#bonus structure

The way it was explained to me is that there are two major elements that get people to buy a game: the game itself and marketing. The metacritic review aggregate is generally thought of as the overall gauge for the game’s quality. If the sales are good but the reviews are bad, it means that marketing is largely responsible for the sales and should be rewarded. If the sales are good and the reviews are good, the dev team gets rewarded. Many people don’t like this, but it is a view held by some executives. These sorts of bonuses are generally not part of the contract with the publisher and offered by the publisher as an added incentive. 

I am not personally a fan of these kinds of bonuses because they tend cause a lopsided incentive structure overall. The main issue is that it encourages people to work on “safe” projects and punishes untested projects and ideas. If you’ve got two projects at your studio - reliable sequel to old game and brand new IP game that is scheduled to release in a year and a half, the financial incentive bonus structure pushes experienced and senior devs firmly towards the reliable sequel instead of the new project. Any new IP has a much lower chance of doing well in sales and much harder carving out a new niche. Tying bonuses to performance like this discourages innovation and experimentation even more when new ideas already start behind developing sequels. It’s a tricky situation to navigate, but I think it is better to remove as many potential roadblocks for new games as we can.

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This, like most situations, is a lot more complicated than most would have you believe. Yes, Activision-Blizzard (stock ticker: ATVI) announced that 2018 was a record year. At the same time, they also announced that they predicted that 2019 is going to be a notably leaner year than 2018 - to the tune of an estimated $100,000,000 less in operating revenue. In order to reassure stockholders from dumping the stock, ATVI pre-emptively announced they would cut costs to help make up for that shortfall, primarily by dialing back on investments they feel didn’t pan out like Blizzard’s esports division. [I wrote about the situation in greater detail in a previous post].

Next, they don’t have a new CEO. Bobby Kotick is CEO of Activision-Blizzard, and has been since 1991, back when it was just Activision. They gave their CCO (Chief Corporate Officer) Dennis Durkin the title and all responsibilities of being CFO (Chief Financial Officer). For doing this, [Durkin received a bonus package valued at $15 million, not $75 million]. ATVI probably gave him such a sweet deal because they’ve had several executives depart recently (Mike Morhaime (President of Blizzard), Amrita Ahuja (CFO of Blizzard), and Spencer Neumann (CFO of Activision-Blizzard) have all left the company within the past six months) and didn’t want it to look like the leadership was fleeing the company. 

Here’s the thing. Executive level compensation and bonus packages tend to be a lot more complex than just “here’s a suitcase full of money” that most people tend to gloss over. First off, most executive salaries (and bonuses) are primarily paid in stock, not money. Take a look at [this chart], it shows the ATVI executive pay distribution from 2017. Dark blue is stock. Light blue is money.

There are all sorts of legal restrictions placed by regulators like the SEC on the stock that corporate executives are paid like [Rule 10b5-1], in order to guard against insider trading. Most of the time, insiders can only sell a certain amount of stock per year, declared ahead of time according to a specific schedule. Furthermore, the stock price isn’t locked in - it fluctuates all the time. Activision’s stock price on March 5th, 2018 was $81.50 per share. Today (Feb 26th, 2019) it’s $42.18. This means that, if Kotick got $24 million worth of stock then, that exact same stock would be worth a little over half that today. So, while the value reported in 2017 of Kotick’s compensation in 2017 might have been nearly $29M, that pay has since lost about half of its value. Executive pay is inexorably bound to the stock price.

Bonus packages are even more complicated because they come with strings attached. Durkin’s $15 million bonus package was about $11.3 million in restricted stock units and $3.7 million in cashwhich are awarded over a period of years (usually four years minimum, but it depends on the contract), contingent on personal and company performance. What this actually means is that Durkin actually gets very little up front. What he gets is a legal promise - if he stays at the company for the next four years and he hits his goals and the company does well, then he gets a chunk of the bonus stock and money after each year. If the company does not hit the goals listed in his bonus agreement, he gets significantly less. If he leaves the company early or does not fulfill his duties, he has to give everything back. The bonus stock he gets is also subject to the exact same legal restrictions as the stock he receives as a salary - he can only sell a certain amount at certain pre-set scheduled times.

