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Making Sense of College Coaching Contracts

By Jason Belzer

With more than 200 college football and basketball coaches earning more than $1,000,000 in annual compensation, and over 50 earning at least $3,000,000, coaching compensation has reached a level hardly foreseeable just a decade ago. In addition to the growing financial commitments involved, negotiating college coaching contracts has become a far more complex procedure for both parties due to the non -standardized nature of each process and outcome. Unlike professional athletes and actors that collectively bargain for certain rights, every single coaching contract is a unique agreement unto-itself. Understanding the nuances of such contracts can allow for the creation of a sensible agreement that benefits and protects both sides, without making it a zero-sum game. Below are a few of the key provisions that are common among some of the top-level collegiate coaching contracts, along with language that can be beneficial for both parties to consider.

 

Base Salary vs. Supplemental Compensation:

 

While a coach’s total compensation package can easily range between seven and eight figures, the actual total base salary for even the highest paid coach is rarely more than mid-six figures. Generally, a large proportion of a coach’s total compensation will be in exchange for duties that satisfy the university’s media, sponsorship, and apparel contracts, including a grant of the coach’s name, likeness and image (collectively, referred to as “supplemental compensation”). Though paid by the university, the Talent Fee is typically funded from revenue generated by its rights deals and sponsorships.

 

Common Head Coach Compensation Structure

 

 

 

 

The distinction between base salary and supplemental compensation may or may not be material in terms of the university’s financial commitment to the coach, depending on the negotiated contractual terms. Generally, only base salary is considered in determining standard employee benefits to which the coach is entitled, such as retirement plan contributions, vacation pay, and university provided life and disability insurance coverage. The most critical significance of the distinction between base salary and supplemental compensation concerns the determination of the parties’ obligations to each other in the event of early termination of their contract; these “buyout” obligations (discussed further below) may consider future base salary only, or may also include supplemental compensation in the calculation of the buy-out.

 

Bonuses:

 

The bonus provision is designed to supplement and incentivize the coach based on performance, and is often one which athletic administration has the greatest flexibility in compromising on. Generally, coach bonuses and incentives will be based on either a predetermined amount of money or a percentage of the coach’s base salary. There are literally hundreds of incentives and escalators that can be given to coaches, but a few of the more popular and worthwhile ones include bonuses related to: Total Wins, Conference Championships, Bowl Game, NCAA Tournament Appearances and Postseason Wins, Academic Performance (APR, GSR, Grade Point) Thresholds, Poll Rankings, Recruiting Rankings, Coach of the Year or Player Recognition, as well as Increases in Game Attendance and/or Season Ticket Purchases.

 

As noted above, schools can use bonus provisions as a pragmatic tool to ensure that their coaches are being compensated and retained based on their performance. This is particularly useful in interim-head coach situations in which a university wants to create program stability while also allowing for maximum flexibility to move on from a coach if necessary. In such situations, it may be prudent for the university to tie much of the interim coach’s compensation to minimal performance thresholds (e.g. finishing with a winning record), and possibly use a similar structure to trigger a contract extension and removal of the interim tag.

 

Deferred Compensation and Retention Bonuses:

 

The use of deferred compensation and retention bonuses is becoming common practice when it comes to compensating coaches at higher levels of college athletics. This trend is likely due to both differing as well as common motivations:

 

  • For the University: retention bonuses and deferred compensation accounts allow for longer-term funding of large deals and encourage stability in a program’s leadership by putting a portion of the coach’s overall compensation “at risk” in the event of early termination by the coach;

 

  • For the Coach: the combination of (1) immaterial perceived lifestyle differences resulting from current income above a certain threshold, and (2) a growing urgency to ensure greater financial security given the instability in the profession favors allocating a portion of otherwise guaranteed compensation as part of a tax-favored deferred compensation arrangement; and

 

  • For the University and Coach: Amounts of overall compensation that are allocated to a retention bonus or other type of at-risk deferred compensation typically are disregarded in the determination of buyouts (discussed below).  Accordingly, adding an annual retention bonus provides a way for a university to provide additional annual compensation to a coach, without impacting their respective obligations to each other in the event of early contract termination.

 

It is not uncommon for a contract to include both retention bonuses or other deferred compensation accounts subject to forfeiture in the event of early termination by coach in order to achieve the university’s interests, as well as a fully vested deferred compensation arrangement (effectively funded with amounts that might otherwise have been part of guaranteed forms of compensation) suited to the coach’s objectives. The types and designs of arrangements to be utilized will depend upon a number of factors, including whether the institution is private or public. Given the variation and complexity of such arrangements, not to mention their tax treatment, further discussion is beyond the scope of this article.  Suffice it to say that as demonstrated by the much-publicized $2 million annual life insurance-based plan included as part of Jim Harbaugh’s overall compensation at the University of Michigan, at the upper echelon of coaching agreements, the parties and their advisors clearly are giving increased attention to alternatives to current cash compensation.

 

Automatic Extensions:

 

While it may seem counterintuitive in many ways, for the long-term stability of a program, a university should consider committing in writing to automatic contract extensions that are triggered by certain performance metrics. For instance, a coach might be assured contractually to receive a minimum of a one-year extension for winning a conference championship and/or making a postseason appearance.

