said. A portion of Wells' bonus also was granted as restricted shares and would have to be forfeited if he were terminated for cause, Murphy said.

Ovitz's 5 million options were exercisable at $57 a share — the market price at the time of the grant in 1995, Murphy said. As a result, he was able to exercise options well below the market price as Disney's shares continued to increase after he joined the company, Murphy said.