<PAGE>
 
                           PLAYBOY ENTERPRISES, INC.

                               CHRISTIE HEFNER
                                 CHAIRMAN AND
                            CHIEF EXECUTIVE OFFICER

March 16, 1998


Mr. Buford Smith
12 River's Bend Drive  
Gulfport, MS 39507

Dear Buford:

This letter confirms our offer of employment for the position of President - New
Media at Playboy Enterprises, Inc. Enclosed is a comprehensive job description
that we have drafted, consistent with discussions we have had. Also as we have
discussed, the compensation package detailed below, consists of a base salary
but also provides you with high upside potential in both variable cash and
stock.

Your base compensation would be $250,000 gross per annum paid on a biweekly
basis and you will have an annual incentive plan which will be customized and
designed around the growth of the New Media business. Given the startup nature
of the business, for years 1998 through 2000, the plan will be uncapped and
based on 2% of revenue generated by New Media where the operating loss cannot
exceed $7 million in 1998 and for years 1999 and 2000, the loss triggers will be
determined as the budgets are set.*** In subsequent years, the plan will be 5%
of Operating Income with targets based upon the New Media operating plan and
will be capped at $1,000,000. To recognize your role and impact as a senior
corporate executive, the incentive plan will have a corporate trigger (if the
Company does not achieve its annual operating plan, your plan pays out at 90%
vs. 100%). Also, you will receive 1% of the equity issued as part of a private
placement or public equity offering for the New Media business with a cap of $5
million in equity value.

---------
***  Confidential information omitted pursuant to a request for confidential 
     treatment filed separately with the Securities and Exchange Commission.
<PAGE>
 
Buford Smith
March 16, 1998
Page 2.

You will also be entitled to participate in the Company's long-term executive
stock program which will include 50,000 shares of stock options which vest in
25% increments over a four year period. The strike price of the options is the
closing price of the Class B stock the business day preceding your start date.
You will also be entitled to 15,000 shares of Class B restricted stock with
accelerated vesting based upon financial performance achievement.

Under the restricted stock plan, your first payout of 2,500 shares will be
earned upon the Company's achievement of a $15 million Operating Income and the
second traunch of 12,500 shares upon the achievement of a $20 million Operating
Income target. The plan, which was implemented in FY'95, has already paid out
its first two traunches as the initial two targets have been achieved. It is my
expectation that once this plan successfully ends, it will be replaced by
another similar plan. You will also participate in the Company's parachute plan,
as described in the attached.

You will be based in Chicago and expected to do as much travel as necessary to
complete the duties of the position. You will be reimbursed for all travel, in
accordance with the Company's Travel and Entertainment policy (a copy of which
will be forwarded to you).

The Company will also reimburse you for all reasonable moving expenditures
related to your relocation to Chicago, in accordance with our relocation policy.

You will be entitled to the Company's health benefits plans (effective on the
first day of your employment) as well as participation in the Company's
executive vacation policy (four weeks), matching 401k plan, deferred
compensation plan employee stock purchase plan and profit-sharing plan. Details
of all of these plans/benefits will be sent to you.

If you should be terminated at any time not for cause (as defined below), you
will be entitled to receive six months guaranteed severance and up to an
additional six months if you remain unemployed during that period ("unemployed"
excludes major consulting work). "For cause" is defined as conviction of a crime
involving dishonesty, fraud or breach of trust, or engaging in conduct
materially injurious to Playboy.
<PAGE>
 
Buford Smith
March 16, 1998
Page 3.

Given our recent discussions regarding your participation in upcoming New Media
related meetings, I'd like to agree to a start date as soon as possible.

Buford, everyone here looks forward to having you join the Playboy family and
having you share in the success of PEI's New Media future.

