When Will We See Incentive Contracts in Sports?

How many times have we heard in the past 5 years that “sports is a business?” I’m guessing it’s perhaps somewhere in the thousands, right?

Who do you think sells more aluminum siding, the door-to-door salesman who gets paid a steady salary or the one who gets paid on commission? Pretty obvious right, the one who gets paid on commission will be banging down doors and annoying the neighbors at 6 a.m. on Saturday morning.

So where is this going? I’ve been meaning to conjure up something about incentive based compensation in pro sports for a couple weeks, but the timing is now particularly relevant given NFL free agency signing bonanza is underway and we already have our first big fluffy contract in Nnamdi Asomugha's NFL leading windfall, complete with a ridiculous $28.5 million in guaranteed moolah. Well, I am a HUGE proponent of incentive based compensation in sports and truly hope it becomes the norm in contract negotiations.

As I alluded to, “sports is a business” is the ubiquitous excuse for every overtly aggressive deal, the stockpiling of talent for ambitious one-year turnarounds, and the demise of athletes spending their careers with one team and one city.

If sports is truly a business, the front office “business men” and sports agents would be wise to adopt the incentive based compensation structure that has swept the business world in the past 10 years or so. Incentive based compensation programs are logical in that they align the interests of the organization with that of its key personnel – or more simply stated, when things go well, everyone gets paid.

In business, executives typically receive incentives in the form of equity ownership, revenue sharing, stock options, and performance based bonuses, which are normally combined with a relatively lower base salary. We do see incentive based compensation pop up from time to time, but its still generally very flawed. For instance, Brian Cashman and the Bloodhounds tried to head in this direction with Joe Torre before he departed for Los Angeles. They were close, but not quite there, so let's highlight some of the oversights that occur in the rare instance incentive based compensation rears its head in contracts.

1) The timeframe – Consider a money manager and their compensation structure. Would you prefer that they receive their bonus based on 1-year performance or 5-year performance? The answer is the 5-year performance, because the shorter time horizon encourages irrational risk taking. Consider the investment manager (or front office executive) who needs to boost their performance in a single year. If the first half of the year achieves poor returns, the natural behavior would be to take concentrated, extremely risky bets in hopes of turning it around in a hurry (i.e., Brett Favre). On the other hand, a manager with the longer time horizon can make sound decisions that are expected to pay off in the longer term and build sound portfolios without worrying about the exact timing that the benefits will be realized. In sports, this is the difference between cohesive units, nurturing young talent, and drafting for the future, versus making expensive high-risk bets year in and year out. This strategy will likely lead to a lack of a close knit chemistry, but rather a group of rotating transients who hardly get to know one another.

2) The second glitch in the plan is another obvious one, but generally overlooked entirely. Coaches and front office executives regularly see incentives in their contracts, but players generally do not. You can’t offer a coach or manager incentive compensation without giving it to the players. Pro athletes’ contracts have become the antithesis of motivation. Think about the number of times you have read about XYZ fat piece of shit who is still collecting millions from a team they no longer play for. If you read Bill Simmons even occasionally, you definitely know a boatload of these guys. Simmons is the king of calling out contractual disasters – particularly in the NBA. I think this is a function of the agents being just far savvier in contract negotiations, because they have made this a norm. These guys are smart and I can’t blame them, but there is a good alternative in incentive based compensation that can easily yield the same payouts, but make for more clearly aligned interests between teams and their players.

To go back to the investment manager analogy, why pay the portfolio manager based on performance if the guys/girls doing the research are paid cushy salaries regardless of if their recommendations are any good. The boss can work his ass off, but if his team is feeding him terrible ideas and slacking, there is nowhere to go but down. As business clichés go, it’s garbage in, garbage out. The interests of the whole organization need to be aligned in terms of the compensation.

3) The metrics – Generally when you see incentive based contracts (again, generally at the coaching level, not the player), they involve a provision based on some level of success in the playoffs. Again, in the proposed Torre contract, they offered incentives based on getting past the first round of the playoffs. That is moronic. Do you really think that is motivation for the whole season? It’s so stupid and arbitrary to try to motivate someone for one week of the season. Sure you have to get to the playoffs, but there is a lot of work to do in the regular season, such as improving specific areas where the team shows weakness. The incentives should be based on things you can actually improve like the team ERA. There are a million metrics that could be used here that would actually matter from game to game, but making it about one week at the very end of the season is just silly.

4) Finally, this one is a little more of a reach, because it never happens in sports, but I think it is important. Teams should consider implementing a succession plan. Teams are forgetting about legacy and focusing on single seasons, which is new to nobody, but the plans should be in placewhen it comes time to turn over the reigns to the next generation.

So, the intent here is to show that the wave of the future in sports should be incentive based compensation. It works. Period. People like to make money, so put their priorities in line with those of the team. I may be overoptimistic, and as usual, overexcited, but I really think this is the way to shift sports back to a more team focus versus the individual negotiation focus of today, while still appealing to the bank accounts of both coaches and athletes in the meantime. If sports really is a business, it wouldn’t hurt to at least run it like a good one.Subscribe to us