How Mike Trout’s $430 million-dollar contract can instruct corporate compensation committees
Most organizations I have worked with have a disproportionately one-sided view of executive compensation. The question I receive most often around comp is; “what do CXO’s in our industry get paid?” With this data in hand, organizations then attempt to structure something competitive against this benchmark. This process has merit and deserves consideration for sure. However, I believe this compensation approach is too narrow and misses what is arguably a far more compelling perspective.
Let’s examine Mike Trout’s situation to flush out this idea. If the Los Angeles Angels were to view Mike Trout with a market salary perspective, the contract the Angels would have offered would have been much less. The Angels know they need a center fielder and they would like the person holding that job to be great – in the same way all organizations would like their CXO’s to be great. The Angels could have simply looked at baseball players around the league that play the same position that Mike plays and tried to offer him something competitive against that benchmark. But that is not all the Angels did. So how did they get to such an astronomical contract amount?
Instead of disproportionately viewing Mike’s contract as expense to the organization and benchmarking against the league to come to a competitive number, the Angels had a much broader perspective. They asked; “What value does Mike Trout bring to the organization?” Compensation expense is nominal while the power of value creation is exponential. If we could wrap our heads around all the ways Mike Trout creates value for the organization – which is exactly what the Angels did – we would see more clearly why this “astronomical” contract makes sense. Similar to the way “A-list” actors sell a lot of movie tickets and create great value for a film, great athletes (and great executives) generate a ton of exponential value for the organizations to which they belong. Next time you hire an executive be sure to include a detailed analysis of exactly how the new executive will create organizational value. If you are curious how to evaluate the value creation aspect of a candidate during an interview process, please give us a call and we would be happy to have a no obligation conversation with you about how to do this.