Podcast Alert: Coaching Buyouts: Smart Strategy or Expensive Panic?

Transcript

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Charles Rolston: [00:00:00] Welcome to Navigating Sports Business podcast, back for another hot takes edition. I’m Charles Rolston, VP of Consulting here at Navigate, and I’m joined by our founder, AJ Maestas. Today, we’re diving into one of those topics that seems to come up every single year in college athletics, coaching buyouts. 

And honestly, the more things change in college sports, the more they stay the same. We’re staring at another year of record-breaking dead money, and from the outside, it all looks completely irrational. But when you really look at the numbers, there’s a reason schools keep making these moves. The upside of getting the right coach in place can be worth far more than even an eight-figure buyout. 

Charles Rolston: So AJ, let’s start with this. What’s the real financial logic that drives a school to make a change even when the buyout is massive? 

AJ Maestas: The quick answer there is that a successful coach, as compared to an average coach, drives an incremental $20 to [00:01:00] $35 million per year just in athletics at your top programs. 

Charles Rolston: Wow. 

AJ Maestas: There’s more to it, right? I think we all know there’s some caveats there. 

Charles Rolston: And that ties directly into the timing element too, because the flip side is the cost of not acting. I’d love for you to touch on what’s the real cost of indecision here. Don’t be afraid to get into details. 

AJ Maestas: All right. I appreciate that invitation cause I’m at risk of getting into serious details. But one of the things that is that it’s not overnight, right? There’s a slow slide, down that sort of scale, and you don’t turn on the floodgates immediately either. And it’s very dependent on the university. 

But but yeah there are examples, Colorado, and we had him on this podcast, so people can comb through our library and find that interview with Rick George. But that instantly paid for itself and yielded the kind of numbers I just shared. But on average, it’s the risk of sliding down and then the slow road back. 

So what’s hard for the outside world to see is the math on [00:02:00] that, lag effect of getting good again and not really wanting to feel that pain, certainly in an environment where the cost structure is increasing so much, right? There’s $20 million a year these top programs are now paying directly to athletes. 

It’s not like they instantly found $20 million more in revenue this year. So yeah, bad time bad time to go backwards. 

Charles Rolston: Yeah, and we know that from our research that the difference between a seven-win team and a 10-win team can mean as much as $50 million in exposure value annually across broadcast and earned media for the institution. 

When a team wins, that exposure really can jump 20% to 40% year over year as they get placed on more high-profile linear windows. But I kinda want you to talk about this cost of indecision. What’s facing universities from a macroeconomic level? I want you to talk about the demographic cliff drops in enrollment for less attention and investment given to athletics. 

What is facing leaders in college athletics and institutions around the country right now that keeps them up at [00:03:00] night? 

AJ Maestas: I don’t think there’s a ton of indecision. We’re breaking records this year with how early people are being let go. What keeps them up at night, when we talk about 20 to 35 million incremental per year with a great coach versus an average performance that’s not counting things like fundraising at the university overall or esprit de corps, on campus. 

You shared research with me just recently, that at these major conferences, 90-plus percent of the student population feels athletics is critical or, very important to, to the culture and atmosphere of the university. I’m not talking about the media exposure they earn, so I’m not doing fuzzy math and saying, “Oh, they earn media equivalency of this many millions of dollars of advertisements you’d buy.” 

This is all in addition to what I’m describing when I say 20 to 35 million per year. I’m also not talking about enrollment, and that’s a whole nother rabbit hole we can end up going down. But for the first time in generations, many generations enrollment is on the way down, already on the way down in a lot part of the country, and it’s gonna get worse because of size of population and intent [00:04:00] to go to college. 

This is basically how they balance their books when the states come short on funding every year, right? Rise intuition or increase enrollment. The problem becomes much bigger than 20 to 35 million per year when you count the full influence and ape- effect, that athletics has on a whole university. 

