Luring and Retaining Top Talent: The Compensation Game
In both business and sports, LeBron James has become a pioneer in garnering creative incentive packages. But, while these salary packages and perks can readily be compared to those offered to “star” executives and highly talented employees, this practice has caused an imbalance in both industries.
Hiring to win
Some of the reported salary terms and perks presented to James to stay with the Cleveland Cavaliers were $20 million per year in salary, a lifetime supply of beer, and a personalized episode of a cartoon show called Family Guy. According to the Wall Street Journal (July, 2009), some of the biggest banks (who received federal financial assistance) offered multi-year multimillion-dollar packages, not only to retain their own talent, but to also lure top talent from competitors. This trend of offering salaries at the top or above the “normal” pay scale has drawn scrutiny in business just as much as it has in sports.
The cost of big contracts
In business and sports, big contracts for top talent can give some companies an unfair advantage. High-salary contracts in business benefits profitable and successful organizations because they’re able to offer hefty compensation packages while unprofitable and unsuccessful companies struggle to offer similar types of salary packages and perks. In the National Basketball Association (NBA), this would be equivalent to unsuccessful franchises such as the New York Knicks or the Los Angeles Clippers offering James $20 million per year.
The notable difference between offering huge salaries in the business world and the sports world is their definition of “hefty.” In business, a hefty salary may be $2 million to $3 million a year compared to the NBA, where basketball players can earn upwards of $20 million per year. In business, high salaries are scrutinized more heavily by federal regulators and challenge the business leader’s integrity. In sports, high salaries are expected and celebrated while the leader’s sanity is questioned.
To add to this imbalance between industries, as a means to solve the problem in business, the federal government is considering a move to regulate compensation. But, the federal government has yet to consider regulating compensation in sports.
You pay, they play
Organizations that choose not to compete for top talent with large salaries and exorbitant perks stand to lose out. In business, loss of top talent may result in poor productivity and effectiveness. Loss of talented employees may also mean a loss of investors or a lower valuation of the company’s stock. In sports, the loss of top talent could result in a loss of fan support, revenue or a relocation of the franchise. In both cases, a leadership decision of opting not to make big payouts for talent can be just as costly as overpaying for a highly talented star.
Nonetheless, the ultimate winner and loser will be the customer and/or sports fan. While the customer and/or sports fan benefits from better products, services or entertainment, they often end of paying for it in one way or another. This is because compensation entails a number of components: base salary, short-term incentives, long-term incentives, employee benefits (i.e. health, medical, tuition reimbursement, etc.), and perks. Because the organization’s objective is to make a profit, the employee’s compensation expense is transferred to the customers or fans by raising the price of the goods and services offered.
It’s still about the team
Some may view the tactic of offering large salary packages and bonuses as a savvy business decision, or as a necessary evil. In order to walk that fine line a leader must decide if they are going to actively compete to lure and retain top talent. And, a leader must decide to what extent (or just how much) they are willing to offer and invest in a talented player.
Most importantly, a leader must determine how to communicate their decisions to the rest of the organization and its stakeholders in order to ensure the desired productivity and effectiveness of the team is not diminished.
Kelly, K., & Munoz, S.S. (July, 2009). Banks ramp up pay packages to top talent. Wall Street Journal.
Nursey, J. (2010, July 8). Billons and beer for LeBron James as NBA free agent gets bombarded with contract offers. Mirror.co.uk.