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Arts & EntertainmentHollywood

Hollywood stars vs. CEOs: Who’s getting the better deal on pay?

Geoff Colvin
By
Geoff Colvin
Geoff Colvin
Senior Editor-at-Large
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Geoff Colvin
By
Geoff Colvin
Geoff Colvin
Senior Editor-at-Large
Down Arrow Button Icon
August 25, 2021, 8:30 PM ET
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When Scarlett Johansson recently sued the Walt Disney Company for allegedly knocking several million dollars off her pay as star of Black Widow, she turned a klieg light on an epochal change in Hollywood finances. Less visibly, and for different reasons, CEO pay is also being transformed. Life is changing for some of the world’s most highly paid people, and you’ve got to wonder: Who’s coming out ahead?

Johansson is miffed because Disney released Black Widow in theaters on the same day it began offering the movie on the Disney+ streaming service. Her contract, signed before Disney+ existed, includes hefty bonuses based on box-office receipts. Since Disney+ undoubtedly siphoned revenue away from theaters, Johansson claims she’s getting paid far less than she ought to, and she wants monetary and punitive damages. Disney responds that “there is no merit whatsoever to this filing.”

The spat exemplifies a much larger trend: Movie and TV stars will no longer be paid as they have been for decades. Top-tier actors have long negotiated contracts that give them so-called back-end compensation in addition to an initial fee. The back end for a movie might be a percentage of the revenue, which is what Johansson says she is getting for Black Widow. For TV series, the back end has generally been a piece of the syndication sales after the show’s network run. The resulting pay is less certain, and spread across years, but potentially much larger than a flat fee.

Now, in a world of streaming services, that model makes less sense every day. Netflix, Amazon Prime, Disney+, HBO Max, and many other streamers produce much content exclusively for the service, where there is no back end. Decisions on when or whether to put content in theaters are sometimes made late in the game. TV syndication doesn’t exist in the streaming world; hit series like The Crown (Netflix) or The Marvelous Mrs. Maisel (Amazon Prime) can just stay on the service forever.

So top stars are increasingly being paid the old-fashioned way: with a big, fat check. In the old world, initial fees before the back end for A-list stars topped out at $20 million. Now Warner Bros., a corporate sibling of the HBO Max streaming service, has paid Denzel Washington and Will Smith $40 million each for their roles in The Little Things and King Richard respectively, Variety reports. The reason: “to account for diminishing box office in light of streaming premieres.” Dwayne Johnson could get some $50 million for Amazon Studios’ Red One, says Variety, once the price of the back-end buyout is agreed on.

The future seems clear. “Backends are going away,” writes Richard Rushfield in his popular Hollywood newsletter, The Ankler. “This is a transition as old contracts are converted, some with more screaming and table-pounding, some with less. But the destination is the same.”

For high-earning CEOs, the trend is exactly the opposite. The back end is becoming the whole game, or nearly so. Look at any list of the year’s most richly rewarded bosses, and those nine- and ten-figure pay numbers are almost entirely stock-based awards that may or may not pay off years down the road, depending on performance. Driving the trend are activist investors and increasingly independent boards of directors, who want to incentivize bosses more strongly than ever.

Salary—the CEO equivalent of the stars’ initial fees—is becoming insignificant or even nonexistent. Tesla CEO Elon Musk receives no salary at all. He’s a founder, but hired-hand CEOs are also paid primarily on the back end. Consider General Electric chief Larry Culp: His 2020 pay was 99% back end, consisting of stock-based awards valued at $72 million. He declined most of his salary and all his bonus in light of the pandemic, but even if he hadn’t, his pay package would still have been over 90% based on GE stock’s uncertain future.

That uncertainty goes to the heart of who’s better off as these pay trends diverge—Hollywood stars or CEOs. The likely answer: CEOs. Back ends are disappearing from Hollywood because in the streaming world there’s ever less data on which to base them. As revenue comes increasingly from monthly subscriptions and less from ticket sales, dollars-and-cents evidence of fans’ favorite actors becomes scarce. In the current transition period, mammoth checks still go to stars who proved their worth in the box-office era (like Washington, Smith, and Johnson). But in 10 years, how will producers know who—if anyone—is must-have talent? In losing their risky but potentially lucrative back ends, actors also lose their bargaining leverage.

CEOs, by contrast, gain at least a chance of making far more money than ever. Depending on their pay package, they could cash in even in a market downturn if they outperform their peers. If they underperform, they may have to scrape by on salary, typically a measly million or two, for a while. But boards often respond by creating rich new stock-based awards that will incentivize the CEO to improve performance from a new, lower base.

The overarching principle is that when people are paid for performance, objectively measured, they tend on average to perform better and get paid more. That may seem strange, considering that most people don’t like having their performance at work measured too closely. But like it or not, movie stars will eventually be sorry that measurement of their performance is decreasing, and CEOs will be glad it’s increasing.

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About the Author
Geoff Colvin
By Geoff ColvinSenior Editor-at-Large
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Geoff Colvin is a senior editor-at-large at Fortune, covering leadership, globalization, wealth creation, the infotech revolution, and related issues.

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