Special Report: Compensation

March Payday Madness


On the night of Apr. 5, when the coach of college basketball's newly crowned champion climbs a ladder in Indianapolis to cut down the nets, the moment will be freighted with emotion—and money. March Madness, after all, isn't just a basketball tournament; it's a cash cow. CBS last year charged nearly $1.2 million for a 30-second spot during the national championship game, the highest ad rate for any sporting event not called the SuperBowl. Even the aforementioned ladder is monetized: For the third year running, the Werner Ladder Co. has paid the National Collegiate Athletic Assn. and CBS an undisclosed sum—and built a special 9-foot model—in order to be "The Official Ladder of the NCAA Basketball Championships."

On an individual level, no one gains more from March Madness than the coach standing atop that ladder. It's a good bet his contract contains a hefty bonus clause for winning the title. Should the University of Kentucky win it all, its coach, John Calipari, will receive an additional $650,000 on top of his $3.7 million in guaranteed compensation this year. And winning the NCAA tournament almost always means a new, more lucrative contract for a coach, as well. After the University of Kansas won the national title in 2008, it tore up Bill Self's $1.6 million-a-year contract, which had three years remaining, and gave him a new 10-year, $30 million deal.

Even the coach of the losing team in the finals can reap an irrational profit. In 2004, runner-up Georgia Tech rewarded Paul Hewitt with a new six-year contract that bumped his pay past $1 million a year. More impressively, it includes a provision that calls for the term of the contract always to remain at six years. That means should Georgia Tech ever want to fire Hewitt—something many Yellow Jackets fans would like, since Hewitt hasn't been within sniffing distance of the Final Four since then—it will have to pay him nearly $7 million in severance. (Hewitt has recently been in discussions about moving to St. John's University.)

If, as the saying goes, the NBA is a players' game, then college hoops belongs to the coaches. With the best college players staying in school for only a year or two, it is the grown men stalking the sidelines who supply the identity and (relative) continuity of college basketball. Fans create cheers around the coaches' names, the alumni clamor for them to attend their gatherings, and the television cameras focus on their contorted faces throughout the game. But their power is much more than symbolic. The peculiarities of the labor market give them huge financial leverage. Unlike the players, who according to NCAA rules must sit out a year if they transfer to another school, coaches can, and do, change jobs pretty much at will. Even more important, because the NCAA remains wedded to the romantic imagery of amateur "student athletes," the coaches are March Madness' only officially paid contestants. So even in today's economic climate—with schools facing budget cuts and shriveled endowments—college coaches remain proudly impervious to recessionary pressures. "Someone asked me, 'When are universities going to quit paying coaches these outlandish salaries?' " says University of Kentucky President Lee Todd. "And I answered, 'When people turn off their televisions and don't want to watch college basketball.' "

NIKE'S EMOLUMENTS

Before 1979—the momentous year in which Larry Bird and Magic Johnson faced off in the NCAA finals, ESPN was born, and the Big East Conference was formed—college basketball was small-time. "Coaches would get a one-page 'letter of appointment' saying, 'Here's your salary, you're here for this year, good luck,' " recalls Robert Ades, a lawyer who represents top coaches, including Syracuse University's Jim Boeheim and University of Maryland's Gary Williams. "But after 1979, you had 10-page appointment agreements, 20-page endorsement agreements, and 10-page media agreements."

The biggest boost to coaches' paychecks initially came from the shoe companies, particularly Nike (NKE). In the late '70s, a basketball promoter named Sonny Vaccaro persuaded Nike, then a fledgling company focused on runners, to break into the basketball market by paying coaches to outfit their players in Nike gear. The first payments topped out at around $10,000. By the mid-'80s, after Nike's annual basketball shoe sales grew from $7 million to $400 million, the company was giving coaches such as Georgetown University's John Thompson $200,000 a year. "Nike was paying them more than the schools," says Vaccaro.

In the 1990s, Nike and other shoe companies mostly stopped paying coaches directly and signed "all-school agreements," in which the company cuts a check to the school in exchange for all its teams wearing its gear and for other considerations (such as signs in stadiums and arenas) that coaches don't control. The universities then disperse this money to their coaching staffs, with the major portions of it going to their football and basketball coaches. In addition to the ample proceeds from broadcast deals and other corporate sponsorships, these funds account for the bulk of coaches' compensation today.

Kentucky's Calipari is currently the highest-paid coach in college basketball. He has an eight-year, $31.65 million deal, but of the $3.7 million he's guaranteed to make in 2010, only $400,000 is formal salary. The rest comes from what his contract calls "University Agreements," which include Kentucky's deals with Nike and the sports marketing giant IMG (which runs the network that carries Calipari's radio and television shows). Many coaches are explicitly paid for appearances; Jim Calhoun, coach at the University of Connecticut, made $1.6 million this year in a deal that compensates him for, among other things, attending golf outings, banquets, and the team's annual visit to the Connecticut State Capitol.

SWEATER RIGHTS

Beyond their mammoth contracts, coaches have shown a gift for entrepreneurialism. When Ohio State University hired Jim O'Brien as its basketball coach in 1997, he received $200,000 from the university's all-school deal with Nike. O'Brien then cut his own separate deal with another company to supply his team with basketballs. "Ohio State said, 'You can't do that,'" recalls Ades, who represented O'Brien. "I said, 'You didn't say anything about the ball.' So then they changed that. They had to buy him out. It cost them money to learn that." Bob Knight, while the coach at Texas Tech, sold "sweater rights" to O'Reilly Auto Parts (ORLY), which slapped its logo on the black sweaters Knight wore during games.

