Updated from 9:40 a.m. EST

It seems Sumner and Mel are doing OK after all. Or well enough.

Viacom

(VIA) - Get Report

announced a resolution Thursday to the much-debated dispute between its top two executives. The media conglomerate said it reached new employment agreements with CEO Sumner Redstone and operating chief Mel Karmazin, and that Karmazin will stay through May 2006.

Speculation has been rife for many moons over the fate of the highly-thought-of pair. As the process of negotiating Karmazin's new contract dragged on over the past months -- it was set to expire this year -- some Wall Street wags thought Karmazin might leave for

AOL Time Warner

(AOL)

or another Viacom rival.

At the heart of the negotiations, according to the chatter, has been the remuneration and responsibility sought by Karmazin, balanced against Redstone's own desire for credit and operational authority. Karmazin's new contract appears to give Redsteone more power in major decisions, while strengthening Karmazin's hand by giving him more of what could politely be referred to as "screw you" money.

Karmazin, a tireless advertising salesman, is considered by many on Wall Street to be key to the success of Viacom, which merged with CBS in 2000. Viacom also owns VH-1, UPN, Simon & Schuster and other properties.

The threat of Karmazin's departure, along with the usual economic and geopolitical factors, has weighed heavily on Viacom's stock over the past few months. Shares in Viacom, down from their 52-week high of $51.89, rose $1.64 Thursday, or more than 4%, to trade at $40.39.

Clearing the Air

The resolution of Karmazin's employment issue erases "a material overhang" on Viacom's stock, according to Merrill Lynch analyst Jessica Reif Cohen, and is "a material positive" for the company's operations, given Karmazin's management expertise. Cohen has a buy rating on the stock and a $50 price target; Merrill has received investment banking fees from Viacom over the past 12 months, and managed Viacom's most recent public offering, sometime within the past three years.

The new contract appears to give Redstone greater authority over Karmazin, though it also makes it easier for Karmazin to enjoy a well-compensated departure if Redstone exercises that authority. For example, Redstone enjoys "full and final decision-making authority" over corporate policy and stragegy, such as "significant" acquisitions and sales. But if Redstone overrules Karmazin on such a decision, Karmazin can step down while collecting full compensation for the remaining portion of his contract.

The new agreement gives Karmazin a $1 million annual salary, a "target bonus" for 2003 of $6.7 million, and deferred compensation that starts at $3 million in 2003 and grows from there.

In 2001, the last year for which Karmazin's compensation is publicly available, he received $3.3 million in salary, a $12 million bonus and 750,000 stock options expiring in 2011. Those options have a strike price of $57.01, putting them now under water.