Contributing Reporter

Incentive pay may be making corporate America's executive ranks rich, but in Hollwood, profit participation is usually a frustrating game of "heads we win, tails you lose."

It all boils down to how a studio defines "net profit" and for many lower-level players promised a piece of the action, net profit never comes.

Take, for instance, the blockbuster hit "Forrest Gump," which grossed more than $650 million worldwide and ranks among the top five highest-grossing movies of all time. Mega-star Tom Hanks reportedly received more than $30 million in gross profit participation from the movie on top of his acting fee. But author Winston Groom, who wrote the book on which the film is based, was promised 3 percent of the net profits in a word, nothing.

That's because "Forrest Gump," for net profit participation purposes, lost $62 million, according to Hollywood accounting standards.

Bottom line: Not all participants are created equal. Only the top stars and directors who have the power to pull in audiences are offered gross participation, or "first-dollar" rights. Typically, gross participation means that the top talent gets a percentage of a studio's gross receipts from a movie, without any deductions for production costs or distribution fees (though some expenses, such as residuals and nominal fees, are taken off the top).

A major star or director, and sometimes a marquee writer like Michael Crichton or Tom Clancy, can negotiate gross participation of anywhere from 5 percent to 15 percent. So in the case of a studio that receives $100 million from theaters for a hit movie, and deducts $5 million in nominal fees, gross receipts would equal $95 million. A major star, such as Jim Carrey in "The Truman Show," might receive 10 percent of the studio's gross receipts.

Typically, though, top actors and directors aren't likely to accept only gross participation. It's too risky. Instead, they will negotiate an up-front fee, say $20 million for the likes of Carrey or Hanks, which is usually a non-refundable advance against the actor's gross participation. The star would then receive additional compensation only when his share in the gross receipts surpassed $20 million.

It is in the studio's interest, of course, to keep the number of these gross participants as small as possible. At any one time, there are only a few actors, directors and producers who have sufficient clout to qualify. Though no actual list exists, anywhere from 10 to 20 of Hollywood's most accomplished actors, directors and producers, in addition to a handful of hot writers, can garner a share in a movie's gross lucre.

Mel Gibson, for instance, took home as much as 15 percent of the gross for "Braveheart." And for "Forrest Gump," Tom Hanks reportedly received more than $30 million in gross-receipts participation. Directors James Cameron and Martin Scorsese merit the perk, as does action-flick producer Jerry Bruckheimer.

Net profit participation, on the other hand, goes to lesser lights, such as co-stars and writers. For the most part, these deals are worthless. One study found that less than 5 percent of films actually show a profit for net profit participation purposes.

"It's very convoluted and has nothing to do with true accounting profits where X dollars come in, X dollars go out and the difference is profits," said Bill Abrams, an entertainment lawyer and accountant at Abrams, Garfinkel & Rosen LLP in Los Angeles. "The studios strip out so much money before you get to a bottom line that, in essence, there's no profit."

Exactly what the studios strip out in net profits has been the subject of several lawsuits, most notably Art Buchwald's case against Paramount Pictures over the movie "Coming to America," which grossed more than $350 million but showed a loss of $18 million for net profit participation contracts. The court found in that case that some of the studio's accounting provisions were "unconscionable," though the decision was appealed and later settled out of court. Other lawsuits have followed, including a case brought by "Forrest Gump" author Groom, also filed against Paramount.

Not surprisingly, all the major studios contacted for this article refused to comment on how they calculate net profits. Generally, though, studios subtract five costs: the actual cost of producing the film (called "negative cost"), a distribution fee (ranging from 30 percent to 60 percent of the film's gross), costs of advertising and film prints, an overhead fee and interest charges on the production costs and distribution expenses.

"If you are standing behind those five areas of expenses and fees, it's unlikely that the talent will ever see any money," said William Sobel, an attorney in the Los Angeles firm of Edelstein, Laird & Sobel who has represented the likes of Glenn Close, Whoopi Goldberg and Bette Midler in profit-participation negotiations. "The list of movies that have grossed hundreds of millions of dollars and never have paid out any net participation is substantial."

What's more, because the studio's distribution fee is typically a percentage of the film's gross and not a fixed amount, as the film gross rises, the studio's share increases proportionately while net profit participants still end up with zip.

Some movies actually pay out net profits but not much. "It's rare enough," said Sobel, "that it's a major event; it's like winning the lottery."

Even if a movie eventually becomes successful through video sales and rentals, marketing tie-ins and sales of television rights, it generally takes years for all the money to trickle in, which further puts off profit payouts.

Perhaps that is why more and more of Hollywood's top talent are creating independent companies that serve as one of those five profit-eating entities.

"That's how the big stars make their money now: by owning the production companies that make the movies, not by being an employee of Paramount doing a big movie," said Abrams. "That's the windfall of being a big star. They are saying: 'Forget this form of you giving me the profit participation. I want substance here, I want to be a partner.' "

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