Amending College Coach Contracts: Let Prudence Not Panic Be Your Guide

Coach Corso’s familiar caution invites consideration of the velocity with which the contracts of his former college football coach colleagues are being renegotiated.

College football coach contracts are often prematurely renegotiated.  Universities should consider a representative performance sample before renegotiating a contract so that the amendment properly accounts for the coach’s true performance level.  All too frequently, a single extraordinary season is being treated as the start of a sustainable performance trend rather than a data point. This phenomenon, equally prevalent in college basketball, fuels seemingly boundless salary escalation and, quite often, poorly considered contract amendments.

There are many worthy reasons for a university to amend a coach’s contract, and they range from clerical corrections necessitated by NCAA Bylaw changes to material financial restructurings justified by sustained performance increases. Amendments also result from pressure universities feel to retain a head coach whose services are coveted, or believed to be coveted, by other employers.

Following is a survey of college coach contract amendments that provide for material compensation increases.  Section I posits the methodology for the analysis and reviews the data derived therefrom. Section II incorporates on-field performance into the amendment analysis, which supports the fundamental theory of this article – college coach contracts are renegotiated prematurely. Section III recollects a real world example that ambitiously addressed pre-amendment considerations and post-amendment consequences. The article concludes with a respectful recommendation.

I. Methodology

We reviewed amendments to head football coach contracts at public Autonomy 5 universities over the five-year period preceding the most recent season. This review analyzed amendments executed between December 1, 2011 and November 31, 2016.  Amendments following the recently completed 2016-2017 season were excluded because although some may have been widely reported, documentation confirming the terms of such amendments is still very limited. Further, for purposes of this article, contract modifications that were clerical in nature, (e.g., to coordinate existing contract provisions with conference realignment, the College Football Playoff or to evidence automatic rollovers) as well as amendments executed in the last year of a coach’s current contract, were not considered. College coach contract amendments that met the foregoing criteria represent the applicable sample set (the contract amendments or restatements and the parties thereto represent the “Sample Set”). Following are raw data from the Sample Set:

• Amendments by Conference:
  • ACC: 11
  • Big 12: 7
  • Big Ten: 17
  • Pac-12: 17
  • SEC: 27

The number of amendments for SEC head football coaches is artificially high relative to the other four conferences because (a) other conferences include more private schools that are likely to have entered into amendments but that are not publicly available and thus not analyzed;  and (b) contract amendments at Ole Miss and Mississippi State are, at least in part, a function of the impact of Mississippi law, which limits the duration of contracts for state employees to four years.

• 1.80: Average years since last contract negotiation/re-negotiation
• 3.72: Average years remaining on contract at time of amendment
• 71: Amendments extended term
• 1.93: Average extension length in years, where term was extended
• 64: Amendments provided for additional annual guaranteed compensation
• $731,227: Average year-over-year compensation increase in amendments where compensation was adjusted
• 44: Amendments increased available bonus totals
• 15: Amendments added a deferred compensation feature or additional deferred compensation amounts
• 10: Amendments provided for an increase in the Coach buyout amount
• 21: Amendments expressly provided for an increase in the University payout amount
• 24: Amendments tie the University payout to compensation payable to Coach

We employed the following formula to estimate the overall value provided to each coach by the amendment:

[remaining term at the time of amendment^A, multiplied by annual increase in compensation^B]
Plus
[total annual compensation^C, multiplied by number of years added to contract^D]

For example:  Coming off an appearance in the 2013-2014 BCS National Championship Game, Auburn rewarded Gus Malzahn with a contract amendment on March 31, 2014.  The contract amendment extended the term of the original agreement by 2 years^D and provided, among other adjustments, for additional personal service compensation.  At that time, Coach Malzahn had in excess of three years remaining on his contract^A.  Coach Malzahn’s total university compensation for the 2013-2014 season was $2,440,000.  Coach Malzahn’s total university compensation for the 2014-2015 season was $3,854,500^C (a post-amendment increase of $1,414,500^B).  Applying the formula above, we consider this amendment to have added $11,952,500 to the total compensation amount payable to Coach Malzahn ($1,414,500 for each of the three remaining seasons on the contract, and $3,854,500 for each of the two new seasons under the amendment).  In this instance, that amount is actually lower than the total value provided to Coach Malzahn, as Coach Malzahn’s contract features automatic university compensation increases of $250,000 per year.  This increased value is in addition to $675,000 in bonuses payable to Coach Malzahn for his team’s on-field performance in the 2013-2014 season (notably, Coach Malzahn’s previous contract did not contemplate a bonus for an appearance, but loss, in the national championship game but not surprisingly, that lapse was remedied in the amendment).

Using this formula, the average compensation expense incurred by the universities across the sample set was $8,075,584.  This sum is effectively guaranteed if the university concurrently extends its obligation to pay the coach his annual guaranteed compensation for the balance of the term as liquidated damages upon its decision to terminate the coach without cause, and creates market-wide distortion as prior contracts are used by coaches, and their agents, as mere starting points in future negotiations.

