Think of it as Hollywood's version of a salary cap.
With moviegoing declining and production costs skyrocketing, studio executives are taking a harder look at the industry's most cherished and costliest perk: first-dollar gross profit.
The practice of giving A-listers first dibs on a studio's box-office take has long allowed the industry's top actors, writers and producers to grab the bulk of a movie's total receipts well before a studio has earned back its investment. But what's been good for the likes of Tom Cruise and Steven Spielberg has become increasingly problematic for studio executives.
In a move that some leading talent agents say would have been unthinkable just a few years back, studios are now placing a hard cap -- usually about 25% -- on how much of a film's revenue will be split with the talent. A growing number of studio deal makers also are eliminating the old pay system on a broad spectrum of projects, suggesting instead that actors, directors and producers essentially become financial partners in a movie's making.
The upshot of these new deals, which are called cash break-even, is simple: If the film is a hit, the directors, lead actors, writers and others will enjoy an even richer payday, but only after the studio has recouped its investment. If it's a bomb, the studio will be spared the ignoble task of cutting bonus checks on a money-losing dog.
"The economics are evolving in the movie business," said Adam Goodman, production chief at DreamWorks SKG. "Everybody has to recognize that."
The new formula is being used in deals for several upcoming features, including Walt Disney Co.'s big-budget "Pirates of the Caribbean" sequels and Steven Soderbergh's $30-million, black-and-white World War II drama "The Good German," which stars George Clooney.
Disney's dealings on its "Pirates of the Caribbean" movies dramatize why the new formula makes sense for the studios. It will cost Disney some $600 million to make and market the next two "Pirates" films, the first of which comes out this summer. For example, if Disney were to pay star Johnny Depp, director Gore Verbinski and producer Jerry Bruckheimer under the old formula, the studio would pocket only about 70 cents on every dollar coming in.
At that rate, Disney might not recover its investment for years.
But under the new formula, the studio will keep 100% of the revenue until it is reimbursed for its costs. After that, Disney will split the remaining proceeds with the film's cast and creators -- which could yield a windfall far greater than they might have received under the old system. (Director Michael Bay struck a similar deal on "Pearl Harbor," and his ultimate payday exceeded $40 million.)
"The budgets [of big movies] are just too high," said Disney production chief Nina Jacobson, who declined to comment on the "Pirates" deal. "You can find yourself, under a traditional first-dollar gross deal, writing huge checks while you are bleeding. It just doesn't seem fair. It feels great to be writing checks in success. But it kills you to be writing checks in failure."
Talent agents and show business lawyers are skeptical of the shift. They fear the new contract terms are another way for the studios to amass more profit for themselves while sharing fewer proceeds with the people who actually dream up and make the movies. After all, Hollywood studios have a reputation for getting creative with their bookkeeping.
Peter Nelson, an entertainment industry lawyer whose clients include Peter Jackson of "King Kong" and Andrew Adamson, the filmmaker behind "The Chronicles of Narnia: The Lion, the Witch and the Wardrobe," worries that the new compensation formula is more an accounting ruse than a true partnership.
"The studios have made a fine art out of creating contract definitions that have no relation to reality," Nelson said. "These definitions just create new profit streams for the studios."
He notes that even though studios complain that mid-priced dramas have become the most financially risky productions, the studios are pushing for the new pay formula on high-budget franchise films.
"If the middle movies are the ones where the studios are getting hurt, why aren't the studios pushing for cash break-even on those movies, rather than on the big movies, where they are theoretically making most of their money?" Nelson asked.
The new formula is one of many strategies that Hollywood is employing to improve its movie margins as it grapples with growing costs, declining ticket sales and slowing growth in ancillary markets, such as DVD sales. Warner Bros., for example, has enlisted Wall Street investors to split the budgets on some of its priciest productions, including "Batman Begins" and "Superman Returns."
The speed in which Hollywood's deal-making sands are shifting is evident when it comes to writer-director Nancy Meyers and her movie "Holiday," which is due out this Christmas.