So… could they scale back the executive compensation? I’m sure they could. But even in that case, the company would just have a bunch of additional shares of stock and most employees must be paid in cash, not stock. The company could sell those shares of stock to raise money (a process called [Equity Financing]) to pay for all of those employees, but that sort of thing is also tightly regulated by the Securities and Exchange Commission (the SEC) and has its own effects on the stock price. And even then, it still wouldn’t fix some of the underlying problems, such as having a staff of esports coordinators/managers/etc. when they are trying to reduce their esports investment.

Overall, it’s still a bad situation for those involved. I wish that things were otherwise, I really do. And yes, I agree - I think that the executives are almost certainly overpaid. Reducing their pay might make you (and those laid off) feel better, but it won’t actually do much else. This isn’t a situation where somebody can just toss out a simple solution and everything is fixed. There’s a lot of laws and regulations involved, and there are still core problems that have nothing to do with just funding. The biggest unsolved problem is that ATVI invested big in esports (especially Blizzard esports), hoping it would pay off… and it just didn’t. That’s why they announced that they will be refocusing on developing games and game content (and hiring more developers to do so) and scaling back on non-development investments like esports. So what do you do with an entire esports division if you aren’t going to put more money into esports? It’s a ball of absolute suck that this meant so many talented, dedicated people lost their jobs, but there’s not a lot else you can do short of magically transforming them into programmers, artists, designers, and producers or just continuing to throw money away paying people to do nothing.

The FANTa Project is currently on hiatus while I am crunching at work too busy.

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Profit sharing, bonus pay, royalties, etc. all depend on the agreements in place between the studio and the publisher. There’s two primary ways of rewarding developers for the creation and shipping of a game - bonus targets and royalties from game sales. I think, however, that the latter is becoming less common than it used to. I’ll go into them in a bit more detail.

Bonuses are usually annual payouts to employees of publishers. They are primarily tied to how well the company is doing (Is it profitable?), but also to the employee’s annual performance evaluation (Are you contributing?), and affected by factors like how well the studio is doing (Did the games games your studio worked on do well?), and how well your game did. The publisher decides on a total bonus pool, and then that money is allotted to the studio itself, which then disburses those funds at its own discretion. Some studios, like one of the independent ones I used to work for, kept the bonus funds and reinvested it into the studio itself. Others (like the one I am currently working for) paid out bonuses to each of the employees.

This is where the infamous Metacritic score can kick in - some publishers award larger bonus pools if the Metacritic score is above a certain cutoff. The general mindset regarding that is that a game that sells well with a high metacritic score is due to the quality of the game (so the devs get rewarded), while a game that sells well without a high metacritic score is due to the efforts of the marketing team. Obviously, this doesn’t account for everything (and it isn’t even necessarily correct some of the time), but those sorts of decisions are usually handled by publishing executives and studio heads.

Royalties are the other option, and the one you asked about specifically. There’s a few reasons that royalties aren’t quite as popular anymore - firstly, it has to do with what the studio has negotiated with the publisher in their contracts. Some studios like Infinity Ward, Bungie, etc. negotiated royalties for their employees as part of the publishing deals they had. Others didn’t - it’s entirely dependent on the sort of leverage that the studio has in the negotiations. Secondly, team size has increased significantly since the days of yore. Sharing a pie with 30 people nets you a much bigger slice than sharing it with 200. 

Royalties are also becoming less and less frequent because of the signal to noise ratio. There are a lot more games coming out today than there were in the years before. Most games get a significant drop/stop in sales after the first few months, which means that royalties and bonuses are usually about the same. The main difference comes in the form of really long-lived games, or games that significantly exceed sales expectations (sleeper hits). Buying old games still does pay out depending on the contracts that are still in force as long as the conditions are met. Some contracts may require the developer to still be an employee of the studio that made the game in order to continue to receive royalties, and that studio or publisher may not even exist anymore.