What Victor Cruz's Contract Negotiations Tell Us About CEO Pay
About New York Giants wideout Victor Cruz, the New York Post's Paul Schwartz recently wrote that "The Giants want to make Cruz rich, but he wants to become richer." Cruz is a restricted free agent, and the restricted nature of his status means it's unlikely another team will give up a first round draft pick to sign him away.
Of possible worth to readers, Cruz's situation tells us a lot about CEO pay. To understand why, it has to be remembered that every economic act is a speculation.
The Giants have offered Cruz somewhere in the neighborhood of a 5-year deal worth $36 million, with $12 to $15 million of it guaranteed. It's obviously a lot of money, but Schwartz notes that Cruz "feels he deserves more."
Cruz has caught more passes the last two years for more yards and more touchdowns than have Vincent Jackson, Dwayne Bowe and DeSean Jackson, yet the offer from the Giants would pay him less than the $10 million paid annually to Jackson, Bowe and Jackson. Cruz can accept the Giants offer, or he can sign a one-year deal for nearly $3 million. If so, he'll be an unrestricted free agent after next season, at which point he can sign with any team he wants. The Giants could then place the "franchise" tag on him, but if they do that, Cruz's pay for the following year would jump substantially to an average of the best-paid NFL wideouts.
Assuming Cruz accepts the Giants offer, he'll once again take in at least $12-15 million over the next few years. Of course it's certainly possible that Cruz could have a huge 2013 season, at which point he would be one of the most underpaid star receivers in the NFL. If so, as in if he thinks he'll have a big year, he should sign a one year, $3 million deal with an eye toward a bigger contract after next season.
Some would say that Cruz should wait to sign a multi-year contract until after next season, that his NFL numbers mean he should patiently wait in order to get the big money next year. That's a nice speculation for Cruz's partisans, but they might consider ex-Giant and ex-Cruz teammate, receiver Steve Smith. In 2010, Smith was offered a six year, $36 million deal from the Giants, with $15 million guaranteed. Smith rejected the deal, subsequently tore up his knee, and now floats among NFL teams as a low-paid backup. As Schwartz put it about Smith, "the pot of gold he eschewed [is] gone forever."
With Smith in mind, Cruz faces a tough choice. He can pass on a lot of guaranteed money with an eye toward much more in 2014 or 2015, or he can ensure his financial future right now.
The Giants have a similarly tough choice, or speculation. If Cruz has a big 2013 season, $36 million over five years will be a bargain for them. At the same time Cruz's numbers could decline, or as was the case with DeSean Jackson this past season, injury could keep him off the field for a lot of games, at which point they'll have overpaid him. Assuming Cruz walks away from their offer and takes $3 million for one year, after which he stars in 2013, the Giants will regret not offering Cruz a bigger contract. They will because signing him after a successful 2013 season will cost even more than what he's asking now.
Going back to the 1998 NFL Draft, Peyton Manning was picked first by the Indianapolis Colts, and then Ryan Leaf 2nd by the San Diego Chargers. Many draft experts and team general managers though Leaf had the greater upside, and both were rewarded with very impressive contracts. But once play started it was apparent that Manning was underpaid, and as Leaf was out of the league within a few years, he was clearly overpaid. As is always the case, pay is a speculation.
Looking at NFL coaches, the Washington Redskins signed Steve Spurrier to a 5-year, $25 million dollar contract in 2002. Speculating that Spurrier's offensive genius would translate well in the NFL, Redskin owner Dan Snyder wrote a big check only to see Spurrier fail such that the ex-Heisman Trophy winner and national champion coach of the Florida Gators was overpaid.
Fast forward to 2010, it was then that Jim Harbaugh signed a 6-year deal to coach the San Francisco ‘49ers. The pay was said to be in the $6 million/year range, but as Harbaugh took the ‘49ers to an NFC Championship in year one, followed by the Super Bowl in year two, it's very apparent that the ‘49ers underpaid when they signed him.
What's important about coaches is that like CEOs, the great ones are rarely paid enough, and the bad ones frequently paid too much. Those who decry high CEO pay think contracts should be obvious, but if we just compare Harbaugh and Spurrier, the latter had the bigger resume among the two when he came into the league.
Applied to company CEOs, Robert Nardelli is frequently the poster-boy for overpaid CEOs after his dismissal from Home Depot in 2007 brought with it a $200 million dollar exit package. What's missed is that Nardelli had learned at the feet of GE's Jack Welch (an underpaid CEO considering GE's market cap when he left) and Home Depot, hoping it was buying some of the Welch magic, had to pay up to get Nardelli. Home Depot's speculation was wrong.
But to show why beyond Welch that CEOs are paid so much, consider the late Steve Jobs. Having underperformed at the end of his first stint at Apple, only to achieve even less with NeXT, Jobs was brought back to a limping Apple. Regarding Jobs' compensation, he died with a net worth of roughly $10 billion; his wealth a function of his holdings in Pixar and Apple.
Upon return to Apple Jobs accepted pay of $1/year until his interim CEO tag was removed, at which time the board purchased for him a Gulfstream V, plus offered him options on 14 million Apple shares. Jobs asked for options on 20 million shares, and his request actually disappointed board member Ed Woolard, according to Walter Isaacson, Jobs' biographer.
The point of all this is that no doubt Jobs' options plus the Gulfstream offended numerous CEO pay scolds at the time, but as history reveals, Jobs was arguably the most undercompensated CEO in the history of the world. His innovations turned what was a dying company into the world's most valuable, yet all he got was a plane plus several billion. If foresight were 20/20, Jobs could have asked in 1997 for stock options that would have eventually made him the richest man in the world, and Apple's board wouldn't have blinked. What this tells us is because CEOs at least have the potential to impact companies the way Jobs did, their pay is going to reflect it. Sometimes they'll be underpaid as Jobs was, and sometimes they'll be vastly overpaid as Nardelli apparently was.
Back to Victor Cruz, his pay next year could be too much, just right, or well below his market value. It's impossible to tell. Just the same, it's near impossible for companies and the CEOs they hire to know whether they're over or underpaying. That there are countless individuals who presume to know what's the right pay is, and who write columns complaining about pay, speaks to a segment of society totally divorced from reality.
With pay, we just don't know. And we never will. Let the speculation continue.