Friday, October 24, 2008

Pay for Performance

This is from Frank Glassner of Compensation Design Group. Enjoy!



NBA teams are making the final push for the playoffs in hopes of playing for the championship. Many of these teams have made enormous financial sacrifice by relying on a few select players to lead them to glory, and paying them millions of dollars in guaranteed pay.


Are these so called “warriors of the courts” worth the outrageously absurd amounts they are paid?


Frank Glassner, a nationally recognized authority on executive pay and CEO of Compensation Design Group (CDG), decided to see if the actual game statistics of NBA superstars contributed to their multi-million dollar pay packages.  A sports player’s statistics reflects their accomplishments on the job.  Likewise, in any well run company executive compensation should depend on how well both a company and its executives perform.  Either way shareholders and sports fans want to see one thing – PAY FOR PERFORMANCE!

The NBA salary cap has increased from $26.9 million 10 years ago to a new level of $55.63 million, the highest amount since the cap was established in 1984. This doesn’t even take into consideration amounts each player receives from endorsement contracts.  “The current salary structure of the NBA has become bloated and obscene,” said Glassner. “Exorbitant sports salaries and mind-bending compensation packages have become synonymous with ‘pay for ego’ vs. ‘pay for performance.” 

“Some NBA players are paid like some CEOs who’ve run companies aground, and still scored handsome exit packages – leaving scores of fans, shareholders and employees disappointed” said Glassner, a 32-year executive pay consulting veteran.  “They are paid for lackluster performance, and deliver what they are provided incentives for”.  An ideal compensation plan for players would be one based on the same principles and procedures used for successful businesses - a plan based heavily on the core of Compensation Design Group’s “pay-for-performance” incentive plan programs.

In Glassner’s plan, players would receive a base salary determined by number of years with the NBA, plus incentives based on points (adjusted by field goal percentage, “FG%”), assists, steals, and blocks per game.  Additionally, there would be bonus payments for post-season play, for achieving top league status in various statistics – and behaving themselves as well.









  The following outlines Glassner’s Pay-for Performance plan for the NBA:

Base Salaries:                                                            Per Game Incentives:

Rookie             $200,000                                             $2500 per point

2nd Year           $300,000                                             $1500 per assist

3rd Year           $400,000                                             $1500 per steal

4th Year           $500,000                                             $1000 per rebound                             

5th Year           $600,000                                             $600 per steal

6th Year           $700,000                                

7th Year           $800,000        

8th Year           $900,000

9 + Years         $1,000,000


In order to avoid potential for “gaming” the points category, points related incentives would be adjusted based on field goal percentage (FG%).


FG% Per Game

Points Adjustment

≥ 60%


















≤ 20%


For example, if player A scores 20 points in a game with a field goal percentage is 0.235; his total income from points scored is $10,000.

20 x $2500 x 20% = $10,000

In contrast, if player B scores the same number of points in a game but his field goal percentage is .461; his income would be $62,500.

20 x $2500 x 125% = $62,500


In the summer of 2005, the Cleveland Cavaliers signed 29 year old Larry Hughes to a 5 year, $60 million deal. Hughes was expected to be the sidekick of young superstar LeBron James, but he has been injury prone and his productivity has decreased each year since joining Cleveland. Hughes is set to make $12 million this season, and his salary will increase to nearly $14 million in 2009-2010.

  Assuming that he plays in each of the remaining games this season, for every minute he is on the court, Larry will bring in approximately $6375. Additionally, if we take into consideration that Larry practices 4 hours per business working day, then he would still earn about $236 per minute. Imagine if you made $6375 for every minute you worked. In just one day, that’s 60 minutes x 8 hours x $6,375 = $3,060,184.  In reverse, the median household income for 2006 was $48,201.  Break that down and the average American made about $0.38 a minute. 





Applying Glassner’s plan to Hughes’ performance so far, he would have earned $1,686,500 - a far cry from the current situation.  Up to this point in the season, Hughes played in 21 games scoring 192 points with a field goal percentage of 33.8%, 57 rebounds, 49 assists, 34 steals, and 5 blocks:



Total Pay

Base Salary

11th Year in NBA


$2500 for each point

192 points


$1500 for each assist

47 assists


$1500 for each steal

31 steals


$1000 for each rebound

53 rebounds


$600 for each block

5 blocks





(1) Field goal percentage incentive calculated for each game and totaled.

Assuming Hughes maintains this productivity and plays in every game for the remainder of the season, his total earnings for the year would be about $3,225,000. This is considerably lower than his $12,000,000 salary.

“Under this plan, if players performed at their maximum, they could actually earn their current mega salaries,” said Glassner. “The incentive to perform at their optimum would be simple: better performance, more money.”

In contrast, let’s apply Glassner’s plan to teammate LeBron James, one of the NBA’s most exciting and productive players (at the moment), who has a comparable salary to Hughes. At this point in the season, James is averaging over 3 times as many points as assists as Hughes, and more than twice as many rebounds. Through the team’s first 31 games, James would have earned $4,036,600 under Glassner’s performance based plan, which would be about $9,725,000 for the entire year at the current performance levels. 



Total Pay

Base Salary

5th Year in NBA


$2500 for each point

848 points


$1500 for each assist

222 assists


$1500 for each steal

55 steals


$1000 for each rebound

210 rebounds


$600 for each block

31 blocks





(1)     Field goal percentage incentive calculated for each game and totaled.



It is evident how much basketball players are overpaid, even high performers like LeBron James. In fact, under Glassner’s plan, Wilt Chamberlain’s legendary 1961-1962 season, where he averaged over 50 points and 25 rebounds per game, would earn him around $18 million in today’s dollars. This pay would rank him behind 11 players for the 2007-2008 season, some of which have never had a 50 point or 25 rebound game in their careers.

Realizing these figures only represent individual production, players are also eligible for year-end awards.  The tables on the following page outline incentives that players can also cash out on if they perform – and behave themselves as well. 

Year-End Awards:

Year-End Team Based  Incentives

Per Player

NBA Championship

$1 million

NBA Runner-Up


Division Winner


Playoff Participant


Year-End Individual Incentives


Most Valuable Player

$1 million

Rookie of the Year


Defensive Player of the Year


Sixth Man Award


Most Improved Player


Sportsmanship Award


J.Walter Kennedy Citizenship Award




With white-hot scrutiny on executive pay, why not apply the same concept to professional athletes?” said Glassner.  “Especially now, with sports pay that has skyrocketed at an alarmingly high rate – with more and more players performing like Apollo 13.” 

Unfortunately, in the end, the fans, especially the kids, are the ones who lose if the current guaranteed pay system continues. “If sports teams dared to adopt true pay-for- performance pay plans, they could actually improve the game,” said Glassner. “Players, like great executives, become more motivated to improve skills and set great examples that are reflective of their pay.  Owners certainly wouldn't complain about rewarding performance, and the real winners would be the fans.  They would get to see an improved game with all players trying their hardest, no matter where their team is in the standings – just like the old days”.



No comments: