October 20, 2007
Joe Torre and Contract Incentives
Posted by Gordon Smith

After 12 years as the manager of the New York Yankees, Joe Torre is walking away. On Thursday, Yankees' owner, George Steinbrenner, offered Torre a one-year contract to continue as manager, but the contract would have cut Torre's based salary by $2.5 million (to $5 million), offering instead $3 million in performance-based incentives and an $8 million option for 2009 if the Yankees won the 2008 AL pennant.

In declining the offer, Torre's responded: "I just felt the contract offer, the terms of the contract, were probably the thing I had the toughest time with -- the one year for one thing, the incentives for another thing. I've been there 12 years and I didn't think motivation was needed."

I am no Yankees fan, but I am a Joe Torre fan. If you remember Steinbrenner's Yankees pre-Torre, you will appreciate what an amazing job he did with the team. Here is the graphic from ESPN:


Still, is it true that Joe Torre needs no additional contract-based motivation? Is the desire for fame, on-field success, and eventually (when a longer-term contract expires) contract renewal enough to produce the requisite effort?

More from Torre: "Yes it was a very generous offer, but it wasn't the type of commitment that 'we're trying to do something together,' as opposed to 'let me see what you can do for me.'" Torre touches on the standard rationale for long-term contracts: they encourage investment. But also, if you are interested in the symbolic aspects of contracting, this is classic. Notice how the form of the contract sent a message beyond the bare terms. If I am reading this correctly, Torre was insulted because he has proven himself a competent and diligent manager without the sort of contract-based incentives proposed in the new deal. Whether Steinbrenner intended to send the message that Torre received, I don't know, but it wouldn't take too much imagination to conclude the Torre would respond in this way.

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