Libertys Masters Benefits from Mergers

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Lee Masters may be known as one of the top programming
executives in the cable industry, but you can add savvy negotiator to that list, given the
compensation package the Liberty Digital president and CEO could wrangle from his bosses
this year.

Masters -- who surprised the industry when he resigned from
E! Entertainment Television in January to head Liberty Interactive, the
interactive-programming arm of Liberty Media Group -- has engineered a compensation
package that could bring him more than $61 million per year for the next five years, the
length of his employment agreement.

What has helped to boost Masters' annual paycheck
significantly is the series of mergers that eventually folded his Liberty Interactive --
as well as Liberty Media's Internet and interactive-programming assets -- into TCI
Music, creating Liberty Digital.

That deal caused TCI Music's stock to skyrocket -- it
had languished in the $3- to $4-per-share range, but it reached as high as $41 after the
news broke. The stock was trading at $23.25 per share last week.

According to a proxy statement filed last week by TCI
Music, most of Masters' big payday will come in the form of stock options, which have
appreciated rapidly in the past few months.

Masters will receive a salary of $750,000 per year --
double what former president and CEO Thomas McPartland received last year -- and stock
options for 15.2 million shares of TCI Music stock at a purchase price of $2.46 each.

Based on TCI Music's stock price last week, those
options alone are worth $353 million. The difference between the option price and the sale
price means that Masters could net about $311 million over five years if the current
trading price holds.

Masters vests about 20 percent of the options in each year
of his employment agreement, making them worth about $62.2 million per year.

In addition, he receives a golden parachute equal to
another 15.2 million shares at $2.46 each. Those options are only exercisable if Masters
is terminated for reasons other than just cause.

But Masters' payday is not a done deal just yet. As
TCI Music is folded into Liberty Digital, Liberty has decided to amend its
executive-compensation package, terminating its "Executive Stock Option" plan in
favor of the more lucrative "Stock Appreciation Rights Plan."

Shareholders are expected to vote on that and other matters
at the company's annual meeting Sept. 8 at TCI Music headquarters in Englewood, Colo.

Although many in the industry consider Masters to be a
leader and an innovator, one analyst wondered how shareholders would react to such a
lucrative compensation package.

"What they're talking about is basically 30
million shares with the potential of a $20-per-share profit -- that's $600
million," said one analyst who asked not to be named. "Those are [Liberty Media
chairman John] Malone-type numbers. If you were a shareholder, the first thing you would
have to ask is: How much wealth has he created for us? Part of me would say,
'Let's put some incentive into this.'"