The inequity of tour's equity

Making sense of the PGA Tour's reported loyalty rewards program (it's better than Marriott's)

Rory McIlroy and Tiger Woods (Christian Petersen/Getty Images)

Details of the PGA Tour’s new player equity program was first reported by intrepid golf journalist Jamie Corrigan in The Telegraph, noting that Tiger Woods would receive $100 million for his loyalty and Rory McIlroy $50 million. To receive equity payouts, players will have to remain loyal to the PGA Tour, with the funds vesting over the next eight years. And going forward, the PGA Tour plans to award $100 million per year to the players.

The Golf Channel confirmed that the initial equity grants will be approximately $930 million distributed to 193 players via four categories, starting with the tour’s biggest stars:

The first group includes 36 players receiving $750 million in equity based on the last five years of play. “Career Points” will be awarded based on how many years a player has been a (PGA) Tour member, how many times they earned a spot in the Tour Championship and how many times they have won, with extra points awarded for high-profile victories like the majors, The Players Championship and the FedExCup.

Group 2’s share of the initial equity will be much smaller ($75 million) and will be granted to 64 players. The group is considered “steady performers and up-and-comers” and will be based on FedExCup points earned over the last three years.

Equity to Group 3 will be $30 million going to 57 players based on career earnings and how many times a player finished inside the top 125 in FedExCup points.

The final group will include “past legends,” like Jack Nicklaus and Tom Watson, with $75 million going to 36 players based on the “Career Points” formula. Those grants will only be awarded to “past legends” that are living.

Perhaps most important to players will be the program’s eight-year vesting period. The grants will be worth 50% of their value after four years, 75% after six and 100% after eight years, when a player will be able to sell their equity in PGA Tour Enterprises, the for-profit arm the tour created for the program. At each vesting benchmark players will be responsible to pay taxes on the grants.

Will this be enough to keep players from abandoning the tour and signing up for lucrative guarantees with LIV Golf? “I think the one thing we’ve learned in golf over the last two years is there’s never enough,” McIlroy, who last week confirmed he’ll play the PGA Tour for the rest of his life, said on Wednesday when asked about the reported equity sums.

The Daily Drive asked Peter Kaufman — president, head of restructuring and distressed M&A at Gordian Group LLC — to try to make some sense of the reported equity program.

By Peter Kaufman

The PGA Tour is giving ownership of its new for-profit entity to the players. For them, it’s a potential windfall several years down the road. If they keep their head down and do their thing, they could reap substantial benefits. But it's confusing, no doubt.

What exactly is the PGA Tour proposing for its superstars, stars, also-rans and up-and-coming talent? And how effective will it this be in terms of warding off further LIV Golf/Public Investment Fund poaching? In essence, the money being pledged for the names of the game (think Tiger, Rory) is a reward for remaining loyal, although more effective than reward for loyalty is the promise of future riches.

There are two primary possibilities: One is that Strategic Sports Group, the private equity consortium that sent PGA Tour Enterprises a check in the neighborhood of $1.5 billion in late January, has earmarked those funds for the players in the form of equity shares, via various levels of accomplishment.

The other is closer to the truth as per the PGA Tour: the allocation of funds is based on projections over a period of time, meaning the money that will go to the players is not simply sitting there waiting for them to scoop it up. Rather, the SSG investment will be used to grow the business with the expectation that it will result in a hefty return for all involved — and allow someone like Tiger Woods, whose been earmarked to get $100 million or Rory McIlroy whose been reported to be getting $50 million — to cash out after eight years.

In other words, nothing is guaranteed.

Said differently, the players’ potential windfall will rise and fall with the success or failure of this for-profit entity. Therefore, no one can be certain of what value they might be receiving. It’s quite possible that after eight years, Woods’ haul could be worth considerably more than $100 million. But maybe not.

According to the Golf Channel, the equity “grants will be worth 50 percent of their value after four years, 75 percent after six years and 100 percent after eight years.” It’s not quite clear what anything will be worth, but it feels like the language is imprecise and that what is meant is that the vesting will occur over those periods of time.

That implies that the players can sell 50 percent of their interests after year four, 75 percent after year six and 100 percent after year eight.

Egalitarian — one for all and all for one — it is not. Younger stars might grow resentful of how long they will have to wait their turn to move up tiers and how little there might be left for them down the road.

Golf Channel went on to say: “At each vesting benchmark players will be responsible to pay taxes on the grants.” That means that if a player keeps his interests through each vesting benchmark period, and does not sell, as these grants vest, the players have to pay taxes on interests they have not monetized.

A few more questions arise here: if the grants are linked to whatever value the new enterprise has, who would buy their interests? Another player? SSG? Is there a plan to take the new enterprise public?

Here is what it seems to mean: Even with the expertise and savvy of the very successful people involved with SSG, the PGA Tour is putting forth something that raises more questions than it answers — at least to those of us on the outside.

It’s clear that the program is aimed at providing “Golden Handcuffs” — a business term meaning that it’s aimed at making it very unappealing for the player to leave for LIV or anything else. But how effective can this be? LIV offers cash up front, and perhaps more will be available a year or two down the road. A PGA Tour player is going to have to wait to get rewarded.

One is reminded of the wisdom of J. Wellington Wimpy, from the Popeye cartoons in the 1930s. Wimpy loved hamburgers, and mooched them often. His stock line: “I will gladly pay you Tuesday for a hamburger today.’’ The PGA Tour is offering to pay its players on Tuesday — eight years from now and with 100 percent risk of what the value might be then — which could well be effective if not for LIV offering to pay the players for the burger today, no need for an accountant to figure out what something is worth.

Next move: does LIV Golf poach another marquee tour player, one with some name cachet?  Just to remind the PGA Tour who still has the leverage here?

And does the tour now have to start issuing a calculator and green eye-shades to the players?