Have you ever read about a professional athlete signing a contract for millions of dollars (or euros, or rupees, or whatever currency you carry) and proclaim that it is unfair that someone should be paid so much money to play a game?
Why do people feel that way? Is there anything more transparent than the publicly disclosed salary schedule of a sports team? With a few clicks of a mouse, you can find the total payrolls plus individual salaries of almost any team and player in any sport on the planet. You can also find the relevant statistics in that sport to make a subjective evaluation if an athlete “earned” his/her salary. You can look for evidence such as batting average, goals scored, assists, points per game… you get the idea. Athletes whose performance is not commensurate with their compensation are likely to hear about it every time they perform, and not just by the person who signs the paycheck, but by thousands of disappointed fans and by members of the media.
I’m sure most of us would welcome the opportunity to make the kind of money that top professional athletes make, especially if that money were guaranteed in a multi-year contract. However, how many of us would also be willing to have our salaries made a matter of public record and have them become a topic of public discussions? And how many of us would be willing to have anyone and everyone weigh in on whether or not we were earning our salaries every time we showed up for work?
Compensation Method Similarities
There are many different methods of compensation for athletes, just as there are many different methods of compensation for financial advisors. Some athletes sign contracts for a salary that is guaranteed, regardless of whether they become injured or fail to meet expectations of performance. This might be akin to fee-based asset management, where the advisor earns a fee based on the value of the assets under management. The salary is affected only slightly by investment performance. For example, if the value of the client’s assets declines by ten percent, the advisor still receives ninety percent of the prior salary.
Some athletes are paid strictly on their performance; professional golfers are a well-known example of this method of compensation. There is no guarantee of anything with them. Their pay each week is based on how well they performed that week. A baseball player in a 2-for-40 hitting slump still gets the same paycheck as he does later in the month when he’s on a 20-for-40 hitting streak. A professional golfer can miss a three-foot putt that can reduce that weekly paycheck by a half-million dollars. No one in the financial services business chooses this compensation method. The closest we come is hedge fund managers, who take a guaranteed fee and a big percentage of gains over a certain amount. However, they never assume risk akin to missing a three-foot putt. This is why the average hedge fund manager makes more than even the best professional golfers. (It’s also why I have more respect for the worst professional golfer than I do the best hedge fund manager.)
Because individual salaries have risen so high in professional sports, there isn’t the kind of bonus money there used to be. The bonus money is also not large enough to be a major incentive to these athletes. Some athletes receive bonuses for reaching performance targets, though their contracts almost never have a similar penalty for failing to meet minimum performance targets. I’ve even seen bonuses paid for not exceeding a certain weight. (How ridiculous is it when you have to pay a professional athlete to not let his body go to pieces?) Bonuses paid in our line of work are more common and can come in several forms. Your company may pay a bonus to employees if certain revenue and profit targets are met. But the most common bonuses in the financial services field are based on production – how much of our product did you sell last month/quarter/year?
Compensation Transparency: A Spotlight You May Not Want
I’m not advocating any one compensation method over another, either in professional sports or in financial services. I believe the market does the best job of determining the proper methods and levels of compensation, at least when there is transparency in the process.
Here’s my final thought on comparing compensation methods in these two very different fields – If ESPN decided to do an expose’ on how you get paid and how much you get paid, could you justify your method and level of compensation any better than the professional athlete? Could you show a clear correlation between value given and income received? Would you fear that undisclosed sources of income or conflicts of interest would come to light? Would your public image suffer if the public suddenly knew anything and everything about your compensation package? If your clients watched this expose’, how would they react? If the thought of such an expose’ makes you uncomfortable, it’s time to change those aspects that make you uncomfortable. It doesn’t speak well of our profession if a bunch of overpaid jocks can handle transparency better than we can.