So really, honestly I can understand why people are pulling the trigger close earlier, I should say, than normal, and that’s before we even get into, transfers and the transfer portal window being moved up. That doesn’t help. That forces schools to make that decision quicker. So yeah I can understand why many of these universities have pulled the trigger. 

Charles Rolston: It’s been said for the past 15 or 20 years that athletics is really the front porch to the institution. But I think things are changing with the timing of this demographic cliff is that, knowing from that research how important a healthy and sustainable athletics program is to the student body, it’s really more of an enrollment stabilizer now than just being a front porch and an introduction. 

I wanna ask you a hypothetical because I [00:05:00] think that when I’m on Twitter and I’m on specific institutional forums, I go deep on the rabbit holes. One of the things that we see as a common argument is that, why not keep our coach and let’s take that buyout money, call it 50 to 70 million, and let’s actually invest in NIL and put the best possible product on the field? 

Do you have a challenge to that argument? And I would love to hear your thoughts on it. 

AJ Maestas: I think that’s smart. I think that’s really smart. In fact I believe yesterday I had a conversation with one of those athletic directors, very rare person who’s had great success in the pro sports world and has college experience. 

And he’s done just that. He, in assessing his program, because let’s be honest, each case is unique, and we all know you can see, the shortfall, the momentum, culture recruiting, et cetera. And he identified that they were so short on resources, that they weren’t properly supporting their existing staff. 

So were they really ready to make a switch, or had they given that person a fair chance? And so now I’m gonna contradict myself by saying, yeah, I think there’s plenty of examples when you look at [00:06:00] that cost of change and ask yourself if you’ve invested correctly. And by the way, the new coach, they’re gonna expect you to do that. 

If you want to attract a high-quality coach, they’re gonna have expectations around NIL, around training, around the locker room, right? They’re gonna, they’re gonna have expectations that you’re gonna have to meet, so better get your house in order first. So why not? Yeah, I agree. And there’s a long track record of legendary coaches who had some ugly years in their first three, four, or five years. 

Virginia Tech’s a client of ours, of course, so they’re top of mind for me lately. And their legendary Hall of Fame coach would’ve been fired in this current climate before he ever started winning. So yeah, patience pays sometimes. 

Charles Rolston: Just because I like to play devil’s advocate, when I read those tweets the first thing that comes to mind is that NIL, to me, is not really funded by the institution. 

It’s funded by donors and donor confidence. And if you’re not– if they’re upset with an AD’s decision to hang on to a coach that, might be past its time you’re gonna lose that donor [00:07:00] confidence and that money that you were gonna be devoting to NIL might dry up. And again that, that trickles down all the way to athletes who consider that institution as, a potential lily pad to get to the NFL Draft. 

And I think that there’s, massive ramifications for that indecision that we talked about earlier that goes beyond just, oh we have this money that would be devoted towards a buyout. Now we can put it directly onto the product on the field. 

AJ Maestas: Yeah. I don’t think that’s crazy at all. There’s an agency issue here. 

And by that the economic term, incentive alignment. You’re an athletic director and everyone’s barking at you, and you probably aren’t gonna be the athletic director there in 10 years or even five, and they wanna make a move, and it’s not your money. It’s not coming out of your pocket. 

And so yeah sure. We could go down another rabbit hole on incentive structure and governance and what have you, but but no doubt I agree. You start to see that momentum move. Ticket holders, donors, so many donations are tied to premium seats. You don’t wanna get on the wrong side of that sliding scale.[00:08:00]  

And not in this environment either. Another topic that could take us way off subject is, realignment. And so certainly the main pressure is this house versus NCAA settlement and this new, 20 million a year you’re having to find to compensate athletes. But big picture, you can feel the last train leaving the station here on the highest level of college football at least. 

Charles Rolston: I do wanna touch on AD incentives, and I’m really glad that you brought it up because, when I ask myself, how can schools better align AD motivations with the long-term goals of the program? Right now they’re incentivized and judged on their short-term outcomes. 

