Thursday, December 31, 2009

Pay him with stock...Tiger, that is!

Yet another sponsor has pulled it's "support" of Tiger Woods. Shocking.

In this post, I argue that paying financial firm executives in stock probably accomplishes little more than costing taxpayers more money. Here, I'll take the opposite side: Sponsorship deals should be equity based, or closer to it.

Let's call it "Tiger Risk". The sponsor (AT&T) is short Tiger Risk: He does something (or allegedly does something) dumb and that costs them money. In fact, arguably it may cost them all the value he's added to the brand. Some would call that Tiger "alpha" (hedge fund lingo for the pixie dust that makes their returns better.) I would call it Tiger "beta" (hedge fund lingo for the risk they're taking for being friends with Tiger.)

So, because AT&T is taking TR, they should pay Tiger in a way that reduces the volatility of TR. If they pay him stock, he's more concerned about the stock performance, and therefore his own potentially costly behavior.

But wait, you say! Before I argued paying in stock is a bad deal. In this case, Tiger has no influence or even information about the underlying risk of the company. That's very different than managers of financial firms.

But wait, before I said stock is expensive because its so risky, and you pay the guy in stock, you are giving him a call on the equity market. On the one hand, you are right. On the other hand, Tiger's "real job" has no stock market risk, or very little. That's different from a financial institution. So, stock market risk is uncorrelated with his ability to earn a living actually playing golf, (barring material correlation between, say, the pot at tournaments to the equity market, or the correlation of his skill to the equity market,) so paying him in marginal equity market exposure is cheaper than paying Lloyd Blankfein in marginal equity exposure.

Still, I agree, somewhat. The "best" way to construct equity option based compensation to Tiger would require benchmarking AT&T, for example, to other telecom providers, and paying him a fraction of relative performance based on what you believe he added to the performance of the company over its competitors.

Gee, isn't that the way all managers of companies or those expected to add value to their firm versus competitors should be compensated? Certainly, but it's much more straightforward for a third party like a paid sponsor.

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