By ADAM SCHUPAK
Senior WriterThese guys are good – and rich. And at the end of the PGA Tour’s first playoff series, someone will be $10 million richer.
That first-place prize to the FedEx Cup champion is billed as the largest single bonus payout in sports. But there should be an asterisk attached to it, because the money will be paid next spring as deferred compensation into the winner’s retirement account.
Not that anyone should complain: The FedEx Cup will award $35 million in deferred compensation, with top-70 finishers receiving at least a six-figure contribution. Enticing, yes, but it absolutely, positively will be a long wait until the fortunate recipients can spend their FedEx fortunes.
“I may be dead by the time my retirement fund comes around for me to be able to utilize it,” says 31-year-old Tiger Woods, who is secure enough that he decided to sit out Round 1 of the playoffs (The Barclays).
For those top FedEx finishers who make it to Champions Tour age, the miracle of compounding interest should ensure their golden years are lived on Easy Street. For Woods, or anyone else in his late 20s or early 30s, that’s likely more than 20 years of tax-deferred compounded growth.
Dave Lightner, a partner in FSM Capital, a Cleveland-based financial planning firm that represents 60 professional golfers, predicts the numbers will be staggering.
“You could easily see guys with $250 million-$300 million in a retirement account,” he says.
The PGA Tour’s performance-based retirement plan is universally regarded as the most lucrative in sports (see story, page 48). It is not fettered by a maximum annual contribution; last year the average contribution for an exempt player exceeded $195,000, according to the Tour’s annual report to its membership. As first reported in
Golfweek (March 24, 2001), a Tour member who sustains a lengthy career should be set for life thanks to his retirement account, which increases by at least $3,700 every time he makes a tournament cut.
This season, FedEx Cup bonus money has raised the stakes significantly. For instance, if Anthony Kim, the Tour’s youngest player at 22, wins the FedEx Cup and doesn’t dip into his retirement plan until he is 50, his $10 million bonus, compounding at 8 percent annually and doubling every nine years, would grow to $80 million.
Much about the PGA Tour’s retirement plan has changed with the advent of the FedEx Cup. What originally was devised as a safety net to compensate journeymen pros who never made it big has evolved into a tax shelter for the rich and richer. Though hardly anyone is complaining about competing for FedEx Cup purses (each of the four playoff tournaments is offering $7 million), several Tour members have protested that at least some of the bonus money, if not all, should be paid in cash – taxes be damned.
Those who want the money up front resent that the FedEx Cup was created to accommodate the Tour’s elite and not its rank-and-file. More significantly, the discord magnifies a growing schism between the Tour’s haves and have-mores. (Which can be defined as those who still fly commercial and those who travel in private planes.) Yet however one looks at the issue, there are more than 10 million reasons to compete in the playoffs.
To understand how the FedEx Cup bonus money became deferred, one has to understand the evolution of the Tour’s retirement plan and the genesis of the FedEx Cup. With the Tour’s TV contract up for renewal last year, Tour executives conceived the playoff format to attract top players for a season-ending finale that promised big ratings.
To PGA Tour management, whose mandate is to look after the well-being of its membership, deferring the bonus money was financial logic. Deferred compensation enables money to grow tax-free until players draw upon it, no earlier than age 45. Simple math illustrates the advantage: If Woods wins $10 million as an immediate cash prize, he is taxed at 35 percent – paying $3.5 million to Uncle Sam. But through deferred compensation that $3.5 million instead will grow to more than $28 million, figuring for 8 percent interest and money doubling every nine years. (The calculation assumes Woods remains active as a player and doesn’t draw from his account until he’s 60, the latest he may defer distribution. Amounts drawn from the account would be taxed at the required rate at that time.)
Deferred compensation gives new meaning to Ben Franklin’s maxim “a penny saved is a penny earned,” but not everyone wants the bonus money earmarked for retirement. Some would rather get rewarded now.
“For the last year, I felt it would be really cool if we had this big check or we had cash to pay the winner,” says Phil Mickelson, 37. “Guys won’t see it for 20-plus years, and so it takes some of the luster out of it.”
Adds Trevor Immelman, 27: “My son is probably really happy that it’s going to be deferred until I’m 60, but I would probably rather have the money now.”
Deane Beman, who was PGA Tour commissioner when the retirement plan was approved in 1983 – when the average tournament purse was just under $400,000 – says the “pay me now” sentiment is nothing new. Beman chuckled as he recalled one of the first times he explained the benefits of deferred compensation at a players’ meeting and a Tour member stood up and blurted, “Why don’t we just play for it?”
Before the FedEx Cup, the Tour offered three distinct options within the retirement plan (plus a supplemental plan, which enables players to annually contribute as much as $15,500 of their own money). Cuts made are the lifeblood of the original plan, and that mechanism remains intact. Last season, whether a player finished first or 50th, he earned one retirement credit worth $3,700 for each cut made; after 15 cuts made, each additional in-the-money finish earned two credits. The average contribution to the “cuts plan” was $60,000. Steve Flesch, who made 26 cuts and was the Tour’s leader in credits in ’06, earned $135,366 for his account.
