College athletics have undergone a drastic change in the past few years that has transformed the industry. Name, image, likeness (NIL) legislation enabled player pay-for-play dynamics that have led to many downstream implications, including the creation of new roles at universities such as team general managers, chief revenue officers and NIL liaisons.
This transformation has occurred in tandem with record-setting media deals negotiated by athletic conferences — which continue to consolidate. This article focuses on the evolving need for clear and strategic decision-making processes related to compensation for coaches, athletic directors and other athletic program roles.
It also is the second article related to our series on “Pay issues related to PE investments in college sports,” which explores the evolving business of college athletics and the potential impact of changes on athletics departments’ compensation governance and frameworks. Our previous article:
In its most basic form, “good governance” means making fair, transparent and justifiable decisions via a process that involves:
In college athletics, good governance sets the fundamental framework for making pay decisions related to coaches, athletic directors and all other staff positions.
With soaring revenues and some college athletes’ compensation on comparable levels with their professional sports counterparts, many universities’ athletics departments look vastly different from just five or 10 years ago. We have observed a notable shift in the way these athletic departments operate as they blend elements of professional sports teams, for-profit companies and tax-exempt organizations.
Within athletic departments, there is a heightened focus on revenue-generating roles and activities, with skills like corporate development growing significantly in demand and widening the market for talent to encompass the private sector. This cross-industry pollination creates the need for universities to provide competitive compensation packages for athletic department leaders that, in some ways, mimic those leaders within enterprises outside of higher education.
Professional sports teams and for-profit organizations focus as much on the quantum of pay as they do on the design of incentive pay opportunities for those employees who can drive positive outcomes for the organization and its stakeholders. At-risk pay for an executive typically comprises a substantial piece of the overall pay package — appropriately so — as an executive should be incentivized to deliver results that disproportionately create profits and/or success for the organization.
In college sports, universities similarly try to incentivize key employees to deliver positive results that benefit themselves and their stakeholders. While simple in theory, however, the practice of setting the right incentives and measures can be surprisingly complex and typically requires board approval for head coaches and senior administrators.
Against the backdrop of a broadening market for talent is the fact that, unlike many of their talent market competitors, universities are tax-exempt, non-profit organizations. This tax-exempt status adds an additional layer of complexity because maintaining it generally requires universities’ compliance with intermediate sanctions rules under Internal Revenue Code (IRC) Section 4958. In their simplest form, these rules require the board’s discernment regarding, and contemporaneous documentation of, pay decisions related to many of their head coaches and top athletic department administrators.
These employees, otherwise known as “disqualified persons” under the IRC, may only receive pay that aligns with the fair market value of the services they perform based on the universities’ defined market. Therefore, the board must determine the appropriate comparator market before it can compare any employee’s pay to it.
To complicate matters further, as the landscape of college athletics changes and certain employees’ influence over the athletic department’s affairs increases, university boards may find more employees under their remits. This increases the pressure on boards to defend their pay decisions for more people. Boards mitigate risk of IRC compliance failures by following good governance protocols, including establishing a defensible compensation philosophy and documenting pay decisions within that framework.
We recommend universities establish a general framework for evaluating market data and follow a specific set of guidelines when making pay determinations for athletic positions. These often include, but are not limited to:
In summary, good governance helps athletic programs thrive. Thus, it is crucial that universities have clear and fair processes for deciding employment agreement terms, including compensation, as they adapt to transformation now and in the future. By staying on top of market changes while also following applicable rules and regulations, universities can attract top talent and maintain their competitive advantage as the landscape shifts beneath their feet.
