By: Jennifer A. Harper, Esq.
Bean, Kinney & Korman, P.C.
When negotiating and structuring college coach contract bonus provisions that link payment to academic performance, note that certain types of academic bonuses are now being tightly regulated by the U.S. Department of Education (“Department”). 1 Under new rules promulgated by the Department in 2011, some academic bonuses will run afoul of the Department’s ban on incentive compensation under Title IV of the Higher Education Act of 1965 (“HEA”). If an incentive compensation is covered by the ban, adding it to a contract could lead to serious penalties against the school, including the return of some or all federal financial aid awarded. This could mean forfeiture of millions of dollars.
In this article, we examine and discuss the following subjects: the legality of incentive pay to athletic personnel (Part I); coaching bonus as a component of total compensation (Part II); bans on incentive pay for program retention, competition, and graduation (Part III); the problem with combined athletic recruiting and admissions (Part IV); and 10 tips for negotiating contracts in the era of incentive bans (Part V).
Part I — Legality of Incentive Pay to Athletic Personnel
At one time, the legality of academic bonus payments was rarely a concern. It was appropriate for a coach and a school to voluntarily enter into an agreement that included bonuses tied to the academic performance of players. While bonuses for winning a championship title are still acceptable, incentives designed to improve team academic performance and encourage graduation are no longer a mere factor of negotiation. Nowadays, educational institutions must be cognizant that some academic bonuses are no longer permitted in coaching contracts.
The Department’s new regulations, published October 29, 2010, prohibit institutions receiving federal financial aid from paying any incentive compensation “based directly or indirectly on securing student enrollments or financial aid.” Part of that prohibition includes incentive pay based on student retention and graduation rates.
The final regulations went into effect on July 1, 2011, and apply to personnel who are “engaged in any student recruitment or admission activit[ies],” including “higher level employee[s] with responsibility for recruitment or admission of students.” The Department also has made clear the regulations apply to athletic personnel, including team coaches. In its October 29, 2010, comments to the final Title IV regulations, the Department said the ban applies “to all employees at an institution who are engaged in any student recruitment or admission activity or in making decisions regarding the award of Title IV, HEA funds.” The Department included athletic department staff in the class of recruiters, stating, “Recruitment of student-athletes is no different than recruitment of other students.”
At the same time, the Department concluded that incentive payments made to athletic personnel based on factors such as “team academic performance” would not violate the ban. This naturally leads to questions about whether incentives tied to related factors, such as graduation rates, are equally exempt from the ban. Unfortunately, the answers are not so clear.
The Department’s interpretation of the statutory prohibition on incentive compensation is expansive. Of particular interest to collegiate athletic programs is the sweeping definition of “securing enrollment,” which covers incentive pay based on factors such as program completion and student graduation. Although bonuses for team academic performance are exempted, the Department’s regulations fail to explicitly address whether program completion and graduation rates also are exempt from the incentive compensation ban.
In the comments to its final rule, the Department was adamant that any incentives—bonuses included—tied to program completion or graduation rates were a violation of the law. Thus, it appears acceptable to pay bonuses to athletic personnel if the bonuses are tied solely to team grade-point averages (GPAs) (academic performance), but it is a violation of the law if bonuses are tied to graduation or retention rates. Oddly, good academic performance can be directly correlated to higher graduation rates, suggesting program retention and graduation rates should be exempt as well. But this was not clarified by the Department and can become a problem for schools that have relied on these criteria to give academic teeth to the high salaries being paid to coaches.
This legal conundrum and how to manage it will be explained in Part III below, but first we will consider how coaching bonuses are incorporated into overall compensation.
Part II — Coaching Bonus as a Component of Total Compensation
Coaching contracts in collegiate sports can vary considerably in their terms. For purposes of illustration, assume a school is negotiating a generic employment contract for a head coach of a major Division I sport. In addition to base salary, fees, perks, and signing bonuses, the contract also may include incentive payments related to team academic achievement. There are three common scenarios for incentive pay based on team academic achievement: (1) bonuses paid according to yearly graduation rates as measured by NCAA reporting requirements (academic progress rates); (2) bonuses paid for the percentage of student-athletes with a specified cumulative GPA during a period of time; and (3) bonuses paid for the percentage of student-athletes whose annual cumulative GPA increases over a period of time. Other pay may be tied to program retention, such as structured bonuses based on how long a student-athlete remains enrolled in the academic program of the institution.
