The fall­ing price of oil has Univer­sity of Ari­zona coaches on a los­ing streak

Bonuses at the Univer­sity of Ari­zona are paid in en­ergy stocks “In this case, it hasn’t worked out for the coaches”

Bloomberg Businessweek (Asia) - - CONTENTS - −Eben NovyWil­liams and Bran­don Kochkodin

Like many big-time sports schools, the Univer­sity of Ari­zona gives its foot­ball and bas­ket­ball coaches longevity bonuses to re­ward them for stay­ing in their jobs a cer­tain num­ber of years. Th­ese can be worth mil­lions of dol­lars. In a twist unique to the Wild­cats, those in­cen­tives are tied to the price of oil.

That means Sean Miller , whose men’s bas­ket­ball team was set to play in the open­ing round of the NCAA tour­na­ment on March 17, and Rich Ro­driguez, who led the foot­ball team to the Gil­dan New Mex­ico Bowl, are in a strange sit­u­a­tion for suc­cess­ful coaches: Their bonuses have been los­ing value. Crude, which reached more than $90 a bar­rel in 2014, has crashed to $36. The first part of Ro­driguez’s longevity pay­out, due in mid-March, is likely worth about $907,000, 41 per­cent less than the pa­per value of thehe bonus in 2014. In full, the bonus plan for each coach is prob­a­bly worth $3.6 mil­lion, down from $6.2 mil­lion.

Ari­zona isn’t a ma­jor oil pro­ducer, so how did a pub­lic univer­sity’s coaches’ pay end up linked to en­ergy prices?? The bonus struc­ture was put into place two years ago af­ter the school re­ceived an anony­mous do­na­tion of 500,000000 shares of a mas­ter lim­it­eded part­ner­ship. An MLP is a tax-ad­van­taged, pub­licly traded com­pany that op­er­ates pipe­lines and other en­ergy in­dus­try equip­ment. Miller and Ro­driguez each re­ceived 175,000 shares, worth $6.2 mil­lion at thee time. Ath­letic Di­rec­tor Greg Byrne got 100,0000 shares, worth $3.5 mil­lion.

The name of the donor is redacted from pub­lic records and wasn’t re­leased by the univer­sity. How­ever, the records show a price of $35.36 for the do­nated shares on May 12, 2014, which strongly sug­gests one com­pany: Western Refining Lo­gis­tics. Jeff Stevens, the com­pany’s pres­i­dent and chief ex­ec­u­tive of­fi­cer, is an Ari­zona alum­nus, and in 2009 he do­nated $10 mil­lion to help fund the school’s fa­cil­i­ties plan, at the time the largest ath­let­ics gift in the school’s his­tory. The MLP traded at $20.74 on March 15. Stevens de­clined to com­ment.

Ari­zona had good rea­son to get cre­ative with its pay plan. Ath­let­ics de­part­ments are typ­i­cally among the rich­est cor­ners of pub­lic univer­si­ties, but salaries are grow­ing faster than

other forms of spend­ing. By us­ing the do­nated MLPs, the school was able to shift some of the risk of guar­an­teed com­pen­sa­tion onto the coaches, says Chad Chat­los, a prin­ci­pal in the sports prac­tice of ex­ec­u­tive search firm Korn Ferry. In ex­change, the coaches had a chance at a big­ger re­ward. “Un­for­tu­nately in this case, it hasn’t worked out for the coaches,” Chat­los says. Miller, Ro­driguez, and Byrne were un­avail­able to com­ment on the bonus struc­ture, ac­cord­ing to Ari­zona ath­let­ics spokesman Jeremy Sharpe.

In the­ory, the deal could have been a win­ner for both sides. Ari­zona was in a po­si­tion to keep the dis­tri­bu­tions the MLPs paid over the course of the coaches’ tenures and was also giv­ing them an in­cen­tive to re­main in Tuc­son. If they stayed, the coaches could look for­ward to a big pay­day at the end of their con­tracts. Ro­driguez’s name was floated for a num­ber of jobs last year, in­clud­ing some with higher salaries. He chose to stay put.

Sev­eral Divi­sion I ath­letic di­rec­tors say they had never heard of such a bonus struc­ture. Or if they had, they say they wouldn’t con­sider it for their own coaches. “In the world of higher education, many out­side-the-box ideas need very close scru­tiny,” said Bill Bat­tle, ath­letic di­rec­tor at the Univer­sity of Alabama, in an e-mail.

In the orig­i­nal Ari­zona deal, the MLP shares were set to be con­verted to cash and paid out only if the three men were still em­ployed by the univer­sity at the end of March 2022. One year into the agree­ment, they all signed new deals that, among other things, changed the pay­out sched­ule. Byrne and Miller will get their fi­nal pay­outs two years ear­lier, in 2020. Un­der his con­tract, Ro­driguez will re­ceive his bonus in frag­ments, start­ing with 25 per­cent this month.

The ul­ti­mate value of the bonuses will be de­ter­mined over the next four years. Should oil re­bound, there’s time for all three to make back the lost amount and then some. But there’s also the pos­si­bil­ity the pay­outs will be­come even smaller.

The bot­tom line Big-time col­lege coaches are ex­pen­sive, so Ari­zona got cre­ative by pay­ing them with do­nated en­ergy-com­pany shares.

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