February 13, 2013
Tubby Smith’s Buyout: Approximately $3.25 Million
There are two key points presented below.
First, our interpretation of the employment agreement between the University of Minnesota and its men’s basketball head coach Tubby Smith is that the cost of a “buyout” at the end of this season would be approximately $3.25 million. You may have been hearing multiple other sources discussing the $2.5 million termination fee as being the buyout figure, but this particular agreement is unique in some respects as compared to most other head coaching contracts.
Second, it’s important to remember that the cost of a buyout isn’t all new. Had the agreement not been amended last summer, buying out Smith’s contract would have cost the University approximately $2.36 million. The increment cost resulting from the amendment is less than $900k.
If Minnesota terminated Coach Smith’s contract in late March or early April, how much would they still have to pay out to Tubby?
Approximately $3.25 million.
The $3.25 million figure includes three components:
(1) Termination fee – $2.5 million
If Minnesota terminates Smith’s contract without just cause, they are required to pay one-half of the base salary and supplemental compensation owed for the remainder of the term of employment, subject to a maximum of $2.5 million.
(2) Ninety (90) day written notice clause – $498k
Minnesota is required to provide written notice to Coach Smith 90 days prior to the termination of the employment agreement. The $498k represents base salary and supplemental compensation for 90 days from the date of notification.
This requirement in general and especially its length is rare for head coaching contracts. For Minnesota, it’s helpful from a PR perspective in that it effectively keeps a half million of buyout dollars out of the headlines and most news stories. See also component (3) below.
(3) Supplemental retirement contribution – $250k
If Smith is still employed as of April 30, 2013, he will be due a supplemental retirement contribution of $250k. The contribution immediately vests.
Although the notification of termination might be made several weeks before April 30, the 90 day written notice requirement means his employment will not have been terminated as of April 30.
If the contract had not been amended in July 2012, how much would they still have had to pay Tubby if he were to be terminated in late March or early April 2013?
Approximately $2.36 million, or $890k less than under the amended contract.
Prior to the amendment last summer, a termination effective after May 1, 2013 would not have resulted in a termination fee. However, Minnesota would have been required to pay Smith the remainder of his base salary and supplemental compensation through the end of the agreement (i.e., April 30, 2014).
The written notice and retirement contribution components discussed above also existed in the original contract.
Why are you including the 90 days of pay and retirement contribution in this discussion?
The 90 day written notice requirement effectively creates an additional termination fee. When a college coaches is fired, the school and the coach quickly move on. The school will not receive value in exchange for paying the coach this “salary and supplemental compensation”.
The intent(s) of the supplemental retirement contribution isn’t explicitly conveyed, but we believe there is some element of reward for the future commitment by the coach. That is, if Minnesota wanted to retain Coach Smith but he wanted to leave after this season and did so before April 30, he would lose out on that $250,000 contribution. The intent may partly be to compensate him for past services, but the retention of his services is relevant as well. Since the $250,000 payment would not result in retention of his services if the University terminated the agreement, we are including this amount in the buyout discussion as well.
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