Pay issues related to PE investments in college sports
As the ownership structure of college athletics programs changes, “stakeholder capitalism” will evolve. Collegiate sports will experience a seismic shift in its financial landscape as private equity (PE) firms poise themselves to enter the fray. More specifically, PE investment in college sports could impact the compensation of university leaders, coaches and student athletes.
The influx of PE capital combined with performance-based incentive plan models brought by PE investments may lead to higher compensation for the highest performing athletic directors and coaches. However, justifying this increased financial backing also may put more pressure on athletic departments to deliver exceptional financial results in addition to athletic wins.
In short, a heightened focus on financial and operational performance metrics as well as achieving competitive success is coming. And this will extend beyond just satisfying traditional stakeholders to include boards of regents/trustees, alumni, boosters and everyday fans.
The evolving world of college athletics is full of nuance. Through this series of articles, we share insights that hopefully will spark meaningful discussions. We invite collaboration and welcome other viewpoints on this topic to enrich our understanding of this topic.
Free athlete labor was upended after the approval of the October 2024 settlement of NCAA v. House. The practicalities of the decision require schools with top athletic departments to add approximately $20 million per year to their compensation budgets, earmarked to pay student athletes. When schools with tight budgets and high operating expenses must find these extra funds – while maintaining their primary mission of education – revenue generation finds its way to the forefront of leaders’ minds.
For some universities, PE may bridge this revenue gap by providing additional capital to help attract, motivate and retain their best athletic talent (including administrators, coaches and student athletes). The funding also could help improve teams’ physical assets, including stadiums, arenas, training facilities and equipment without inhibiting delivery of educational value to the entire student body.
In its simplest form, PE invests in private, for-profit companies to increase their value and crystalize a profit upon exit, all while collecting management fees. Reflecting on this incentive model, the question becomes whether typical PE success metrics – internal rate of return (IRR) and multiple on invested capital (MOIC) hurdles – could or should be incorporated into athletic departments' pay programs. Additional considerations include whether:
Universities often form strategic partnerships with for-profit corporations to promote research and economic development through the commercialization of intellectual capital. These collaborations can significantly enhance a university’s reputation, financial stability and student value proposition, provided that the university’s mission and values align with those of its corporate partners. Such relationships with for-profit entities can lead to mutually beneficial outcomes, fostering innovation and growth within both academic and corporate sectors.
The most contentious financial issues often arise when a university employee makes a discovery or innovation during one of these collaborations. Specifically, who gets to participate in those future financial gains from the work?
Generally, universities want all discoveries by their employees to be owned by the university itself rather than the discoverer. However, individual agreements can allow for those employees to participate in future gains through royalties, licensing and/or equity stakes in businesses that form from their innovation.
If a university employee is a recognized leader in a technical field in which companies and universities would both benefit financially from that researcher’s discoveries, that employee is more likely to successfully negotiate for a share of future gains from their innovations when the partnership is formed.
In the emerging field of PE investment in college sports, the commercialization of athletes and their teams presents new opportunities and challenges that are in many ways like these research-driven university/industry partnerships. The benefits of these investments may extend to various stakeholders in college sports (Figure 1).
Collegiate and administrators’ pay is determined by a market defined by financials, performance and influence. Top-tier coaches, especially those with significant reputations, belong to a small and elite group. Competing institutions often try to recruit these high-profile coaches from current positions.
Similarly, top athletic directors, however titled, also may be nationally stack-ranked based on criticality, expertise and revenue generation. These nuances are important to every pay analysis because the corporate structure of universities requires a balance between market competitiveness and pay reasonableness.
By comparing pay to the right peers, universities can validate that their compensation packages are market competitive. This helps attract, motivate and retain top talent while reducing the risk of excess benefit transactions.
The question of who constitutes the right peer group may change. For example, rather than exclusively considering coaches and administrators in other higher-education institutions or athletic conferences, should the for-profit world of professional athletics be considered?
Coaches already fluctuate between college and professional jobs. Additionally, in a PE-funded environment, athletic directors will be further required to identify and maximize nontraditional revenue streams and manage unprecedented capital flows. While colleges find their footing in this new market, candidates for those positions may be better sourced from professional teams and leagues, where these issues are more common.
Competitive positioning also is likely to be a bigger challenge. There already is a substantial value gap across university athletics departments. Will PE money narrow or expand that gap?
Lastly, many coaching and athletic-director positions historically are endowed, meaning that a wealthy donor funds the salary and benefits for the role, usually in exchange for naming rights on the job’s title. A recent example of an endowed leadership position includes the athletic director at North Carolina State University. So, will donors shift their largesse elsewhere if they see capital inflows from PE into their favorite teams and schools that dwarf their donations?
IRC Section 4958 imposes an excise tax on transactions where a tax-exempt organization provides an economic benefit that exceeds what typically would be paid for similar services by similar organizations under similar circumstances.
This excise tax applies to individuals with substantial influence over the organization, such as university administrators of athletic directors. Any compensation beyond this value is considered a personal benefit and deemed a prohibited use of university resources for private gain. Additionally, net profits of a tax-exempt organization may not benefit a private shareholder or individual. It also is important to note that the influx of PE could shift market standards for compensation, making it more challenging to determine what is “reasonable.”
As a result of these changes, higher-education institutions need to strengthen their governance and oversight mechanisms to ensure that compensation remains reasonable and compliant with IRC Section 4958, including:
As the world of college athletics evolves and creates an influx of additional revenue through nontraditional sources, athletic programs and their leaders will attract additional scrutiny. This added attention will call for:
Future articles in this series will focus on peer-group selection, examining how PE-backed athletic departments may require a different screening methodology; the new roles in athletic departments; and how we think about universities’ markets for competitive pay.