Landing that perfect high-profile coaching hire, creating that quick momentum that gets donors really excited or responding to immediate pressure. And I think that dynamic, it helps drive these big guarantees and these fast firings that we’ve been seeing. You look at James Franklin, for example. 

He set the standard at Penn State, win 10 games a year and compete for national championships. And he was well known for reliably [00:09:00] beating the teams that Penn State were supposed to beat. But really all it took was, two slip ups that left him out of a job, and he became a victim of that own standard. 

So I would love to hear your thoughts in practicality, the top three things that, could be changed at the incentive level to make sure that an AD’s goals are aligned with the long-term goals of the institution. 

AJ Maestas: I can’t resist talking about that just ’cause now we know he’s going to Virginia Tech. And what do they say? Happiness is performance minus expectations. I can understand how Penn State fans might feel, right? Always losing to Ohio State, one game away. But they didn’t play at that level before him for many years, right? In fact, their whole time in the Big Ten, I think this is about as strong as they’ve been on a consistent basis. 

There’s three coaches right now, three active coaches that have won a national championship. So look at the top 15 universities, let’s say, or football programs. They all expect to compete for and win national championships, but there are three head coaches that have done it. So what is the likelihood you’re gonna succeed in that next [00:10:00] choice? 

How many new hires are there at that school and thriving five years later? They haven’t been fired, there hasn’t been a scandal, they haven’t been poached and taken somewhere else So I do think there’s, it’s such a tough balance for athletic directors and boards and presidents. It’s it’s really tough. 

But and again, I’m not saying they should have kept him necessarily. It’s just what would a stoic say? Let’s wait and see. It’ll be interesting to see what happens here in the future, ’cause it’s pretty tough to elevate the performance he was consistently delivering. And yeah, we’ll see who they choose. 

But don’t keep in mind there are pressures. They’re about to open a new stadium or build a new stadium. The pressure’s on there. So I feel for Pat Kraft and, all that is in front of him there. But he’s a football guy, so I think he’ll know the candidates. 

As far as incentive structure, yeah, what a terrible incentive structure we have. It’s don’t get fired. Don’t let the loud minority fire you, get upset with you. You have one boss, 10 bosses, thousands of bosses. Think of the stakeholders an athletic director has to think about, students, staff, faculty, alumni, politicians donors oh yeah, fans. 

There’s still fans. Yeah I would [00:11:00] say anything a department could do, and you know this is what we’re doing with our clients right now, to create an incentive structure to balance that risk-reward equation. Right now, there’s really high risk aversion, especially with university presidents and athletic directors, and managing against the short term. 

Anything I can do to close this financial gap, but this gap isn’t going away. The health settlement and compensation’s not going away. This is not a short-term problem. It is a perpetual, permanent, and as we’re predicting that those costs will grow higher than are currently stipulated in the health settlement over the next decade, 20 years, et cetera, et cetera. 

So LTIPs, long-term incentive plans where someone has an incentive to consistently, hit certain financial targets, equity or equity-like mechanisms. In the private world, someone who goes to 200 events a year and it’s a lifestyle job and it’s days and nights, and they’re working their butts off in the day and they’re managing 20 sports and all these different stakeholders I described, they have a big payday waiting for them if they double, let’s say, the revenue of that organization. 

It would double its market cap, [00:12:00] and they would participate in that. There’s none of that for athletic directors right now. So yeah, I think governance, think about the people that are ultimately making the decisions for their future. 

Charles Rolston: I’m hopeful that the incentive structures change. 

Let’s do prediction time. What do you think? Okay. I read a stat today that total severance pay for FBS schools since the introduction of the CFP is set to surpass $1 billion, and that just blew my mind. Do you see these coaching contracts changing in the next few years, or is this buy-up cycle here to stay? 

