The impact of salary dispersion and performance bonuses on NFL organizations Joel Maxcy University...
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Transcript of The impact of salary dispersion and performance bonuses on NFL organizations Joel Maxcy University...
The impact of salary dispersion and performance bonuses on NFL
organizations
Joel MaxcyUniversity of Georgia
Mike MondelloThe Florida State University
Pay Dispersion and Firm Performance
Competing Hypotheses Hierarchical Pay Structure
– creates a meritocracy where accomplishments are rewarded monetarily
– Efficiency wage theory (Debrock et al 2004)
Compressed Pay Allocation – improves teamwork between workers– will more likely occur when teamwork is more important – Lazaer (1989)
Empirical Work: Team Sports
1. MLBA. Bloom (1999)
B. Depken (2000)
C. Debrock et al (2004)
D. Frick et al (2003)
Each finds that increased dispersion worsens team performance
Empirical Work: Team Sports
2. NBAA. Berri and Jewell (2004)
B. Frick et al (2003)
Salary compression does not effect or worsens team performance
Empirical Work: Team Sports
3. NFLA. Frick et al (2003)
compression is correlated with better team performance but shy of statistical significance
B. Borghesi (2007) compression is correlated with better team performance
C. Quinn et al (2007)compression is not correlated with better team
performance
Performance Bonuses
Agency Theory– Holmstrom, Baker, Gibbons, Murphy
Compensation based on performance– is an efficient and effective method
Possibly not efficient when– individual and group performance cannot be easily
distinguished– determination of the individual bonus conflicts with firm
objectives– the bonus relies on subjective evaluation
Application to Team Sports
Individual performance– Shirking literature implied positive effect
Team performance– No known empirical studies
NFL’s Payroll Constraint and Pay Dispersion
The NFL Enforces a “Hard” Salary Cap– Constraint implies that rather than a “teamwork”
externality from dispersion . . .– . . . additional salary cap money allocated toward
superstars leaves fewer dollars are available for mid-tier free agents
– A team may be forced to substitute with lowest tier players to meet salary cap constraints
2006 Amendments to CBA
Players get smaller percentage of larger pool– More stadium revenues are included– E.G. luxury seating
Owners share more revenue Also in 2006 new National Broadcast
contracts increases league revenue from $2.2B to $3.74B per year– Split evenly between teams
NFL Payment Methods
1. Signing bonuses – up front payments are rewarded to players for signing a contract or extending a previous one; only source of guaranteed pay
2. Fixed payments – previously agreed upon amounts paid annually and count against a team’s salary cap total, but are not guaranteed over successive years; guaranteed only for current season
3. Performance bonuses – incentive payments based on various individual and team accomplishments. No guarantee must be earned
NFL and Performance Bonuses
At least, if not more common, than in other team sports
More than 70% of all NFL players receive performance bonus payments
Accounted for <10% of total pay through 2005
As of 2006 jumped to about 25% of total pay
Performance Bonuses
Team incentives:– Winning games, conference championships, or the Super Bowl – Total points scored, yards accumulated, and team rankings in
several statistical categories– Touchdowns yielded, number of yards allowed, or sacks registered
Individual incentives :– Statistical accomplishments, e.g. touchdowns scored, touchdowns
caught– Physical conditioning benchmarks including weight limits– Rankings compared to other position players
Incentive Bonus Payments by Year
Year Total per Team % Total Payroll2007 $707.86 $22.12 23.93%2006 $794.81 $24.84 27.82%2005 $217.16 $6.79 9.04%2004 $176.10 $5.50 7.55%2003 $130.37 $4.07 6.18%2002 $110.70 $3.46 6.11%2001 $73.44 $2.37 4.29%2000 $94.05 $3.03 5.58%
Salary Payments and the Cap Constraint
Signing bonuses cap values are prorated over the term of the contract– When a players leaves the team before contract
expiration the bonus is accelerated and the team is left with a “dead money” situation
Other bonuses are counted against the current year’s cap if LTBE– Or the next year if earned but not classified as
LTBE
Management’s Decision
Seek or retain highest quality talent at a few key positions– Market will dictate high signing bonus – Greater pay dispersion
Spread talent more evenly across roster– More opportunity to implement performance
bonuses
Empirical Specification: On-field Performance
DWPit = 0 + 1PAYROLLit + 2BONUSit +3CVPRit +4WPit-1 + 5REVENUEit-1 + 6ROSTERit +7NEWCOACHit + 8CONFERENCEit +9 ACBA + it.