While academic incentives often are far less than the money paid out for winning championship titles, academic bonuses are considerable by ordinary standards. With academic bonuses, coaches are encouraged to align student-athlete priorities with the institutional academic mission.
Academic integrity is a clear reason why institutions want to tie part of a coach’s bonus to team academic performance. The Department, however, lost sight of that goal when it attempted to ban in its final regulations all academic bonuses paid to athletic personnel. In a March 2011 “Dear Colleague” letter, the Department quickly reversed itself, allowing bonuses for team academic performance as well as other “non-enrollment”–based success factors.
Nevertheless, elsewhere in its comments the Department bans any incentive compensation that is based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid. This includes bonuses to recruiters (including coaches) based upon program retention, completion, graduation, or placement rates.
The U.S. Department of Education defines incentive compensation as a “commission, bonus, a sum or money or something of value, other than a fixed salary or wages.” 34 CFR 668.14(b)(22)(iii)(A). This means an incentive can be something other than wage compensation—it could be anything of “value.” Theoretically, this could include items such as game tickets, sports memorabilia, or any other item with a dollar value. Ironically, these items would be banned under the Department’s regulations so long as receipt of the item is based directly or indirectly upon securing enrollments or the award of financial aid (including, presumably, scholarship athletes).
“Securing enrollment” means, in part, “activities that a person or entity engages in…for the purpose of the admission or matriculation of students for any period of time….” 34 CFR 668.14(b)(22)(iii)(B). This includes recruiting students with an eye towards enrolling them in the school. The meaning of “recruitment” is equally broad. The Department defines recruiting as “contact in any form with a prospective student….” Id.
While the Department offers examples such as preadmission activities, scheduling an appointment and visiting the enrollment office, or signing an enrollment agreement or financial aid application, the definition of recruitment contemplates any form of contact. Conceivably, this can include a coach or athletic staff member who so much as talks to a prospective athlete for purposes of recruiting him or her to the school’s sports team. But as we shall see, the Department does not consider athletic recruitment to be covered by the ban when the incentive compensation is based on team academic performance. Conversely, no such allowance is made for any other academic-based incentive.
Part III — The Ban on Incentive Pay for Program Retention, Completion, and Graduation
In the current regulations, the Department takes the position that incentive payments based on program completion indirectly constitute “enrollment.” Building on that principle, the Department concluded, “[W]e believe that paying bonuses to recruiters based upon retention, completion, graduation, or placement remain in violation of the HEA’s prohibition on the payment of incentive compensation.” 75 Fed. Reg. 66874. 2
The Department’s comments and subsequent guidance make clear that coaches who are paid bonuses for team academic performance are exempt from the prohibition on incentive compensation:
…the Department does not consider “bonus” payments made to coaching staff or other athletic department personnel prohibited if they are rewarding performance other than securing enrollment or awarding financial aid, such as a successful athletic season, team academic performance, or other measures of a successful team.
75 Fed. Reg. 66875.
In a “Dear Colleague” letter issued March 17, 2011, the Department further clarified this exemption. It affirmed that bonuses for athletic personnel to reward performance other than securing enrollment or awarding financial aid, such as a successful athletic season, team academic performance, or other measures of a successful team, are permitted. The Department reasoned that, unlike recruiters whose sole purpose is to enroll students, athletic personnel recruit only “that small subset of individuals whose enrollment would benefit the institution’s athletic program.”
It is less certain whether bonuses paid according to program retention, completion, and graduation rates are specifically exempted in the athletic context. Two signs suggest they are not. First, despite the exception for team academic performance, the Department has not fully rescinded its position that athletic personnel are specifically governed by the new regulations, standing by its reasoning that “recruitment of student athletes is not different from recruitment of other students.” Second, the Department’s position that incentive compensation based on program retention, completion, and graduation rates are a violation of the HEA has not been expressly exempted with respect to athletic personnel.
