Monday, October 12, 2015

The Cost and Pricing of Golf Handicaps

Golf Associations provide a variety of services paid primarily by membership dues.  A partial list of those services would include 1) handicap administration, 2) course rating and measurements, 3) golf publications, 4) member tournaments, and 5) sometimes ownership of a golf course.   Most of the services are of little or no value to the average golfer.  The only service that is a necessity is the player’s handicap.  Golf associations, however, do not sell the handicap service separately.  Instead they follow the cable industry model and bundle all of the services for one price—You say you never watch the Hallmark Channel?  Too bad.

Associations have another advantage in that they are monopolies.  There are other organizations that sell handicap services (Myscorecard, for example), but these handicaps are generally not accepted at club tournaments.  This monopoly power lets the golf association charge higher than the free market prices for handicaps as well as bundle unwanted services.  Table 1 presents the percentage of membership dues spent on the handicap service for a sample of state golf associations.  These numbers were extracted from Income Tax Form 990 filed by each organization.  These are only rough estimates since each association accounts for costs and revenue differently.  The consistency of the percentages, however, indicates roughly 10 percent of membership dues are spent on the handicap service.

Table 1
Handicap Costs as a Percentage of Membership Dues (2013)1

Membership Dues
Handicap Cost
Colorado State Golf Association
Northern California Golf Assoc.
Oregon Golf Association
Southern California Golf Assoc.
Washington State Golf Assoc.

What does an association do with the excess revenue it collects?  Most associations would argue the money is invested for the good of the game—e.g., association golf courses, junior golf, scholarships.  These may be good endeavors, but why should a person wanting a handicap be forced to donate to the charities the association wants to support?

In truth, most of the charitable donations made by associations are small.  The Florida State Golf Association, for example, with annual revenue close to $5 million gave only $26,000 in college scholarships. More likely, bureaucracies follow the commandment “Pay thy own self first” and direct discretionary income to management salaries.  As shown in Table 2, the wages of the key executive at each association increases with the size of the membership.  With more dues there is more money to divert to staff salaries. When benefits are also included, the disparity in the compensation between the small and large associations is even more apparent.  At a membership cost of $40, for example, it takes over eight thousand members to pay the total compensation of the Executive Director of the Southern California Golf Association.[1]  It would only take slightly over 3000 members to cover the total compensation of the Executive Director of the Oregon Golf Association.  

Table 2
Reportable Compensation of Key Employees (2013)*

Key Employee
Total Wages
Colorado State Golf Association
Edward Mate
Florida State Golf Association
Jim Demick
Northern California Golf Assoc.
Lyn Nelson
Oregon Golf Association
Barbara Trammell
Southern California Golf Assoc.
Kevin Heaney
Texas Golf Association
Rob Addington
                * Does not include retirement, deferred compensation, and nontaxable benefits.

A counter explanation of the correlation between association size and salaries is large corporations pay their chief executive officers more than small corporations so the varying salary levels at associations should be expected.  The difference is large corporations have billions of dollars at stake and face stiff competition.   Golf associations face no such threat.  They own a monopoly that is almost impossible to challenge.  The executive director of a golf association does not have to make decisions that could make or break the association.  He or she only has to keep the governing board happy.  This can usually be accomplished by giving board members a blue blazer and outings on the better courses in the state.  The skills needed to run large or small associations are basically the same.  That leaves the size of an association as the best explanation of salary level.

For most players, the cost of a membership in an association is a negligible part of their golf budget.  The demand for membership will not be very sensitive to price for these players.  The price may be too high, however, for the casual player whose golf budget is limited—the type of player that needs to be reached if the game is to expand.  Will associations lower the cost of handicaps to attract this player?  If a cafeteria plan was adopted where players could choose “handicap only,” the revenue base of associations would be cut dramatically.  This would mean a reduction in salaries and personnel. The adoption of such a plan is unlikely since bureaucracies are genetically predisposed to follow another basic commandment, “Do not kill the goose that lays the golden eggs.”      

[1] In 2013, the Executive director of the SCGA received $239,971 in base compensation, $51,170 in retirement and deferred compensation, and $4,158 in nontaxable benefits, for a total of $333,299.  Of course the big pay waits if you make it to the USGA.  The Executive Director of the USGA received $812,000 in total compensations.  When an executive goes from a state association to the USGA, he or she can expect a salary bump of around $200,000.