Models– OLS– Fixed Effects– Random Effects
Empirical Specification: Financial Performance
REVENUEit = 0 + 1PAYROLLit + 2BONUSit +3CVPRit +4WPit + 5WPit-1 + 6ROSTERit +7NEWCOACHit + 8CONFERENCEit + 9 ACBA + it.
Models– OLS– Fixed Effects– Random Effects
Data
254 club-year observations from NFL teams over the period 2000-2007
– In 200 they began to separate signing bonuses from other bonuses
Salary and payroll data were obtained from the USA Today’s NFL Salary database
Team revenue data were obtained from Forbes.com The sample contains the full eight seasons for all thirty-two
teams except the Houston Texans, who began play in the 2002 season.
Results
Descriptive Statistics
Variable Observations Mean Standard DeviationDWPCT 254 0.0034 0.231PAYROLL per TEAM (x$1M) 254 $69.33 15.416Incen. BONUS per TEAM (x$1M) 254 $9.07 1.055PAYROLL to CAP 254 0.849 0.085BONUS TO CAP 254 0.098 0.099CV 254 1.236 0.195WPCTt-1 254 0.5 0.189REVENUEt-1 (x$1M) 254 $161.37 38.184REVENUE(x$1M) 224 $167.70 35.758ROSTER 254 60.724 4.391NEW COACH 254 0.189 0.392CONFERENCE 254 0.504 0.501AmCBA 254 0.252 0.435
Model 1: Dependent Variable = DWPCT
Coefficient t-ratio P-value
PAYROLL 0.396b 2.463 0.0145BONUS 0.318 1.519 0.1299
CV -0.203a -2.586 0.01
WPCT t-1 -0.978a -13.229 0REVENUE 0.001 1.401 0.1624
ROSTER -0.006b -1.973 0.0496NEW COACH 0.012 0.369 0.7121CONFERENCE -0.12 -0.816 0.4154
AmCBA -0.127b -2.522 0.0123
Likelihood Ratio 65.933a F-test 2.036b
Coefficient t-ratio P-value
Constant 0.585a 2.91 0.0036
PAYROLL 0.356b 2.356 0.0185BONUS 0.294 1.554 0.1202CV -0.077 -1.121 0.2624
WPCT t-1 -0.829a -12.167 0REVENUE 0.001 1.525 0.1274
ROSTER -0.008a -2.627 0.0086NEW COACH 0 -0.001 0.9989
3b. FIXED EFFECTS
Adjusted R-squared = .40730
3c. RANDOM EFFECTS
Model 2: Dependent variable = Revenuet
CONFERENCE -2.94 -0.74 0.46
AmCBA 42.37a 4.96 0Adjusted R-squared 0.333
Coefficientt-ratio P-valuePAYROLL -14.524 -0.707 0.48
BONUS 81.267a 2.657 0.008
CV 23.541b 2.295 0.023
WPCT 16.143c 1.754 0.081WPCT t-1 5.576 0.59 0.556
ROSTER 2.694a 6.874 0
NEW COACH -8.222c -1.965 0.051
CONFERENCE -35.779b -2.025 0.044
AmCBA 32.903a 4.738 0
Adjusted R-squared 0.663
Likelihood Ratio 186.63a F-test 7.695a
Coefficientt-ratio P-valueConstant -36.116 -1.367 0.172PAYROLL -15.411 -0.769 0.442
BONUS 72.300b 2.448 0.014
CV 19.271b 1.971 0.049
WPCT 16.582c 1.857 0.063
4b. FIXED EFFECTS
4c. RANDOM EFFECTS
Discussion
Significant finding is the strong negative relationship between payroll dispersion and on-field performance in the fixed effects model
Positive correlation between incentive bonuses and winning is consistent with agency theory.
– relative weakness of estimates implies some inefficiency in their administration
– E.g. the games played with the LTBE
Discussion
Increases in incentive bonuses carry a positive relationship with revenue– perhaps indicating that more bonuses are paid in
a “good” year Salary dispersion and revenue are
positively correlated. – Do fans prefer to see teams spending significant
dollars on a few superstars, to a less glamorous team that wins more?