III. It Gets Complicated
If, on average, contracts are being amended less than every two years, then why attempt to negotiate provisions four and five years into the future? It can be a complicated and inexact exercise.
Consider three industry participants, two universities and a coach, that relatively recently and thoughtfully addressed the issues of an amendment and its effect on each party’s obligations and opportunities. In December of 2011, Colorado State University hired Jim McElwain as its head football coach. Coach McElwain’s original 5-year contact at CSU provided for an annual salary of $1,350,000 and a scaled coach’s buyout starting at $5,000,000 in the first year and decreasing by $1,000,000 per year each year thereafter. After his first two seasons, Coach McElwain’s CSU teams had posted an aggregate record of 12-14 including an 8-6 record for the 2013-2014 season. In June of 2014, the parties executed a new contact that extended the contract term for two years and included options for additional extensions. This second contract established a 2014 base salary of $1,500,000 with annual two percent (2%) raises; relatively modest increases. But, the second contract also included substantial base salary escalators tied to: (1) CSU’s receipt of media rights revenue of $15,000,000 or more and an invitation to join one of the Autonomy 5 conferences, which resulted in a $3,000,000 Base Salary in the immediately following contract year; or (2) scaled on-field performance achievements ranging from a new base salary of $1,750,000 for two appearances within a four-year period in the Mountain West Championship game to $2,750,000 in new base salary for winning a CFP playoff game. Mindful of its increased financial exposure, CSU negotiated an increase in Coach McElwain’s buyout to $7,500,000 if Coach McElwain terminated the contract prior to December 31, 2018 (at the time the second contract was executed in the summer of 2014, Coach McElwain’s buyout was $3,000,000 and it would have decreased to $2,000,000 as of January 1, 2015).
During his third season at CSU, Coach McElwain’s team posted a 10-2 regular season record. In December of 2014, Coach McElwain accepted an offer from the University of Florida to become its head football coach. At that time, Coach McElwain’s buyout was $7,500,000. Among the three parties involved, the $7,500,000 buyout was satisfied as follows:
- Coach McElwain paid CSU $2,000,000 in six interest-free annual $333,333 installments;
- Florida paid CSU $3,000,000 in six interest-free annual $500,000 installments;
- Florida and CSU entered into a game agreement for a September 2018 game that includes a payment to CSU of a fixed sum of $2,000,000; and
- CSU effectively waived the $500,000 balance.
To be sure, all three parties cooperated and benefited from the foregoing transaction and each transaction necessarily invoked considerations of the compensation market for coaches, cash flow, opportunity and replacement costs, the time value of money and projected future value. CSU protected itself so that it, UF and Coach McElwain could each receive an acceptable value in the complex set of transfers and agreements among the parties. This case also illustrates the responsibility the coach bears in the contract process. While the universities were creative, generous and accommodating, the coach also shared responsibility for the financial burdens created by the amendment.
The amendment process triggered an extraordinary amount of complicated considerations and negotiations, ultimately affecting three parties. But between CSU and Coach McElwain, only two of the amendment’s many new provisions ultimately came into effect; Coach McElwain’s compensation increased by $150,000 and his buyout obligation to CSU increased by $3,500,000. This circumstance demonstrates the challenges of coordinating future compensation with future performance, job security and career path across an infinite set of potential outcomes. Until a realistic performance trend is identified, perhaps a better solution for all parties would be a one-time bonus criteria based on a well-reasoned metric that quantifies the applicable value of the coach’s extraordinary performance.
Annual compensation increases should be considered over the life of the contract because that is the period to which they almost always apply. Recognizing that the annual compensation increase means more money sooner for the coach, It may make little sense to also increase the university's total payout upon termination. If the coach has earned a merit-based raise, should he also be rewarded with a payout based on merit years in the future when it is most likely the lack of merit (read: not enough wins) that results in his termination without cause? Alarmingly, the university payout obligation was increased (either expressly, or as the result of failure to adjust compensation-based payout structures) in over 55% of the Sample Set. The university proactively decreased its payout obligation in connection with its agreement to pay additional compensation in less than 4% of the Sample Set.
Since contracts are renegotiated less than every two years on average, and the business and economics of college football have never been so fluid, universities are faced with the challenging task of projecting a coach's contributions to the university and setting compensation commensurate therewith. This task can be daunting particularly if the coach's realistic sustainable performance and career objectives are uncertain. If a university were to instead reward each data point with a thoughtful bonus structure, it would have the opportunity to view its coach's contract through longer lenses (and perhaps bonuses would again be considered an adequate reward for performance, rather than assumed as part of ordinary compensation). Then, if a trend is identified, the effect of that trend could be evaluated across the university and its athletic department's revenue streams (and expenses): (1) applications; (2) admissions (3) donations; (4) ticket sales; (5) parking; (6) concessions; (7) licensed products; etc. before making such a costly long-term decision. That is how most businesses (and there can be no question that collegiate athletics is big business) address executive compensation.
The current compensation system is outdated and should be reconsidered, a transition likely to occur one contact at a time. Colleges and universities are rightly proud of their long-standing and productive histories of research, discovery and progress. They are long overdue, however, in applying that progressive spirit, collective intellect and forecasting acumen to their own business.