The Walt Disney Company brought in Michael Eisner, a Paramount executive, as CEO in 1984. The Disney board of directors agreed to pay Eisner a salary of $750,000, plus a signing bonus of $750,000, plus an annual bonus equal to 2 percent of the dollar amount by which Disneys net income exceeded 9 percent return on shareholders equity. In addition, Eisner received options on 2 million shares of Disney stock, which meant that he could purchase them from the firm at any time during the five-year life of the contract for $14 per share.

1. 1. At the end of 1984, shareholders equity was about $1.15 billion. How much would Eisners 1985 bonus have been if Disneys net income that year were $100 million? If it were $200 million?
2. 2. In 1987, the price of Disneys stock rose to about $20 per share. How much were Eisners options worth?

1. 3. Eisners bonus was $2.6 million in 1986 and $6 million in 1987. Including the stock options he exercised, his compensation in 1988 was about $41 million, a record at that time for any U.S. executive. In 1993, his total compensation was about $202 million, again a record. Comment on the use of this compensation model as solving the principal/agent problem by first explaining the problem and then discussing the specifics of its application and effectiveness. Consider short-term and longer-term applications in your comments.