AJ Maestas: Was that a Dr. Evil $1 billion, or what did I just hear? Look, did you rehearse that? Yeah you know what? I need a moment to think, honestly, because the reported numbers are not the real numbers, right? We know there’s relief, right? There’s mitigation on a lot of these contracts which can overstate the buyout, but it can be understated because a lot of assistants are on multi-year contracts. 

There’s huge staffs that are turning over all the NIL and other commitments that are associated with it. But what would I predict? Oh it goes up. It goes [00:13:00] up with one exception, if we start to get into a more free and open labor market situation. I need you to fact-check me on these, but just, rough high-level numbers. 

A head football coach at top programs, let’s call it top 25, makes about… let me do it on a percent basis. They make about five times more than an NFL coach does relative to the revenue of the organization. In basketball, I think it’s even worse, I believe. I’d have to check on my numbers, but there’s some fuzzy math in there because, a football or basketball coach at a major university is also your front office. 

They’re your GM, so they’re talent identification development. They’re managing the payroll. So it’s a little unfair. But even when we look at those numbers and just roughly doing it, it’s in that like three to six X range, as in three to six times more than is invested relative to revenue in the pro sports world. 

Now, the athletes are getting about 25 cents on the dollar, and in the pro world, they get almost always about 50 cents on the dollar. So you have coaches [00:14:00] getting paid on a proportionate basis of the business that they’re, leading three to six times more than you see in the pro sports world, and you see the athletes getting half. 

Is there something that’s gonna curb are, what, are we gonna put a cap on it? Good luck. It blows my mind actually that they were this close to legislation that would give antitrust protection for the NCAA and caps athletes at earning 20.5 million without collective bargaining. 

That is, really surprising to me. Could you get coaches wrangled in? No. Even the pro sports leagues don’t have the coaches into a collective agreement where they’re capped in their compensation. So I think market forces, as in the total labor pool and dollars shift toward the athletes, but that doesn’t help an athletic department. 

Either way, they’re writing that check. But absent that, even though they’re paying a lot more to athletes than we did just a few years ago no, I don’t see it because as we open this discussion, two to three X ROI on a great coach versus an average, on a yearly basis, not counting all the other benefits that accrue to a successful athletic department, it’s a [00:15:00] pretty easy choice and a pretty easy investment in that coach, and there’s these caps and controls on labor, on the talent, on the athletes. 

So yeah, we’ve created this problem ourself ’cause we have a constrained marketplace, right? 

Charles Rolston: As there’s legislation for everything in college athletics being debated right now. And actually there is one that is talking about capping the coach’s salary at 10X the highest paid faculty member at the institution. 

AJ Maestas: Good, good luck. 

Charles Rolston: Will it pass? Good luck. That’s what I was thinking too. But it’s a vicious cycle. If anybody thinks that the buyout cycle is going away, I got real estate to sell them. It, it– Look, you have a big time program firing a coach, and he’s owes a massive guarantee. 

That starts the cycle. Then you get attractive coaches that enter the rumor mill. They use that as leverage to renew early with their long-term guarantees of their own. The ones that do end up switching, they switch because they’re incentivized by a guarantee from the other school as well, and the cycle just continues, and it continues. 

What we’re probably gonna see is no longer 10-year deals for a head coach just because things move so fast. [00:16:00] It can be two losses in a row, and a head coach is gone. And I think we’re gonna continue to see this buyout cycle until there is a cap on coaching salaries, something that I’m not very confident in. 

But you can really, you can realistically change the names, you can change the schools, you can even change the conferences, but the incentives stay the same, and until they change I think we’re gonna see much of the same status quo. So AJ, unless there’s anything else that you want to touch on this subject, I can close this off. 

AJ Maestas: You played college football, so let me ask you a question. And I apologize, you’d be super unprepared for this, but we’re working on these situations. We, the schools we tend to work with are ambitious. They want to play at the highest level. They see those holistic benefits that come to a university. 

You are in the hot seat, and your life depends on this. Your job, your career depends on this, your family, shannon’s life is massively altered. Your future children are massively altered based on you keeping that athletic director job, and you’re probably not gonna get an equal or maybe anyone if you lose that job. 

