- Steven Woda
Applying Superstar Compensation To White-Collar Professionals | Fast Company
Many professional athletes have incentive-laden contracts based on performance. Last month, NFL quarterback Michael Vick signed a new $100 million contract with the Philadelphia Eagles, making him one of the highest paid athletes in football. When the contract amount was announced, it was not immediately apparent (unless you dug a little deeper) that only $40 million is actually guaranteed. This "base pay" is only 40% of the compensation package, leaving 60% at risk, based on performance. In even simpler terms: for every $1 of base pay Vick can earn an extra $1.50 based on results. This ratio provides the proper risk versus reward for both parties. Vick will earn his whopping $100 million only if he stays healthy enough to lead the team for the next six years and only if he achieves certain on-field results. The variable amount in his contract must be "re-earned" each year. This demonstrates that organizations are willing to pay a high premium for great performance.
I love it. Pay for performance models benefit from positive selection because only the best performers are willing to put their pay at risk in return for higher returns. This is signaling at its best!