How Hollywood Accounting Works

Why Does Hollywood Work This Way?

Warren Beatty earned 40 percent of the gross profits of "Bonnie and Clyde," inspiring movie studio executives to devise ways to keep more money for themselves.
Warren Beatty earned 40 percent of the gross profits of "Bonnie and Clyde," inspiring movie studio executives to devise ways to keep more money for themselves.
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Hollywood didn't exactly design this accounting system. Instead, it seems to have evolved this way over time. There are conflicting stories about which star was the first to buck the traditional studio system, in which talent was under contract with the studio for a fixed weekly or monthly rate. Rita Hayworth is said to have had a William Morris agent who, in 1946, got her 25 percent net profit of her movies, along with script approval. Jimmy Stewart waived his usual upfront cash requirements to act in the 1950 movie "Winchester '73" for a piece of the net back-end profits [source: Daniels et al.]. Because these deals were new, the studios didn't know enough to rig the contracts, and they turned out to be lucrative for both actors.

In the 1960s and 1970s, actors, producers, directors and even writers took part in the gross and net profits of hit movies. Warren Beatty, for example, shepherded the production of and played the lead role in "Bonnie and Clyde." In addition to earning $200,000 upfront for his work, he also took 40 percent of gross profits. The movie was not expected to make much when the deal was struck, but it has since earned more than $150 million. That means he has earned about as much as Sandra Bullock would make on "Gravity" nearly 45 years later.

Beatty took a risk on the movie, and it made him a very rich man. His success even prompted studios to take a closer look at the over-generosity of its contracts. Two lessons were learned: Participation motivated those who were involved in the film, and the studios needed to tighten up their contractual reins. In the decades since, Tinseltown has made profit sharing seem like an enticing dream to more and more people, while, at the same time, reducing the actual profit shared [source: Stafford].

Like Beatty, today's power producers, directors and actors who get first-dollar gross might do it to take a chance on a riskier movie or an independent film. Leonardo DiCaprio is said to have taken a pay cut to act in "Inception," but his percentage of first-dollar gross earned him around $50 million [source: Bacardi]. Tom Cruise earned no upfront compensation for producing and acting in "Mission: Impossible II," but his production company received a rare deal for 30 percent of the film's adjusted gross [source: Epstein]. Those who don't rate first-dollar gross might instead receive a bonus payment, made regardless of profit.

That's the other benefit of Hollywood accounting: No one knows exactly how much anyone makes. It's a system based on rumor and innuendo, leaving people in Hollywood speculating about how much everyone else is actually making compared to what's in the contract. Even the distinction for a player who can get first-dollar gross can be substantial in building and maintaining a career.