David Cornwell proposes a new player compensation model
[Editor’s note: Sports attorney David Cornwell frequently comments on matters relating to the NFL. He was a finalist for the position of NFLPA executive director in 2009, and he has provided us with an item that recently appeared elsewhere, with an invitation to share it verbatim with our audience.]
The time has come to change the manner in which NFL players are compensated for their significant investment in the game.
When DeMaurice Smith was elected Executive Director of the National Football League Players Association, I publicly pledged my support and privately told De that my support included “staying out of the way.” I was proud of the men who play professional football for the serious and thorough consideration given in their deliberations and reflected in their selection of De. Since March 2009, I have been careful to avoid any public comment about substantive issues in collective bargaining that could be construed as inconsistent with the NFLPA’s interests. As the NFLPA and NFL stare into the abyss of an intractable dispute that may harm the National Football League in ways currently unimagined, I trust that contributing to the public discussion about the substantive issues in the NFL labor dispute will be accepted for its intent – to improve the private negotiations between the NFLPA and the NFL.
In the interest of full disclosure, I confess to be motivated by the most fundamental form of self interest – survival. A substantial portion of my business and, therefore, my livelihood relies on the representation of sports agents and their clients, the men who play professional football. If the NFL labor dispute is not resolved and the NFLPA “decertifies” and the NFL ceases football operations, these portions of my law practice will come to a screeching halt. Accordingly, a new CBA enables me to continue to feed and educate my kids.
The current dispute over the NFL owners’ demand for additional credit for their investment in the business exposes the difficult issues that flow from the partnership between NFL players and NFL owners. Like any other business, NFL players are employees. Unlike every other business, NFL players are also partners, whose commitment, professionalism, and talent has a direct impact on NFL owners’ bottom line. The most compelling evidence of NFL players’ unique impact on the business is the extent to which player conduct away from the workplace is regulated by the NFL. The concept of NFL players as partners is also embedded in the NFL’s expectation that players contribute to owners’ investment in the growth of the game.
Today, players are compensated for their partnership interest with 59.6% of the eligible revenues generated in the NFL. A partnership share greater than 50% of revenues is appropriate because a portion of the value created by NFL players’ investment in the game is not shared with players. For example, increased franchise values resulting from investments in the game are not shared with NFL players. Delayed revenues, i.e., revenues generated by today’s investment but not realized within 3.5 years (the average length of an NFL player’s career), are not shared with some the NFL players who actually make the investment.
Defining the Problem
NFL players make a $596 million investment ($1 billion of current credits multiplied by 59.6%) in the business every year. The value of their “sweat equity” is incalculable. The NFL expects players to increase their investment in the game by an additional $476.8 million per year (an additional $800 million of credits multiplied by 59.6%). The current stalemate in collective bargaining arises out of NFL players’ legitimate expectation that they will benefit from their increased investment in the game. This stalemate also exposes the problem created by the unique employee/partner status of NFL players. If the NFLPA and the NFL can agree on the problem, perhaps they can make better progress towards a solution.
The fundamental problem in the current NFL labor dispute is that one partner, the player, is compensated with salary as an employee. The current CBA masks this problem by granting players more than a 50/50 split of revenues. The current collective bargaining negotiations, however, complicate this problem by asking NFL players to increase their investment in the game in a manner that simultaneously reduces the pool of revenues available to pay their salaries. The current compensation model for NFL players ignores the fact that not all investments result in immediate revenue growth and long term return on investment can never be captured by current salary.
NFL players are being asked to increase their contribution as partners while simultaneously agreeing to reduce their compensation as employees. NFL players are unwilling to sacrifice current salary to make an investment when the benefit of their investment is not shared with them. On the other hand, the burden imposed on NFL owners by making a current investment in the game with current revenues while simultaneously compensating NFL players from a percentage of current revenues has reached a breaking point. The current stalemate is a reflection of a difficult problem that has a substantial impact on the legitimate business interests of both NFL players and NFL owners. Neither side is wrong to pursue their business interests.
Path Towards a Solution
Thus far, the effort to find a solution to the problem of how NFL players are appropriately compensated for their unique investment in the game is bogged down in an argument over disclosure of current financial information relating to the 32 teams and the NFL. The issue of disclosure of current financial information focuses on whether NFL owners are presently making enough money or losing too much. This subjective debate is going nowhere because both sides are right. The NFLPA has a legitimate interest in ensuring that its members receive their fair share of the pie. NFL owners have a legitimate interest in maximizing the value of their business.
The solution for preserving NFL players’ and NFL owners’ legitimate business expectations begins with an agreement on the scope of future financial disclosure that is required to enable players to measure the performance of their annual investment in the game. Once players are able to measure the performance of their investment, the next step in the solution is developing a mechanism that enables players to receive a return on their investment, regardless of when that return on investment is realized.
A New Compensation Model for the Men Who Play the Game
To resolve the challenge created by a return on investment that is locked up either in increased franchise values or in delayed revenues, the NFLPA and the NFL must embrace a new form of employee/partner compensation for NFL players that goes beyond just paying players a salary.
Other industries have solved this problem by paying an employee/partner with a blend of salary and equity in the form of stock options. The NFLPA and the NFL must challenge themselves to develop a new compensation model that creates for the NFL player a form of compensation that is the functional equivalent of the salary/stock option compensation model that has worked well in other industries. This approach eases NFL owners from the financial burden created by using current revenues both to invest in the business and as the sole source of player compensation. This approach also preserves NFL players’ legitimate expectation that they be compensated for their continued investment in the game. NFL players may be more inclined to increase their investment in the game if their ability to receive a return on their investment is preserved regardless of the year in which the return on their investment is realized.
There are good and smart people surrounding the negotiation table in Washington, D.C. Recognizing their shared investment in the game and their shared interest in avoiding injury to their collective business should be incentive enough to build a new compensation structure that preserves and advances the business interests of NFL players and NFL owners.
To be sure, there will be critics of this new approach. This will include objections such as NFL players do not want to trade the certainty of a salary for the risk of an uncertain return on their investment, NFL owners do not want to share the bounty from their investment, and that a new compensation model will be hard to quantify and difficult to track. These objections miss their mark.
NFL players already have accepted their role as partners in the business and they have accepted the risk of financial performance because each year the salary cap fluctuates with revenues. Given the extraordinary growth and success of the NFL (especially with labor peace), any perceived financial risk to NFL players is more theoretical than real. In 1987, many argued that NFL owners would never accept free agency. Businessmen find business solutions to business problems. If NFL owners expect NFL players to act like partners by sharing their investment in the game, then NFL owners must treat NFL players as partners by sharing the benefits of that investment.
Finally, “hard” has never been an excuse for anything in the National Football League. Besides, pick your poison. The difficulty in developing and monitoring a new compensation system will pale in comparison to the pain that will be experienced by many if the NFLPA and NFL do not get this fixed.
It is time to get it done.