And the pressure’s [00:17:00] on you with underperformance in football or basketball. Let’s be honest. Do you pay one of these giant payout and you roll the dice thinking you’re gonna find that diamond in the rough on a coach? So would you also let go of an underperforming coach and pay the outrageous buyout? 

Charles Rolston: As you were saying before, so many stakeholders that an athletic director is beholden to. The massive amounts of pressure that they must feel, not just on their phone from Twitter notifications, but, seeing people down on campus and constantly hearing the the negative perception of the program because of the way the direction of the of the team is going. 

I would probably fold under that pressure too, but I think what we’ve talked about today is it’s not necessarily a bad thing. These guarantees, they have a role in the space and the economy of college athletics. But the, the, on the other side of the coin, the institutions and the athletic directors are rewarded in the sense for making these quick, swift decisions, as long as they put in the due diligence to make a right hire, and the [00:18:00] trajectory of the team is then, higher than it was before. 

Because the donations are gonna come tenfold, people are gonna fill the seats. There’s all the trickle-down effects that we talked about the positive effects at the campus level. So yes, absolutely I would. I would pay it, and I would be looking to find my next coach, the same day essentially. 

What about you? 

AJ Maestas: We have this service that goes into great detail on psychological profiling of coaches and their performance and teasing out, attraction, retention, identification of talent, all these other factors to truly understand if they’re gonna be successful at school A versus B and what have you. 

And the truth is I don’t think a lot of people do that kind of rigor and due diligence. I think we have tools in our toolkit that would make us, at least from the nerd side of things and what Navigate does, smarter than your average bear in that search. And then, of course, you rely on experts, who know the game and know the people and what have you, and do proper due diligence. 

But yeah, I think I would. One thing I’ll leave you with ’cause I could tell it’s time to wrap up, but the enrollment cliff the demographic cliff coming, and the enrollment issue that I brought up earlier, quick [00:19:00] math, just based on population and the propensity of men in particular to go to college, 10%, 15% reduction, in enrollment. 

So not every school faces this. Not every school. Some schools have unlimited demand. Some schools, don’t want to raise their tuition. But when you count raising tuition, enrollment, out-of-state students, it’s a hundred million-plus dollar annual impact. So your whole athletic department budget right there, could be considered a advertising d- department for enrollment. 

And again, not every school. It doesn’t apply to everybody, but look at some of these Southern schools that have been on great tears, Georgia, Alabama, and what’s happened to their student body. The quality of the students is up. The number of students is up. The per- out-of-state students who tend to pay for three or four times the cost to educate them is, at record-breaking numbers. 

A longtime client of ours, Oregon, 57% of kids are out of state It is literally how the economics work at that university because that brand allows them to attract, in particular, kids out of California. So the enrollment thing, don’t overlook the effect of this. When we isolate athletics on its own and look at the financial matters, it [00:20:00] looks like a mess and a nightmare. 

How can we fund Olympic sports? How is this all possible? When you back out and think about what it does for the university system, this is an easy choice. So yeah, I’m one of those suckers. I’m the guy who puts his whole career on the line, pays a giant buyout, and hopes like hell that you make that great hire. 

And I’m at one of those schools where there’s a fourth active head coach that’s won a national championship. Yeah, I’m in. 

Charles Rolston: Our main goal was trying to keep this brief, and 25 minutes later, here we are. Hope everybody enjoyed that. Thank you all so much for listening to Navigating Sports Business. I’m Charles Rolston, joined by AJ Maestas. 

If you have any questions or comments for us, we would love to solicit some feedback from you. If you like these hot take editions, please feel free to reach out. My email is Charles@NVGT.com. You can find me on my personal LinkedIn or the Navigate page. And we really appreciate all of you for listening all the way through, and we’ll see you next time. 

AJ Maestas: All right. I’ll see [00:21:00] you.