 

Some may reason that if a coach is successful, the institution would offer to extend their contract anyway so what purpose would an automatic extension serve? The proven reality is that many coaches have not received extensions, or sometimes have even been fired following a successful season. The reasons behind this are many, but often traced back to a change in leadership at the top of the athletics department or university itself, which trickles down to a change in regime on the coaching level. An athletic director may make many promises to a coach, but the one thing they can’t promise is that they themselves will be there to see them through.

 

Outside Income:

 

As mentioned earlier, many Power 5 basketball and football coaches derive their income from appropriating their name, likeness and other publicity rights to their university. Unless a coach is being compensated otherwise (as John Calipari is in his contract with the University of Kentucky), the coach should retain the right to enter into endorsement agreements with third parties as long as it does not interfere with their obligations under the university’s media rights, apparel deals, or other sponsorship agreements.

 

Summer Camps:

 

Many universities allow coaches to own and operate summer camps on school property, and to retain all profits thereof, as long as two requirements are met: 1) the camp is advertised as the coach’s camp and not the school’s, and 2) the coach pays all fees necessary to conduct the actual camp (i.e. food, lodging, staff, equipment, etc.), typically at discounted rates. While for some coaches, their summer camps can be a lucrative side business; more often they facilitate providing supplemental pay to assistant coaches at programs with smaller budgets. A coach should be mindful of the risks attendant to operating a separate business, which can be addressed by organizing a business entity eliminating personal liability arising out of the conduct of the camp, and ensuring that liability insurance and background check requirements typically mandated by universities are observed.

 

Some universities, particularly at the Power 5 level, have begun to lock up the rights to summer camps in return for separate and guaranteed compensation for the coach and their staffs. The thinking behind this is that the athletic department (and rights holders) is better equipped to maximize revenue from a camp, especially through corporate sponsorships. While running a camp may create significant liability concerns, depending on the program’s ability to generate a consistent turnout, it may be worthwhile for the university to retain the rights to operate such camps.

 

Guarantee Games:

 

While the majority of coaches in Power 5 conferences will not have such a provision, for those who fall outside the group, it is an absolutely integral part of the contract. Many athletic departments, particularly ones who do not support FBS football, use guarantee games as a major strategic tool to finance their programs. Such guarantee games, in which a team plays a game on a Power 5 school’s home field or court can pay well over $1 million in football and $100,000 in basketball. Because 90% of such games end in a loss, it is both fair and prudent that universities stipulate the specific amount of money that a coach will be required to raise during any given season through participating in such games. For instance, if a basketball coach is required to raise $500,000 for his or her program through guarantee games, that can mean anywhere between 5-7 losses on his record per year, a steep price to pay when it comes to job security.

 

Buyout Provision – Termination by Institution vs. By Coach:

 

The coaching business is not for the faint of heart. There is no other industry in the world where almost 20% of top-level leadership gets terminated on a yearly basis. While both universities and coaches should be optimistic about the ability to build a winning program, universities must enter their contract negotiations with the expectation that the coach’s tenure will end with termination or forced resignation, or a voluntary departure by the coach for “greener pastures.”

 

Coaches and their representation will do everything in their power to ensure that if they are terminated without cause, they receive the maximum amount of the compensation initially promised to them. While many schools will only guarantee a portion of the coach’s total compensation (perhaps limited to base salary) on their initial contract, once the coach proves that he can win and create some leverage for themselves, there may be an opportunity to guarantee the remaining compensation in future years.

 

Many initial term contracts offer a 50-75% guarantee for the coach and a 25%-50% guarantee for the university. Schools often view this provision as a penalty or fine that they can force a coach or their new employer to pay in the event that they leave early, and will often try to make the amount owed to them as close as possible to the total compensation they have guaranteed to the coach.

 

That being said, it is important to note that a school’s first priority should not be to punish a coach who has left, but to ensure that they have been made whole by any damage that such a departure may have caused. The residual costs a school incurs when hiring a new coach are expensive, but rarely do they reach above the low six figures. In general, liquidated damages provisions are valid and enforceable if the amount of such damages represents a reasonable estimate of the actual damages that may be incurred upon a breach, as actual damages cannot be accurately predicted at the time of the contract formation. Further, a liquidated damages provision cannot be drafted merely to act as a deterrent to a future breach of the contract, or to compel performance.

 

There are also pragmatic approaches to lowering the buy-out a coach must pay if they are to leave an institution. One win-win technique is to oblige the coach to play a home-and-home series (or multiple) between their new institution and their previous one. If a coach makes the jump from a mid-major to a high-major program, having a school with big name brand recognition visit the home court of a smaller school can result in a windfall for that university that far outweighs the financial benefit of having a large-buyout put on the coach.

 

Special thanks to Bennett Speyer, partner at Shumaker, Loop & Kendrick, LLP, for his input and expertise, particularly on the subject of deferred compensation and retention bonuses. 

 

1. Federal tax law limits the amount of compensation that may be considered for purposes of determining contributions or benefits under tax-favored retirement plans.  The current compensation limit for these purposes is $270,000.

 

2. Life and disability insurance coverage typically is based on a multiple or percentage of base salary, subject to a cap set forth in the plan.

 

3. A negotiating point with respect to retention bonuses or other deferred compensation accounts subject to forfeiture will be whether a pro-rata portion of such bonus or account is to be paid following a termination of employment outside of the coach’s control, i.e., termination due to death, disability or termination without cause.

 

4. Michigan, Jim Harbaugh agree to increased compensation in form of life insurance loan

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