Given these considerations, it is highly likely that incentive compensation based on these factors is prohibited and should not be included in a coaching contract. Unfortunately, the Department’s stance against the inclusion of these factors has created a split position. Bonuses paid according to academic performance (such as team GPAs or team academic improvement) are acceptable, but bonuses paid according to program completion and graduation rates are not. Perhaps unintentionally, the Department has drawn a line between several factors that, in reality, are part of the same continuum.
Part IV — The Problem with Combined Athletic Recruiting and Admissions
The analysis gets more complicated when athletic personnel have dual job titles or duties that involve admissions or financial aid assistance, or when athletic staff work together with admissions officers and recruiting personnel regarding the application of a player who is a key recruit for the sports team. It is not unusual for a recruiter or admissions officer to get numerous calls from the athletic office to determine the admissions status of a prospective athlete. In addition, where actual athletic recruiting may have little to no direct impact on admissions, athletics could easily play a role in meeting new student enrollment targets. Further, there is often a de facto working relationship among the admissions, financial aid, and athletics departments for the innocuous reason that a coach has a vested interest in whether one of his or her recruits will be accepted for enrollment and, if so, whether federal financial aid is available (particularly at non-scholarship schools).
In these situations, schools should be aware of two issues. First, schools should carefully consider incentive pay to athletic staff who also work as admissions officers or otherwise are involved with the recruitment and admissions process beyond recruiting prospective athletes as coaches. When an athletic staff member, such as an assistant coach, gets too close to the enrollment or financial aid process, the staff member may become subject to the blanket ban on incentive compensation. In that case, any form of incentive pay other than salary or wages for activities resulting in the enrollment of a prospective athlete or the award of financial aid to that athlete could result in a violation of the HEA. Based on the Department’s broad definition of “incentive,” this could include non-obvious incentives like game tickets, apparel, and gift certificates designed as an “achievement” award. So long as these perks or awards are based directly or indirectly on securing enrollment or assisting in making financial aid decisions, they likely are prohibited.
Second, schools must be careful not to let athletic staff inappropriately influence the admissions and financial aid process. This includes formal and informal interaction between athletic staff and admissions personnel. No doubt, schools should be concerned when coaches pressure admissions personnel to assure the admission of a player who otherwise would not meet the institution’s admissions criteria. At the same time, coaches tend to build strong relationships with recruits, and prospective players often rely on coaches as mentors and leaders who can help them navigate the admissions process. Applying to schools is a daunting process for any student. As with any good institution, administrative officers should work cooperatively when it comes to the application and admission of a prospective student. Student-athletes are no exception.
However, due to the incentive compensation ban, schools should ensure the important collaborative effort between athletics and admissions offices do not create a scenario where admissions and financial aid officers are paid incentives to meet enrollment targets benefitting the school’s athletics program. Under the ban, pay based on established enrollment targets should be avoided altogether. Similarly, a school that seeks to bolster its athletic program should avoid incentives that either directly or indirectly encourage admissions and financial aid officers to focus their efforts on enrolling student-athletes. As with the athletic staff member also working in admissions, if any incentive is paid to the admissions or financial aid officer based on enrolling student-athletes or awarding them federal financial aid, it could violate the HEA.
Part V — 10 Tips for Negotiating Contracts in the Era of Incentive Bans
Given these considerations, there are a number of steps schools can take to reduce the risk of a violation of the HEA. First, when reviewing or negotiating compensation plans for athletic personnel, schools should engage in a three-part review that focuses (1) on whether the compensation plan as written complies with the new regulations, (2) if not, how the plan can be drafted or revised to ensure compliance, and (3) how the institution can effectively negotiate compensation plans with athletic personnel that will achieve the school’s long- and short-term goals while remaining consistent with the law.
Because contracts with head coaches often are negotiated in great detail, and include specific achievement incentives, a limited review of top personnel is not recommended. Instead, schools should review compensation plans for all athletic personnel, including athletic directors, assistant athletic directors, assistant coaches, and specialized coaches, regardless of whether they are employees or independent contractors.