Then there are the summer basketball camps, which range from the John Calipari Basketball School, at which children ages 7 to 18 pay $415 for the opportunity to have Kentucky's coach tell them to bend their knees on their foul shots, to Duke Coach Mike Krzyzewski's "K Academy," where adults fork over $10,000 to spend five days playing basketball and learning "team-building techniques."

Krzyzewski's team-building lessons are even in demand away from the basketball court. He's a regular presence on the corporate speaking circuit, charging $100,000 a pop, and has served as a pitchman for American Express, (AXP) boasting in the company's commercials: "I look at myself as a leader who just happens to coach basketball." Of the five books he has authored, only two are about hoops; the other three are about business.

So what do the institutions of higher learning that pay these coaches so much get out of the deal? Reliable data for the return on investment of a big-time college basketball team is difficult to obtain. Under the Equity in Athletics Disclosure Act (EADA), each school is required to submit annual revenue and expense figures to the U.S. Education Dept., but there is no uniform accounting standard, and the figures are all over the map. For instance, according to Duke's most recent EADA filing, its basketball team lost more than $2 million in 2008. That's only because the university's accountants didn't credit a substantial amount of income—like $9 million in booster club donations for the opportunity to buy Duke basketball season tickets—to the hoopsters.

At schools with on-campus arenas that hold more than 20,000, such as the University of North Carolina, ticket sales, concessions, and sponsorship deals bring in substantial revenues. Wachovia (WFC) pays UNC more than $1 million a year to put its logo on a courtside table and elsewhere at UNC sporting events. Booster clubs, like Duke's, typically kick in millions for prime seats. And the better a school's performance, the more merchandise it sells: When Kansas won the national championship in 2008, its licensing revenue exploded to $2.5 million, $1.5 million more than the previous year's.

The presidents of big-time basketball schools are quick to point out that the money their teams generate covers expenses for so-called nonrevenue sports, such as volleyball, water polo, and wrestling. At a handful of schools, the money from basketball and football even overflows the athletic department's coffers and trickles down to the rest of the university. "Each year the athletic department gives us $1.7 million in cash for nonathletic scholarships," says the University of Kentucky's Todd.

These presidents also point to other, less tangible benefits. "One of the most effective ways to market your university nationally is to have a really quality athletic program," says David Schmidly, the president of the University of New Mexico, whose basketball team set a school record for wins this year. "It helps recruit faculty, students, and donors. It helps with the image of the whole university." That's why, when Schmidly became New Mexico's president three years ago, one of his first orders of business was to hire a basketball coach who could build a "nationally competitive program"—something he'd done when, as the president of Texas Tech, he hired Bobby Knight. With the promise of $1 million in annual compensation—not to mention $60 million of renovations to the school's arena that will make it, Schmidly boasts, "the best basketball facility west of the Mississippi River"—Schmidly lured one of Knight's former players, Steve Alford, to coach New Mexico.

The fact that Alford now makes almost twice as much as the man who hired him doesn't bother Schmidly. "It's all market driven," he says. "Steve's probably the only million-dollar coach in New Mexico, and a lot of people have expressed concern about that, but you have to look at what you get. It's a competitive industry, and if you want a good-quality coach, you've got to pay for it."

OPPORTUNITY FOR THE LITTLE GUYS

For raw earning potential, basketball is far less lucrative than football. According to the University of Texas's statistics, its football team turned a $65 million profit in 2008, making it a much better business than most professional football operations. But the team's annual expenses—including scholarships for 85 players, a $5.1 million annual salary for its head coach, and $900,000 a year for his top assistant—run to more than $20 million, a level of investment only a big state school like Texas can typically afford. By contrast, the top-tier basketball teams are lucky to clear $10 million. But the barriers to entry for hoops—13 scholarships, one well-paid coach, and a gym are the basic components—are surmountable for less well-heeled schools, like Butler, Gonzaga, and Xavier, that want to make a name for themselves as March Madness participants. On the basketball floor at least, they can hold their own with the giants.

For a school that fields a competitive mid-major Division 1 team and hopes to crack the NCAA tournament every few years, the going rate for an experienced coach is roughly $300,000. A nonstar coach in the Atlantic Coast Conference, in which Duke and North Carolina play, costs more than double that. Success brings rapid inflation. If a coach puts together a string of tournament wins, it can quickly become unclear who works for whom. The top coaches tend to transfer the whole value of their programs onto themselves. "The cream-of-the-crop players tend to be one-and-done, so they're picking schools by coaches as much as anything," says Craig Fenech, a sports agent who has represented coaches and players. "The coaches are game-changers."

For all its success, Duke basketball without Mike Krzyzewski would not necessarily remain a national power, and the university understands that. So when the Los Angeles Lakers tried to hire Krzyzewski six years ago, Duke President Richard Brodhead, once a literature professor at Yale, locked arms with students at a rally outside the school's basketball arena to form a big, human "K" and chanted, "Coach K, please stay!" Oh, and he gave the coach a lifetime contract. Brodhead knew that no matter what else he did at Duke, if Krzyzewski left, he'd always be known as The President Who Let Coach K Get Away."

That may be the biggest reason why—in the midst of hiring freezes and faculty furloughs—university presidents are still shelling out the big bucks for basketball coaches: They fear the consequences of losing. Last year, Kentucky's Todd fired Billy Gillispie after only two seasons on the job and paid a king's ransom to land Calipari. A UK alum himself, who as a Massachusetts Institute of Technology grad student used to drive to a hill outside Boston so he could pick up the signal from a Louisville AM station that broadcast Wildcat games, Todd knows how passionate Kentucky basketball fans can be. And the fact that Kentucky has not been to a Final Four in his nine-year tenure as the school's president weighs on him personally—and professionally. "My job is a whole lot easier, and I'm a much better president," Todd says, "when we're winning ball games."

Zengerle is a reporter for Bloomberg News.

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