Although a net present value discount may be applied to reduce the additional commitment, that relatively nominal discount is more than offset by the bonuses paid by the university for performance achievements in the season immediately preceding the amendment (the, “Amendment Season”, on average, $232,189) and future seasons, not to mention the significant sums the coach may receive in deferred compensation or retention payments if he completes the newly extended term. Finally, adding to the $8M+ total are staff increases that routinely accompany their head coach’s amendment and may also include adjustments to bonuses and university payouts along with base salary increases, and likely increases in tax withholding and state retirement plan contributions.  Undeniably, the economic effect of an amendment is exponential.

There are many even-handed options available to the university and the coach to address this situation.  For instance, in approximately 12% of the Sample Set, the coach’s buyout was increased.  Other common options include university payouts that account for previously paid compensation, copious mitigation provisions and, more recently, assistant coach buyouts (or reductions or elimination of payouts to assistant coaches if the head coach is no longer employed by the university).  Less common but perhaps more efficient measures include the parties’ agreement to establish a deferred compensation account that accelerates if the coach is terminated without cause or is forfeited if the coach is terminated for cause or departs on his own accord.  Similarly, recognizing that the opportunity to win is the opportunity to remain employed and earn more money, the parties could negotiate for program-based resources to better equip the coach to win: (1) augmented recruiting budgets; (2) facilities development and improvement (to this end, note that annual payments of $731,227 would support traditional debt financing, at the prime rate, of approximately $14,000,000); (3) more comprehensive academic services or curricula; (4) funds for summer school; (5) raises to assistant coach salaries or the establishment of off-field analyst positions; etc.

Importantly, the university and coach should recognize that the benefits of a single, extraordinary season are often not realized directly by the athletic department.  Gone are the days when bowl game payouts were made directly to the participating universities (See, http://www.collegefootballplayoff.com/revenue-distribution). So, matching a head coach’s compensation to an additional win or two is no longer a linear equation.  Rather, additional wins must be viewed in context.  An additional win for Alabama this past season meant a national championship but an additional win for a host of other schools may mean nothing economically, or participation in a different bowl game that, although perhaps more historically significant, ultimately results in an additional $1M+ in university travel party expenses.

The following chart graphically depicts three performance criteria, each based on wins, for the coach/university tandems in the Sample Set: (a) the average number of wins per season over all the seasons the coach has been employed by the university (Win/Season at University); (b) the average number of wins for the coach in the Amendment Season (Wins/Season Preceding Amendment); and (c) the average number of wins in all seasons after the Amendments (Wins/Season After Amendment).

II. On Field Performance Relative to Amendment Data

The chart reflects that, on average, coaches are being rewarded for an anomalously good season and then their performance regresses back to, or often even below, their historic performance levels after the Amendment Season.  In other words, buyer beware; the Amendment Season, not unlike the holiday season, can result in a prolonged period of buyer’s remorse from an impulse purchase.

Separating elite level coaches (based on national championship titles) from other coaches further illustrates the point.  Within the Sample Set is a small fraternity of elite coaches that have won a national championship.  A much larger group of coaches, or perhaps more accurately, their agents, have leveraged a relatively small and statistically insignificant performance sample as comparable to a much larger, consistently elite body of work.

Coaches in the Sample Set that have won a national title actually win at a higher level than their typically lofty historic average after their Amendment Season (or seasons in the case of Coach Saban).  It’s fair to conclude that coaches who win a college football national championship are elite level coaches even if luck or fortuity may have aided their cause somewhere along the way to a title.  And It’s logical to award an amended contract to a coach who has demonstrated the ability to win at the highest of levels, particularly if the coach’s compensation is materially lower than the compensation of his new peer group.  But, for the majority of coaches whose teams produce a singular season with an extraordinarily successful or unsuccessful won/loss record, the decision to amend the coach’s contract on the one hand or fire the coach on the other hand should be considered in the context of the coach’s and the university’s historic performance – especially in the case of less experienced coaches.

Sometimes, however, universities feel forced to prematurely amend a coach’s contract as a means to avoid losing a promising coach to another university or perhaps the National Football League. Replacing a coach always includes transition costs and, depending upon the future performance of the departing coach, opportunity costs.  To avoid these costs, universities are often quick to renegotiate the basic terms of a coach’s contract.  As discussed throughout this article, doing so has substantial and lasting consequences, including (i) the perceived establishment of a mere starting point in future negotiations with the coach or initial negotiations for a successor coach, (ii) complications in contract negotiations with other head coaches within the department, and (iii) regulatory compliance (i.e., Equal Pay Act) concerns.  Instead, a thoughtful athletic director will address these circumstances through retention incentives, deferred compensation or other contractual features which amply reward the coach for his commitment to the program (in a tax-efficient manner) without creating lasting precedent or market distortion.  In a future article we will explore the characteristics of coaches and programs that predict sustained success as well as a roadmap for a university’s consideration of realistic means to retain its coach. The coaching market is seasonal and fluid but its history leaves clues for success. For present purposes, we are considering viable alternatives to an amendment. When viable alternatives do not appear to exist, this analysis highlights some of the most critical issues to consider in negotiating and drafting the amendment.

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:

1. Coach McElwain paid CSU $2,000,000 in six interest-free annual $333,333 installments;
2. Florida paid CSU $3,000,000 in six interest-free annual $500,000 installments;
3. 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
4. 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.

IV. Conclusion

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.