More Thoughts on Incentive Pay

Continuing with the theme of evaluating the behaviors of Major League Baseball Teams and trying to tie their contracts, incentives, etc into those of a business, I thought it would be beneficial to look at an interesting article that was just published called, “How One Cy Young Vote Could Be Worth $21 Million“.

Written by Derrick Goold of the St. Louis Post Dispatch, Mr. Goold pulled back the curtain on the Baseball Writers Association of America (BBWAA) by suggesting that they were politically motivated (or de-motivated) when casting their votes for this (and previous) Cy Young award winners.

If you’ve read this blog for any length of time you’ll know that I’m a huge fan of Steven Levitt (Author of Freakonomics).  In his blog that he writes for the New York Times entitled “The Hidden Side of Everything” he said:

Most people, given the opportunity, would like to have a say in what other people earn. If someone is nice to me, throw a little extra Christmas bonus their way. If they are rude and surly, how about a 3 percent pay cut?

So I find it interesting that the Baseball Writers of America (BBWAA) recently approved a rule which says that any player who has an incentive clause based on an award voted by the BBWAA (e.g., the Cy Young award) will not be eligible to win that award. The proximate cause of this decision is Curt Schilling’s contract, which pays him $1 million if he gets even a single third place vote for the Cy Young. When he joked about paying off a writer to throw him a vote, that was the last straw.

I understand that the politics of voting for the Cy Young award may not make all that much sense to you if you’re wondering why I’m bringing this up so I’ll get to my point.  Topgrading has long suggested a Scorecard by which you can measure the performance of an employee using statistics, accountabilities and accomplishments.  This is something that baseball has been doing for over a decade.  Granted, it’s a lot easier to measure OPS (On Base Average Plus Slugging Percentage), ERA (Earned Run Average), WHIP (Walks & Hits per Inning Pitched) or VORP (Value over a Replacement Player) than whether an HR Manager was able to improve the coaching skills of middle management, but the idea is the same.

For a baseball player, when millions of dollars are at stake, would you rather have someone demand $10 million per year in guaranteed pay with no performance incentives (hint: the sales guy who wants a base of $150k) or would you be more inclined to sign the player who said, “Pay me less than the market but if I perform, you’re going to need to back a bank truck up to my house”?  As a business owner, I’m MUCH more inclined to risk the chance of paying a lot more in the long run to get stellar performance because, if the employee performs at a level a lot higher than what I anticipated, our company will be better for it.

Here are some additional thoughts from Derrick Goold on Adam Wainwright, the Runner-Up for the 2009 Cy Young Award in the National League:

Wainwright’s deal is packed with a two-year option for 2012 and 2013. Both years are triggered at the same time and the base value set for them is $21 million. Wainwright’s two-year option vests like [Matt] Cain’s [a pitcher with the San Francisco Giants]. If Wainwright finishes the 2011 season healthy — i.e., not on the disabled list with an arm injury — then the option vests if he has pitched a total of 400 innings in the previous two years or finished in the top five of Cy Young voting in the previous two seasons.

Consider that for a moment in light of what happened Thursday [the voting for the NL Cy Young].

If Wainwright finishes in the top five of the award in either the 2010 or 2011 season and he finishes the 2011 season healthy, a $21-million option vests for him and the Cardinals. We saw yesterday two voters make two votes that put two pitchers in the top five. That was it. One vote  and a healthy arm could equal $21 million.

While I can see the point of Mr. Goold, I’d also argue that paying someone like Adam Wainwright, if he can pitch 400+ innings in the two years leading up to a contract extension and he’s getting votes for the Cy Young, is a VALUE at $21mm.  He’ll be about 30 years old (the middle of a Pitcher’s Prime), he’ll have shown stability, he’ll be leading the pitching staff and he’ll have thrown well enough to have earned some recognition.

CEO’s who find themselves worried about Performance-based and Incentive Pay are only worried because they’re incentivizing the wrong things.  If you can get your incentives truly aligned with moving your organization in the right direction – they make all the sense in the world.

Tags: A-Players, baseball, chris mursau, cy young, hire better, Incentive-based pay, incentives, incentivizing salespeople, recruit don't absorb, st. louis cardinals, talent acquisition