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?