The Financial Manager’s Perspective: Most of us took note of Conan O’Brien’s $32.5 million settlement earlier this year. However, as Wendi S. Lazar, a partner at law firm Outten & Golden observed, “You don’t need to be at the pinnacle of the entertainment food chain to feel the effects of the contract process, or how the balance of power can shift.”
In her article, “Lessons From Conan,” which appears in the current issue of MFM’s The Financial Manager magazine, Lazar reminds us that the recent economic downturn has placed new pressures on the process as staff reductions result in fewer roles and opportunities for station talent.
One of the key lessons? “Regardless of the level of talent or employee concerned, O’Brien’s settlement points to a primary rule: agreements need to be specific and consistent,” Lazar advises. She points to press reports that O’Brien’s contract specified the exact time of his program’s late-night slot. If it hadn’t, he would likely have been forced to move it to a different time period, or, if he had breached his agreement by leaving, he would have been required to pay damages. And his team wouldn’t have received an additional $12 million.
According to Lazar, the challenge lies in creating documents that accurately reflect the intentions of parties on both sides of the negotiation table. “In the media business – where change is happening at lightening speed, and technology is affecting roles, opportunities, and costs – everyone needs to insure that their documents take the future into account as well as the present,” she notes.
These factors illustrate lesson #2: Anticipating potential issues during a negotiation and papering the deal effectively in an agreement is key. Lazar gives the example of companies that may want and need flexibility due to the possibility of a merger; a reduction in staff; or the subsequent success or failure of a program or series. From the talent’s perspective, he or she may need security and guarantees, since signing one contract could mean giving up other career opportunities.
Because the parties may not always agree, Lazar believes it is essential to assign a value to what is most important to each party, and to assess the level of risk, tolerance or flexibility that is needed to make the deal. “On a basic level, every talent agreement should define the role, duties and responsibilities inherent in the position. Is the role local or global? To whom does the talent report and who reports to him or her? Is he or she anchoring one show a day or three, and will the network be able to rerun the show on cable, the Internet or by posting it on YouTube?”
Addressing these issues requires specificity in the agreement. For a major star, it could be who her co-star is; the size of her trailer; or who is doing her make-up and hair. In drafting or responding to these agreements, these non-business terms may be material and must be spelled out in explicit detail to avoid ambiguity.
These considerations may also apply to management contracts, Lazar notes. For example, an executive’s deepest concerns may include the location of his or her office, or the reporting line or authority.
Once the non-business terms are established, the specific business terms must be clearly articulated in the contract. Lazar advises that it’s important to define matters like the requisite performance with clear targets and goals when compensation is attached to the terms. She also reminds negotiators to ensure that sales levels for products, such as DVDs, are stated in the agreement, so that there is no second-guessing by the parties as to what triggers certain payments.
The level of guaranteed payments and the timing of these payments will also change, depending on the leverage of the talent. Senior-level executives and some major “stars” will have the leverage to negotiate and specify their own terms and conditions and to receive enhanced compensation and benefit packages accordingly, Lazar finds.
However, the new economy is affecting these deals as well. For major talent, the deals are less frequently driven by large upfront salaries. Instead, talent is lowering their fees and taking a piece of the gross – the backend. Lazar points out instances where big stars have risked millions this year, with contracts that only paid out if the show was deemed successful in accordance with terms and conditions.
The same situation has been holding true in contracts with high-level executives, according to Lazar. The deals are less about upfront cash and stock and more about deferred cash or equity that vests over time and is likely to be based on reaching target performance goals. For both these groups, the financial rewards will depend on clarity in terms of defining net, gross and ultimately, defining success, she notes.
On the other side of the negotiating table, talent may need to spend more in order to prove their worth in this economy, Lazar suggests, because they may need to hire compensation experts in addition to lawyers. “Proving your worth is worthless if the agreement is not clear on the factors that will contribute and pay out bonuses, back-ends and residual payments” she says.
Lazar’s article goes on to include a number of recommendations in light of these “lessons from Conan. They include:
Boilerplate Vs. Tailored Contracts
• Boilerplate agreements can be treacherous if they are overly broad or overly inclusive.
• Ensure your boilerplates are updated to redefine new technology terms and address electronic or digital rights.
• Non-compete clauses that apply to all employees but haven’t been structured to address individual talent competition or solicitation, may be found unenforceable in certain states when other factors are present.
• Boilerplate agreements that do not capture the specific and individual reason for an early termination of an agreement, or that allow for competition if certain trigger events take place, may be costly for talent when they look for and attempt to secure new opportunities after leaving the position.
• Individually drafted agreements give both parties an enhanced opportunity to examine and understand their relationship without a preconceived form to inhibit or govern it.
• Once basic terms and business terms are agreed upon and both parties have significantly invested in the process, it is time to engage in a more aggressive negotiation over the legal issues that likely remain.
• Terms for Departure
• From an executive’s perspective, the essential legal terms worth fighting for concern the grounds for termination; how termination effects compensation; and severance, and what, if any, restrictions there are on future employment.
• A “for cause” definition for termination should present a high threshold of wrongdoing before an employer can terminate talent.
• An executive agreement should have objective qualifiers such as willful misrepresentation or material breaches before “cause” can be triggered.
• An ability to resign for “good reason” generally means an executive can voluntarily resign if an employer drastically changes the material terms of the employment relationship, or there is a change in control of the company
• Each state has its own laws about what kinds of restrictions are reasonable and enforceable, and this will be a consideration before signing an agreement.
• Many states will only enforce these provisions if there is adequate compensation in exchange for the restriction.
• Executives and talent should consider whether being out of the business for even a minimal amount of paid time will negatively affect his or her chance for a position in the future and agree to language that is relatively limited.
Lazar’s article concludes with the advice, “Making sure an experienced attorney who understands the deal and who has properly translated and crafted what is intended by the parties will help to eliminate uncertainty and tribulations in the future and result in a stronger and more balanced contract.” I couldn’t agree more. While I share her observations as part of MFM’s mission to educate the industry on matters affecting the business of media, they are not intended to diminish the importance of seeking legal counsel for these matters. As we saw with the “Lessons From Conan” one condition can be very costly to one of the parties involved.
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-- Mary M. Collins, President & CEO, Media Financial Management Association