The current model for structuring Major League Baseball contracts is flawed. Today, with signing bonuses and guaranteed money, contracts for professional athletes have become the antithesis of motivation. Today’s ballplayer earns millions of dollars a year, regardless of how well he played. There’s no difference in compensation whether he hits .220 or .320. Besides pride, what is the motivation of players with guaranteed contracts to perform at the expected level?

Incentive pay, also known as “performance pay,” is usually awarded for specific performance results rather than simply for time worked. Most salespeople and production line workers are paid based on performance. You reward your critical talent in a way that motivates them and keeps them engaged. I used to work for a Fortune 500 company that other companies hired to come in and replace their hourly pay structure with one based on performance. I don’t remember the numbers, but the increase in performance (ie output) was significant. The other benefit was that a company’s underperforming employees left because they weren’t willing to put in the effort.

Who do you think sells more aluminum siding, the door-to-door salesman who gets paid a flat salary or the one who gets paid on commission? Obviously, the one who charges commission. He doesn’t get paid unless he makes sales (performs). The increase in sales helps both the seller and the company.

We hear that professional sports are a business. If that’s true, and I believe it is, then team management staff and player agents should adopt the kind of incentive-based compensation structure that has become increasingly popular in both the public and private sectors. private for the past decade. Incentive-based compensation programs make sense because they align the interests of the organization with those of its key personnel.

So if this business model is good for corporate America, why wouldn’t it be good for professional sports?

How many times have we heard that sport is a business? I am a strong advocate of incentive-based compensation in sports. My main focus is Major League Baseball (MLB). I’m also realistic, knowing that the players’ union would never approve incentive-based pay and why should they when there are owners foolish enough to pay players like Jason Werth $126 million to hit .232 and drive in 58 runs. Add in his .229 average with Riders in Scoring Positions (RISP) and you have the perfect candidate for incentive-based compensation.

The Washington Nationals aren’t the only team in the dumb-and-dumb category. The Boston Red Sox paid Carl Crawford $142 million (BA -.255, RBI – 56 RISP -.231) and John Lackey $82.5 million, who compiled a 12-12 record with a 6.41 ERA and a batting average against (BAA) of .308. Let’s not forget the Chicago White Sox. Adam Dunn was paid $56 million (BA -.159, RBI – 42 RISP -.142), plus 177 strikeouts in 415 at-bats.

To further prove my point that players perform better when there’s an incentive to do so, check out the numbers these guys put up in the final year of their contract:

Player Walk Year Batting Average Home Runs RBI
Jason Werth 2010.296 27 85
carl crawford 2010.307 19 90
Adam Dunn 2010.260 38 103
Alex Rodriguez 2007.314 54 156

There are two main problems with professional athlete contracts. One is the guarantee of money and the duration of these guaranteed contracts. Werth, Crawford and Dunn’s contracts are just the latest. The best example of what’s wrong with a long, guaranteed-money deal is the $275 million, 10-year deal that Alex Rodriguez signed with the Yankees in 2007. Rodriguez will be 37 next year and will be 42 when he’s out. . Rodriguez hasn’t played 140 games in a season since 2007, and he only played 99 this year. His on-base plus adjusted slugging (OPS+) has dropped four straight years, from 176 in 2007 to 150 to 138 to 123 to 116 this year. An OPS+ of 100 is considered average for a hitter. Consider that along with declining on-base plus slugging percentage (OPS), a measure of offensive production, that was 1.067 in 2007, .965 (2008), .933 (2009), .847 (2010) and .823 this year. He would like the highest-paid professional athlete in North American team sports history to do it, but no problem for Rodriguez; he gets the $30+ million from him every year and will do so for another six years.

The 2007 contract actually has the potential to be a $305 million deal, but at least the additional $30 million is an incentive based on home run milestones ($6 million each for hitting 660, 714, 755 and tying and breaking the major league record for HR).

If Alex Rodriguez becomes a free agent tomorrow and signs a six-year, $143 million contract, it would be considered one of the worst deals in baseball. Well, the Yankees are on the hook for Rodriguez on exactly those terms.

So if you owned a baseball team, who would you rather have, a player who demands $10 million per year in guaranteed pay with no performance incentives (i.e. the salesman who wants a $150k base) or would you be more inclined to sign the player who said: “pay me less than the market, but if I yield, you will have to pay me much more”? If I own the team, I’m going to be much more inclined to risk paying a lot more for outstanding performance because, if the player performs at a higher level than I anticipated, my team will be better for it. It’s a scenario. win-win

Here are some statistics that could be used as performance measures in conjunction with a base salary. Obviously, individual contract incentives will vary based on that player’s skills. For example, the sprinter who starts will have different hitting incentives than the power hitter who hits fourth. However, they could have similar field measurements.

Number of hits, Number of doubles, Number of triples, Number of home runs, Slugging percentage, Number of runs batted in (RBI), Number of walks, Number of strikeouts, Number of stolen bases, Number of errors, Number of games played (not on IL), sacrifice fly, bunt situations and runner movement, postseason performance, awards: All Star, MVP, CY Young, batting title

There are many new statistical measures called sabermetrics that could also be added to this list. An example of these measures is Wins Above Replacement (WAR). This is a sabermetric baseball stat used to show how many more wins a player would give a team compared to a “replacement level” or minor league/bench player at that position.

Will incentive-based compensation be in the future of professional sports? I hope so because it works. Players like to make money, so align your priorities with the team’s. They need to move away from contracts negotiated for the individual and move towards team-focused contracts. I don’t envy anyone who makes as much money as they can; I just think they should earn it. With incentive-based compensation, players have the opportunity to earn more and owners only have to pay for what they get. Maybe the fans would also get what they paid for. The average cost for a family of four to attend an MLB game ranges from $170 to $230. Unless you live in New York, Boston, or Chicago, that number goes up. In the end, it is the fans who have to pay for these guaranteed long-term contracts. So if sports really is a business, why not start running it like a business?