The underlying issue of long term contracts is that changing circumstances may render terms unappealing to one, or even both, of the relevant parties. In this context, how can the buying party ensure a certain level of control? In this post, I have turned to the lucrative world of football for inspiration.
The Premier League has seen several instances of players whose performances have deteriorated following the award of a large contract. These include Manchester City F.C.’s Samir Nasri and Tottenham Hotspur F.C.’s Emmanuel Adebayor.
Adebayor in particular has often excelled on the pitch when trying to secure a lucrative move to another club (see Arsenal F.C., Manchester City, Real Madrid, and Tottenham). Inconsistent performances following the acceptance of a large contract could signal a drop in motivation levels. One solution to this issue is to motivate players through the use of performance based incentives. Clubs and buyers do, however, need to find a balance between the latter and the standard base fee.
Offering a supplier performance based incentives focused on a number of KPIs is common practice. The idea is that by inserting performance related bonuses suppliers will maintain a high level of effectiveness throughout the course of the contract.
Recently, in a bid to avoid over-paying for unwanted stars, Liverpool F.C. introduced new incentive-based deals for their players. Luis Suarez became the first to benefit from the new contract structure. As result of scoring an impressive 28 goals in 38 matches this season, the Uruguayan striker saw his salary grow by an additional £20,000 per week. Of course it might have been a good idea to insert a clause relating to on-field behaviour…
In contrast, Nasri, whose £175,000 a week salary is not complemented by substantial performance based incentives, has spent much of this season on the bench.
The Walcott Conundrum
In the vast majority of cases, time can be played against the worst positioned of the two parties. Take the case of Theo Walcott.
After a few seasons in which the Arsenal forward showed only glimpses of quality, contract renewal discussions were delayed by the club. Unfortunately for Arsenal, as the player’s contract ran down, his performance levels improved drastically. This weakened the club’s position as they risked either losing the player on a free or giving in to his contracts demands. In January 2013 Walcott signed a highly lucrative, three-and-a-half-year contract worth £100,000 per week. Buyers need to make a move at the right time if they are to effectively balance risk and reward.
Balancing Risk and Reward
Of course there is no guarantee that any of the above examples of loss in form were a direct result of contract renewals and incentives. What is clear is that buyers need to look beyond simple cash rewards as a means to incentivise suppliers. Timing in particular needs to be taken into consideration if buyers are to avoid ending up on the wrong side of the negotiating table.