What Do Bankers and Movie Stars Have in Common?

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Yes, they both enjoy summering in Hamptons. But that's not what I'm referring to. According to an article in the New York Times today, Hollywood actors are beginning to get a taste of something that Wall Streeters are also increasingly being force to accept: deferred compensation. Upfront salaries are being minimized, while performance based pay is making up the lion's share of total compensation. And this is a good practice for actors for the same reason it makes better bankers: results matter.

First, here's the gist of the Times' story:

Movie stars, who not so long ago vied to make $20 million or even $25 million a picture, have seen their upfront salaries shrink in the last several years as DVD sales fell, star-driven vehicles stumbled at the box office and studios grew increasingly tightfisted.

How bad is it?

Pretty bad.

Most of the three-dozen or so top-billed actors in the 10 films up for best picture in this Sunday's Academy Awards ceremony, including blockbusters like "Up" and "Avatar," appear to have received relatively minuscule upfront payments for their work.

Specifically:

Once upon a time, the biggest stars were rewarded with deals that paid them a percentage of so-called first-dollar gross receipts; that is, they began sharing in the profits from the first ticket sale, not waiting until the studio turned a profit. Now studios often insist that even top stars forgo large advance payments in return for a share of the profits after a studio has recouped its cash investment.

That sounds vaguely familiar, doesn't it? Sort of like if a banker created a security, but his compensation relied on the long-term profit that resulted? Why, that's almost exactly what's being recommended these days for Wall Street. Regulators and shareholders are beginning to demand that banker pay involve a larger portion of performance-based revenue, often in company stock. And if a deal goes sour, then that pay may even be clawed back by the bank.

Of course, in Hollywood, there's no such thing as a movie losing money it's already made. A box-office dollar received can't be later lost. So there's no claw back provision necessary in Hollywood like on Wall Street, but the idea that compensation should be based mostly on how much total profit is made off a product is the same.

And it should be: in both industries the individuals in question play with other people's money. If it's a banker, then investors, clients and shareholders put up the cash. If it's a movie star, then some production company or financier invests in the film.

Deferred compensation is good from a movie-lover's perspective too. I am always so frustrated when I see a big movie star do an terrible movie because the pay is good. I'm even more annoyed if I accidentally go see it, based on that actor's presence. While there are numerous such examples, a perfect one is Adam Sandler's "Little Nicky." Arguably Sandler's worst movie, it has the box office record to match. According to Box Office Mojo, it grossed $58 million worldwide, but had a production budget of $85 million. For those with no calculator handy, that's a loss of $27 million. Ouch. But Sandler was paid $20 million, according to the Internet Movie Database. He might as well have made a synthetic collateralized debt obligation referencing subprime mortgages.

Since Sandler would be paid handsomely whether the movie did well or not, he did not have to care much if the movie was a success. He was already a well-established comedian by then. A dud here and there wouldn't really hurt him. So why not collect a cool $20 million even if the movie fails? Yet, if his compensation was mostly back-loaded, dependent on performance, he would have had a greater incentive to think twice about signing onto such an awful script.

Ultimately, more deferred pay shouldn't really hurt actors: they'll just have to care about the movies they make. If they produce a stinker, their paycheck will feel the pain. That's the same paradigm that we want bankers and traders to face. Why not hold actors to the same standard?

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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