Consider the following 10 tips for reviewing and negotiating contracts with athletic personnel and ensuring athletic personnel are not directly or indirectly placing the institution at risk of violating the incentive compensation ban under the HEA:
(1) Until the Department clarifies its position, avoid offering incentive compensation tied to program completion, retention, and graduation rates.
(2) If any existing contracts contain incentive payments that violate the ban, execute an amendment that revises the incentive compensation to eliminate the offending provisions retroactive to July 1, 2011.
(3) Revise the duties of athletic staff who also work in admissions or financial aid to comply with the new regulations and ensure they are subject to the same policies in effect for recruitment professionals.
(4) Be wary of simply changing job titles for athletic staff who also work in admissions or financial aid. Merely changing job titles likely will not insulate the school from the incentive compensation ban if the job functions remain the same.
(5) Ensure the policies applicable to athletic departments include the new regulations governing incentive compensation to the extent they are applicable to athletic personnel.
(6) Until the Department clarifies its position, avoid bonuses that could be based upon securing “student” enrollment, such as the percentage of players admitted to the school. While the Department has implied that athlete-recruiters are not recruiting players as students, it is less clear how the Department will deal with direct or indirect recruitment of athletes as students, and it could be seen as “securing enrollment.”
(7) Avoid rewarding athletic personnel for assisting players in obtaining scholarships or other financial aid. Do the same for admissions and financial aid officers with regard to the enrollment and award of financial aid to prospective student-athletes.
(8) Revise school policies to prohibit athletic personnel from the admissions process or securing financial aid for recruited athletes where such influence in any way is rewarded by anything of value, including salary increases.
(9) Specifically tie incremental salary increases to merit-based, seniority-based, or other non–recruitment-based criteria. Use standard evaluative factors for making salary increase determinations.
(10) Clearly and unambiguously tie bonuses and other incentive payments to team performance directly related to success of the team in the play of the sport (e.g., championships, bowl games, and conference titles).
Conclusion – The U.S. Department of Education’s regulations still contain gray areas when it comes to incentive pay for coaches. Without further guidance from the Department, the compensation structure of athletic personnel will depend on the level of risk each institution is willing to bear. A very conservative approach might eliminate incentive compensation altogether. The preferred approach would include expressly acceptable forms of incentive compensation, such as bonuses for team academic performance but not for program completion, retention, or graduation rates. For now, schools must make their own judgments regarding individual contracts as the Department has said it will not continue its previous practice of providing informal guidance to schools with fact-specific circumstances. This means definitive clarification will likely come from future enforcement cases. Until the Department publishes additional guidance, schools should be careful not to overreach. No educational institution wants to be the first test on whether its own interpretation of the rules corresponds with that of the Department’s—particularly when there is no telling quite what the Department’s position will be.
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Winthrop Intelligence Research is featured in
Athletic Business August 2012
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Key Insights
Because of ambiguity in U.S. Department of Education regulations, it is wise for institutions to take a cautious approach when doling out incentive pay to coaches and other athletic personnel. Bonuses should be paid according to academic performance, such as team grade-point averages or academic improvement; however, bonuses based on program completion, retention, and graduation rates should be avoided.
Institutions should carefully review the duties of athletic personnel who also work in admissions or financial aid. The duties of these staff members should be revised to ensure compliance with U.S. Department of Education regulations; simply changing job titles for such personnel is likely insufficient in preventing violations.
References:
- Coaches and athletic personnel are generally covered by the Department’s ban on incentive compensation. Therefore, negotiating coaching contracts requires an understanding of which academic-related bonuses are acceptable and which are not. This is more difficult than it seems. ↩
- The Department’s reasoning was as follows:
“Such compensation is “indirectly” based upon securing enrollments—unless the student enrolls, the student cannot successfully complete an educational program, and with the proliferation of short-time, accelerated programs, the potential exists for shorter and shorter programs, and increased efforts to rely upon this “safe harbor” to incentivize recruiters. This safe harbor may lead to lowered or misrepresented admissions standards and program offerings, lowered academic progress standards, altered attendance records, and a lack of meaningful emphasis on retention.” – U.S. Department of Education Issue Paper #4. ↩
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