Chernin's pay day.

NEWS Corp. Chairman and Chief Executive Rupert Murdoch seems to have turned good compensation practice on its head by approving a new employment agreement for Peter Chernin, his president and chief operating officer.

Under the agreement signed on Aug. 1, and which extends through June 30, 2009, Chernin's base salary has been lowered to $3.8 million from its astronomical $8.3 million, (Even the $3.8 million salary is the highest I could find in a compensation review of U.S. COO's running companies with net sales in the $15 billion to $135 billion range.)

But in another part of his employment agreement, we find that the company will be contributing $358,334 a month to a fully vested savings account. That gives Chernin a total annual contribution of $4.3 million. Add that to his reduced base salary of $3.8 million, and you get a base salary of $8.1 million--only $200,000 less than where we- and Chernin--started.

The bonus section of Chernin's new contract calls for annual bonuses of up to $25 million a year--based on a formula that compares News Corp.'s earnings per share in the current year with that of the preceding year.

But the EPS figure used to compute Chernin's bonus may not necessarily be the figure you see in the company's annual report. That's because there are a few exclusions made in determining the EPS for bonus purposes. They include non-cash intangible asset impairment charges and write-downs on investments to realizable values; gains or losses on the sale or other disposition of businesses or investments; extraordinary items; and the costs of material business restructurings, reorganizations and relocations.

So, to a significant degree, EPS can be tailored to produce a much better result for Chernin than for the shareholders for whom he is supposed to be working.

Even if the current year's EPS drops as much as 12.5 percent from the preceding year, Chernin still gets a $4 million bonus. If EPS increases by 40 percent or more. Chernin's bonus rises to $25 million. On its surface, a requirement to boost EPS by 40 percent would seem to justify a huge bonus.

The bulk of his pay, as I see it, is coming from a cushy base salary, a luscious savings plan and a bonus plan that looks as though it were designed personally by Chernin.

I well remember my one encounter with Murdoch back in the late 1980s. I was then the consultant to 20th Century-Fox and was in Los Angeles getting ready to make a presentation of a proposed new long-term incentive plan to the studio's top executives. Before I entered the meeting room, Barry Diller, then the head of Fox. took me aside and said: "Rupert is in town today, and he likes to roam the corridors. So it's possible he may show up in the middle of your presentation and sit for a bit. Don't get alarmed. Just keep going as if he had never come in the room."

Sure enough, Rupert showed up. He listened for about 20 minutes, asked a couple of intelligent questions and then walked out.

There's a lot to be said for "management by walking around." Yet I wonder if Rupert was walking around somewhere else when Chernin's agreement was constructed.

--Graef Crystal, Bloomberg News