Sincerely,

/s/ Christie Hefner
Christie Hefner



ACCEPTED:

/s/ Buford Smith
-----------------------
Buford Smith


     6/24/98
-----------------------
Date
<PAGE>
 
                  EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
                       AND INCENTIVE COMPENSATION PLANS

     To aid the Company in retaining its most senior executives and certain
other officers, the Board approved Change in Control Agreements (the
"Agreements"), which provide for the payment of specified benefits to selected
officers in the event their employment terminates after a "change in control"
(defined below) of the Company. Ms. Hefner and Messrs. Lynn, Perkins and
Rosenzweig are beneficiaries of this program. Each Agreement provides that (i) a
lump-sum cash payment will be made within ten days following termination, equal
to 300% of the sum of the officer's annual base salary in effect immediately
prior to the occurrence of the change in control and the maximum bonus for the
officer's position under the Program established for the then applicable fiscal
year; (ii) the amount of the payment would be subject to reduction so that no
portion would be subject to the excise tax provision of the Internal Revenue
Code of 1986, as amended (the "Code"), but only if the officer would obtain a
net after-tax benefit from such reduction; (iii) the officer will be allowed to
continue his or her participation in then existing welfare benefit plans, such
as medical insurance, for up to a year from the effective date of termination;
(iv) it will have an initial five-year term, automatically extended on each
anniversary of its execution unless the Company or the officer gives notice that
it or the officer does not wish to extend the Agreement; and (v) payments become
due and benefits are provided if, within 18 months after a change in control,
the employee is involuntarily terminated for reasons other than death,
disability or "cause" (defined below), or voluntarily terminates employment for
certain reasons. A "change in control" is defined as (1) any liquidation or
dissolution of the Company; (2) a sale, exchange or other disposition of Playboy
magazine; (3) any occurrence by which The Hugh M. Hefner 1991 Trust and Christie
Hefner (who is deemed to hold shares beneficially owned by the Trust to the
extent Ms. Hefner has sole voting power with respect to such shares) cease,
collectively, to hold at least 50% of the Company's stock entitled to vote
generally in the election of Company directors; and (4) the merger,
consolidation or reorganization of the Company, or sale of all or substantially
all of the Company's assets, unless such transaction is initiated by the Company
and, as a result of the transaction, not less than a majority of the combined
voting power of the securities of the surviving or transferee corporation is
held by persons who held not less than a majority of the combined voting power
of the outstanding voting stock of the Company immediately prior to the
transaction. Under the Agreement, "cause" is defined as conviction of a crime
involving dishonesty, fraud or breach of trust, or willful engagement in conduct
materially injurious to the Company. The Agreement also provides that the
reasons for which the officer may voluntarily terminate employment without
forfeiture of benefits include failure to maintain the officer in the position
held prior to the change in control, removal of the officer from the Board,
assignment to the officer of duties materially inconsistent with the authorities
and responsibilities exercised prior to the change in control, an aggregate
reduction in the officer's cash compensation, a termination or reduction in
scope or value of the officer's employee benefits, a good-faith determination by
the officer that, as a result of a change in circumstances following a change in
control, the officer is unable to carry out the authorities or responsibilities
of the officer's position, or requiring the officer to perform duties beyond a
50-mile radius from the officer's employment immediately prior to the change in
control, or to travel at least 50% more than was previously required in any of
the three years prior to the change in control.

<PAGE>
 
[LOGO]  PLAYBOY ENTERPRISES, INC.                     INTEROFFICE CORRESPONDENCE
                                                              CONFIDENTIAL
                                                              ------------
        DATE:     July 20, 1998
 
        TO:       Buford Smith
   
        FROM:     Howard Shapiro
  
        SUBJECT:  Your Contract

--------------------------------------------------------------------------------

          Christie asked that I confirm your conversation concerning the equity
          "kicker" in your contract.

          The kicker applies to valuation (and not money raised) and will apply
          to each relevant New Media transaction, with a cap of $5 million.

          In other words, if Playboy did an initial transaction that established
          a value of $150 million, you would receive $1.5 million on closing. If
          Playboy did a second transaction that established a value of $350
          million, you would receive $2 million on closing; i.e. 1% of the $200
          million in increased value.

          If this conforms to your understanding, please sign, date and return
          the enclosed copy of this memo to me.



               /s/ Buford Smith
               -----------------------
               Buford Smith

               Date    7/21/98
                   -------------------