PGA Tour’s strategy: Win now, retire rich

Sep 4, 2007 @ 12:01 am

By Adam Schupak

PONTE VEDRA BEACH, Fla. — These 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.

No one, however, should complain: The FedEx Cup will award $35 million in deferred compensation, with top 70 finishers receiving at least a six-figure contribution. That is enticing, yes, but it will be a long wait until the fortunate recipients can spend their FedEx fortunes.

Only if you survive

“I may be dead by the time my retirement fund comes around for me to be able to utilize it,” said 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 that their golden years are lived on Easy Street. For Mr. Woods or anyone else in his late 20s or early 30s, that is likely more than 20 years of tax-deferred compounded growth.

Dave Lightner, a partner in FSM Capital Management LLC, a Cleveland-based financial planning firm that represents 60 professional golfers, predicted that the numbers will be staggering.

“You could easily see guys with $250 million, $300 million in a retirement account,” he said.

The PGA Tour’s performance-based retirement plan is universally regarded as the most lucrative in sports. It isn’t fettered by a maximum annual contribution.

Last year, the average contribution for a player exempt from qualifying exceeded $195,000, according to the tour’s annual report to its membership. 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% annually and doubling every nine years, will grow to $80 million.

Much about the Palm Beach Gardens, Fla.-based 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.

Although 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 upfront 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, respectively).

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, its 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 allows money to grow tax free until players draw upon it, no earlier than age 45.

Do the math

Simple math illustrates the advantage: If Mr. Woods wins $10 million as an immediate cash prize, he is taxed at 35% — 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% interest and money doubling every nine years. (The calculation assumes that Mr. Woods remains active as a player and doesn’t draw from his account until he is 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,” said pro golfer Phil Mickelson, 37. “Guys won’t see it for 20-plus years, and so it takes some of the luster out of it.”

Golfer Trevor Immelman, 27, said: “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. He 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 contribute annually 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 2006, 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 126th to 150th.

The new plans, however, did little to improve the frequency of tournament appearances among the tour’s marquee players. Mr. 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). Mr. 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%.

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%? That wasn’t going to last,” said 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%.”

For a player such as Mr. Woods, well on his way to becoming the first billionaire athlete, that’s significant.

“He’s got a chance to have 40% of his net worth in the retirement plan,” said Joe Ogilvie, a player director on the tour’s policy board.

Some players contend that 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. (Mr. 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, elite players need all the tax breaks they can get, according to financial advisers.

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 Mr. 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, its policy board determined that a deferred-compensation structure for the FedEx Cup was in the best long-term interests of the vast majority of players.

That decision, in part, was based on the conservative premise that the cup winner will have earned more than $5 million in prize money for the season — and likely won’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.

Weighing deferred comp

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 upfront.

But the policy board voted unanimously in favor of 100% deferred compensation at a November meeting in Ponte Vedra Beach, Fla.

Mr. Ogilvie said the issue became a “no brainer” once tour officials agreed to expand investment options and give players greater control of their retirement funds. (San Francisco-based Charles Schwab & Co. Inc., 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 Mr. Flesch would like to see the tour governed by a more democratic approach. He said 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 said. “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 that it was worth the wait.

Adam Schupak is a Golfweek senior writer. This article was reprinted with the permission of that publication.

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