Cash for Gold

When I am not being a mermaid my (Katie) day job is being an executive compensation consultant.  I recently wrote this article for our newsletter about the incentives in sport and I thought you guys might enjoy it.

The 2016 Rio Olympic Games saw Michael Phelps win his 23rd Gold and his 28th Olympic medal.  Phelps was already the most decorated Olympian by quite some margin but his victories in Rio further cemented his place in history.

Before the 2004 Athens Games, Phelps’ sponsors, Speedo offered him a $1m bonus if he equalled fellow swimmer Mark Spitz’s record of seven Goals in a single Olympic Games.

This raises an interesting question about the role of incentives in sport. Did Phelps need this monetary incentive to motivate him to win gold?  Is this what drove him to get up at 5am every day and push his body to the maximum?  The answer is almost certainly not.  Phelps is more than likely driven to win for the reward of winning itself.  He swam length after length day after day because he wanted to be the greatest Olympian of all time – not because of the $1m bonus.

At the 2008 Beijing Games Phelps won a total of 8 Gold medals surpassing Spitz’s achievement and donated his $1m bonus to charity helping promote water safety and encourage youth swimming.

Incentives in sport are not as uncommon as you might think. While not typically publically disclosed it is widely acknowledged that Premier League clubs pay bonuses to players for things such as scoring goals and improved league places.  The press was filled with pictures of dozens of identical BMWs for the Leicester City players as a thank you from the chairman for their surprise win of the Premier League.

In the other kind of football, American football, the Carolina Panthers and Denver Broncos met in the 2016 Super Bowl. Reportedly each of the victorious Broncos team took home a bonus of around $100,000 with the Panthers team members getting around $50,000 each.  This money comes direct from the NFL and is on top of any payments agreed between players and their team directly.  It was rumoured that Peyton Manning, the Broncos quarterback, may have earned up to $4m for leading his team to victory.

Again, on the whole, players are probably not primarily motivated by these monetary carrots. The accolade of winning is motivation enough.  What these payments do do, however, is provide a reward for a job well done and allow clubs to share the team’s success with the players.

In some ways, CEOs are the quarterbacks of the corporate world leading their teams to victory or failure.  Like their on the field counterparts many are motivated not just by the monetary rewards but by achieving success and a job well done.

A recent study by Alexander Pepper[1] claims that executives care more about how they are paid relative to others than they do about the absolute amount they are paid.  Michael Phelps may not have been motivated to win because of his $1m bonus but would he have been happy if rival Ian Thorpe had been offered $5m for achieving the same outcome?  Perhaps executives see how much they are paid relative to their peers as their badge of success, their own version of a Gold medal round their neck and perhaps this is the problem.

[1] Pepper’s studies, conducted with the University of Bath’s Julie Gore, are described in his book The Economic Psychology of Incentives: New Design Principles for Executive Pay (Palgrave Macmillan, 2015).

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