Recently, we sat down with the Goizueta Newsroom to answer some questions about our research and the website:
For many college basketball coaches, the NCAA tournament provides an opportunity for increasing their pay. For instance, it has been reported that Tubby Smith could have received a $2.75 million bonus if the Golden Gophers had won the NCAA Title, while Shaka Smart could have earned an additional $350K if VCU had won the tournament.
The variation in incentive contracts of coaches suggests that the value of making and progressing in the NCAA tournament is not well understood. In the analysis below, we report the one year projected value of reaching the tournament or the final four for schools and coaches.
For example, for the aforementioned Tubby Smith, we estimate that reaching the final four would result in $797,700 in brand equity (annual) while Minnesota’s cost in terms of bonus payments to coach Smith would have been $600,000. In contrast, if VCU had progressed to the final four, the benefit to VCU is estimated to be about $1.1 million while the payout to Coach Smart is just $56,000.
We suspect that this analysis will provoke questions. Several such questions are provided below:
1. How was the analysis performed?
Elsewhere on this site we report an analysis focused on school’s and conference’s brand equity. These estimates are computed using a revenue premium model. Basically, this model examines single year revenues as a function of performance in a given year. The excess revenues (the residual of the model) represent a form of brand equity. Specifically, the revenue premium (or deficit) provides a measure of how the team’s brand influences fans to pay more (or less) for the school’s basketball product than is merited simply by the team’s on court success.
To understand how this brand equity is created, we then examined the relationship between brand equity and each school’s past NCAA success (Tournament participation and Final Fours) and conference membership (major or mid major). The results from this statistical model then reveal how brand equity is created by reaching the tournament or the final four. We also use a nonlinear specification for these terms to account for whether cumulative achievements yield diminishing returns. Finally, we include terms that estimate separate effects for high and mid major conference members.
2. Since Brand Equity is an enduring asset wouldn’t it make more sense to look at the Net Present Value (NPV) of the created brand equity?
This is a complicated issue. On one hand, it is likely that an improved brand image will have at least medium term effects. It is, however, hard to assess the dynamic impact, because coaches can often “harvest” a significant amount of the increased equity through higher salary levels.
3. Why don’t colleges use greater incentives and perhaps less salary when negotiating a coach’s compensation package?
It could be argued that our analysis suggests that compensation should be more heavily skewed towards bonus payments. The logic for this argument is that if brand equity creation can be measured then coaches should be paid for their actual results. However, we must remember that the coaching hires occur in a competitive market. It is likely that coaches are somewhat risk averse and may prefer fixed salaries over incentive-heavy contracts.
4. Why doesn’t Louisville create brand equity from making the tournament?
In the case of schools’ like Louisville, the existing brand equity and fan expectations are so great that the impact of making the tournament is negligible. It is more likely that making the tournament merely maintains the Louisville brand. Failing to reach the tourney would likely hurt the brand, but Rick Pitino would need to take the Cardinals to the final four to improve the Louisville brand.