But the cuts plan did nothing to maximize star power. In 1998, the Tour created an incentive plan – to encourage top players to enter more tournaments – that divided the season into three segments. The top 70 players in each segment, based on their rank in an adjusted money list, could earn contributions ranging from $360,000 for first place to $4,000 to 70th. To fully vest in the incentive plan, a player had to over four years play in 100 events or compete in each event on the calendar at least once, or increase his average schedule by three tournaments. Under this plan, the average contribution in 2006 was $47,244; however, Tiger Woods, the incentive plan leader, earned $510,800.
A year later, the Tour added a bonus plan that rewarded a player’s finish on the money list. Contributions ranged from $100,000 for those finishing first through 30th to $30,000 for players ranking 126 to 150.
The new plans, however, did little to improve the frequency of tournament appearances among the Tour’s marquee players. Woods, for example, dominated the incentive plan, but failed to meet vesting requirements because he played only 18 to 21 events per year (and just the 15-event minimum in 2006 due to his father’s illness and death). Mickelson played a career-high 26 times in 2002, but dropped tournaments over succeeding years, slipping to 19 in 2006. As a result, both players were permitted to vest only at 62 percent.
Unable to influence their stars’ schedules, Tour executives eliminated the two incentive plans, and instead reallocated the $16.5 million in these two programs as FedEx Cup bonus money. Into this pot they added $18.5 million, thanks in part to the sponsorship deal with FedEx, and ditched the vesting requirements that punished players for not playing enough.
“The guys generating the show, bringing in the sponsors and TV dollars – and they’re only getting 62 percent? That wasn’t going to last,” says Tour veteran Sean Murphy, playing on the Nationwide Tour this season. “But by rolling it into the FedEx Cup, it allows these guys to keep playing their same old schedule (assuming they play well enough) and vest at 100 percent.”
For a player such as Woods, well on his way to becoming the first billionaire athlete, that’s significant.
“He’s got a chance to have 40 percent of his net worth in the retirement plan,” says Joe Ogilvie, a player director on the Tour’s policy board.
Some players contend the FedEx Cup was designed to benefit the Tour’s elite in other ways, too. What had been golf’s endless season left little downtime to conduct off-course business. There are courses to design and openings to attend, commercials to shoot, and, of course, family time. (Mickelson skipped the 2006 Tour Championship in part so he could take his children trick-or-treating on Halloween.) In exchange for playing three to four events in a row during the playoffs, and perhaps as many as six of seven events between the World Golf Championships Bridgestone Invitational and the Tour Championship, the superstars can call it a year shortly after Labor Day.
Nevertheless, in the final analysis, the FedEx Cup is a classic example of the rich getting richer. The top players benefit the most by deferring money into their retirement accounts. At that income level, say financial advisers, elite players need all the tax breaks they can get.
The decision to defer the FedEx Cup money ultimately rested in the hands of the Tour’s nine-member policy board, comprising four player directors (Stewart Cink, Joe Durant, Davis Love III and Ogilvie), four independent directors (Richard Ferris, Victor Ganzi, John McCoy and Ken Thompson) and the president of the PGA of America (then Roger Warren). According to an e-mail response from the Tour, the Tour policy board determined that a deferred compensation structure for the FedEx Cup was in the best long-term interest of the vast majority of players. That decision, in part, was based on the conservative premise that the Cup winner will have earned upwards of $5 million in prize money for the season – and likely wouldn’t be hurting for cash.
But according to several players who attended meetings to discuss the proposed FedEx Cup last year, the membership initially favored an immediate cash prize. As talks progressed to the 16-member Player Advisory Council, an early show of hands produced a deadlock on the issue of how players should be paid. Then the Tour invited to PAC meetings several financial advisers who espoused the benefits of deferred compensation. Eventually, the PAC recommended retirement contributions to the Tour policy board. But the debate didn’t die there. The policy board, too, hashed out the pros and cons of deferred compensation at several meetings. They even considered paying half the bonus money in cash and deferring the other half to appease players who wanted at least some of the money up front. But the policy board voted unanimously in favor of 100 percent deferred compensation at a November meeting in Ponte Vedra Beach, Fla.
Ogilvie says the issue became a “no brainer” once Tour officials agreed to expand investment options and give players greater control of their retirement funds. (Charles Schwab, a corporate marketing partner of the Tour, is custodian of the retirement plan.) Beginning this year, for example, players who have more than $5 million in holdings can invest in any publicly traded security.
The final outcome, however, hasn’t pacified many players who feel their voice went unheard. Tour veteran Flesch would like to see the Tour governed by a more democratic approach. He says players, using the Tour’s Intranet site, could vote as easily on policy matters as they do for player of the year.
“Why not get the pulse of the membership?” he says. “Sometimes what gets passed from our PAC to our board members isn’t what the majority of the membership wishes.”
Meanwhile, players will have to live with the system. And if they play well enough to earn a share of the FedEx bonus, then live long enough to crack that nest egg, they’ll likely agree it was worth the wait.
• • •
Adam Schupak is a
Golfweek senior writer. To reach him email
aschupak@golfweek.com.
Golfweek’s special report: The FedEx Cup is worth millions to the top Tour players, but they won’t see the money for years. Which isn’t so bad, considering how much it figures to grow in the meantime.
• Performance-based plan has its risks (magazine exclusive)
•
How the plan came togetherGolfweek first revealed details of the PGA Tour’s lucrative retirement plan in March 2001. Read them here:
• Set for life
• The $5 billion man
• The dream team
Posted: 8/21/2007
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