The Incentive-Based Contract

Thought of the Week: The Incentive-Based Contract

Ricky Williams' deal may pave the way for more bonuses, less guarantees

New York, May 25, 1999 -- One of the tenets of a capitalistic system is a reward structure for good work. Bonuses, raises and stock options are common elements of the working environment. However, in professional athletics, the rise of long-term contracts and guaranteed salaries have turned this notion on its head. How often does one hear that an athlete is having a "career year" in the last year of his contract?

Athlete unions as well as trade and civil service unions don't necessary hate bonuses and incentives. But they would trade some incentives for contract stability. The reasons are just: uneven treatment of the workers can raise the dangers of the employer playing favorites. They do not want too much subjectivity in the hands of bosses to determine these goodies.

Since professional athletes in the four major sports receive far more income than an average unionized worker, I think this worry is not as great.

What brings this to mind is an item I saw the other day. Saints running back Ricky Williams' incentive-laden, seven-year contract that guarantees him $11.6 million over that time. Not a huge, huge amount these days for a top rookie. However, if all the bonuses are exercised, it could be worth $68.4 million, the most lucrative deal ever for an NFL rookie, according to the New Orleans Times-Picayune. Williams' contract includes an $8.84 million signing bonus and base salaries that range from $175,000 to $400,000 over the course of the deal. Also included is $1.6 million in annual bonuses of $100,000 for doing such things as participating in off-season workouts and keeping his weight below 240 pounds. Williams can earn another $500,000 each year if he reaches at least 10 of 26 goals worth $50,000 apiece.

There are also escalator clauses that jack up his salary based on his previous season's rushing total. For example, Williams can earn $1 million for gaining 1,600 yards, $1.5 million for 1,800, $2 million for 2,000, $2.5 million for 2,100 and $3 million for eclipsing the NFL single-season rushing record. And those are just a few of the incentives.

This is a contract should be seen more frequently, not just in football (which generally does not use guaranteed contracts and are front-loaded with huge signing bonuses for that reason), but in baseball. As a sport with the most powerful athletic union, these kinds of contracts (with incentives for numbers of hits and RBIs, for example) could serve to increase productivity among certain players and also be a public relations boost for the players, who have received considerable public criticism over the last two decades for the size and length of their contracts.

The Williams deal with negotiated by an agency run by Master P, a rap artist who seeks to enter the sports world as an agent. It's a back-loaded contract, meaning that the major goodies do not even become available until the 2003 season (a major risk, since the average playing life of an NFL player is three years). Even the signing bonus is not a straight fee. More than half of it is deferred.

Incentives do not always work and the potential for abuse by owners and coaches exists. Benching a player just before breaking a record could happen, but the contract could have a "good-faith" performance clause to alleviate that risk. If the player thinks that management is deliberately trying to stop him to achieving a milestone, an arbitrator can be appointed to hear the matter and decide.

In any event, Ricky Williams' deal can be a benchmark for others.