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One of the greatest challenges facing professional (sports has been the rapid increase in earning power of professional athletes during the past quarter century. This challenge is likely to dominate the sports business landscape in the coming decades, especially as salaries and endorsements that have reached averages in the millions of dollars encounter an increasingly turbulent, complex, and transnational economy. But now, more than ever before, the income potential of professional athletes has significant implications for the relationship among sports, business, and society.
As professional sports became more organized during the twentieth century, professional athletes in all developed countries were increasingly paid several times the average worker’s salary. But even the relatively high-paying jobs that persisted through the first 70 or so years of the century did not parallel the rise, magnitude, and capacity of the professional athlete’s earning power during the latter part of the century, especially in the professional baseball, football, basketball, and hockey leagues in the United States. The rise of the professional athlete paralleled that of the blue-collar worker, albeit with much better pay. That is, both professional athletes and blue-collar workers carved out a livelihood based on a cash wage with few fringe benefits until unionization increased their capacities to earn higher salaries and gain benefits. This increased both their social standing and their political power. But just as dramatically as the status of the blue-collar worker has fallen during the past 30-plus years, the status of professional athletes has experienced growth.
The Evolution of Athletes’ Salaries
To fully perceive the economics of modern athletes’ earning power, it is helpful to bear in mind the rapid transformations that have occurred as sports shifted from pastime to business. There is perhaps no better starting point for such explanation than in the evolution of athletes’ salaries, which have traditionally served as the greatest portion of their incomes.
Talk of athletes’ salaries has often been considered in the context of team sports. Yet whether athletes play team or individual sports, professional athletes by definition receive pay for their performance in athletic competition. One of the early forms of paying individuals for athletic performance was established with the emergence of prizefighting in the late nineteenth and early twentieth centuries. In particular, the influx of European émigrés to the United States during this period of time, combined with the emancipation of slaves in the post-Civil War era, resulted in the ascension of social minorities through participation in sport. While white Irish Americans were the first to gain mass popularity—and to be paid accordingly—as prizefighters, Jack Johnson, a black man, had become heavyweight champion by the end of the first decade of the twentieth century. Johnson’s ability to come out on the winning side of fight after fight elevated him to the status of pop culture icon, which brought with it all the benefits and trappings of such a position.
However, much of the standard for today’s salary structures across the sports landscape has its modern roots in the advent of professional baseball in the United States. During the late nineteenth century and for more than half of the twentieth century, baseball was the most popular professional team sport, and Babe Ruth was baseball’s—and, arguably, the country’s— most popular and dominant figure. Ruth, who played for the New York Yankees, was among a few stars whose presence on a team had such an impact on the press and at the turnstiles that he had the power to command an exceptionally high salary. And as one well-known anecdote relates, when reporters asked Ruth, whose contract at one point was valued at $80,000 per year, why he should be paid more than President Herbert Hoover, Ruth reportedly replied, “Why not? I had a better year than he did.”
Nevertheless, the contracts of such stars were outliers. The average salary for a professional baseball player at the time was approximately $7,000, and although this figure was upward of five times that of the average working family, the disparity within the sport tells of how little impact stars had on the salary demands of other players on their teams. It also hints at the extent to which most players were bound to the whims of ownership.
As in almost any organization, payroll allocation has historically been one of the primary influences on sports franchises’ decisions when negotiating player contracts. In fact, the infamous Black Sox scandal, in which eight members of the 1919 Chicago White Sox conspired with gamblers to intentionally lose that year’s World Series, is generally considered to be the players’ reaction to having felt underpaid by team owner Charles Comiskey. Yet the players’ earnings were constrained not only by the actions of a penny-pinching owner. They were also severely limited by the existence of the reserve clause.
The Reserve Clause and Free Agency
The reserve clause was one of the longest standing provisions in player contracts of both the major and minor leagues. It bound a player to a single team, even if he signed contracts on an annual basis. The term of reserve, therefore, effectively restricted a player from changing teams unless ownership granted his unconditional release from the team.
From the late 1800s until the 1960s, when the amateur draft was instituted, the only conceivable license that players had over their careers was the freedom to negotiate as an amateur with any team willing to sign them to a professional contract. Once the contract was signed, it was at the team’s discretion to trade, sell, reassign, or release the player. The only alternative leverage that players held at contract time was to hold out—that is, refuse to play unless their preferred conditions were met.
One of the earliest serious studies on the reserve clause and its implications was conducted by Simon Rottenberg in a 1956 article, “The Baseball Players’ Labor Market.” Rottenberg concluded that the reserve clause inevitably transferred wealth from the players to the owners. He also determined that the best players tended to play for teams in the largest markets because these teams were in the optimal position to exploit the players’ talent for the benefit of attracting fans to the ballpark.
But only a couple of years prior to the publication of Rottenberg’s (1956) study, the Major League Baseball Players Association (MLBPA) had been established. As it functioned early on, the MLBPA was largely unassuming, to the point of being ineffectual until 1966 when the players hired Marvin Miller, a former negotiator for American steel workers, as the head of their union. The appointment of Miller would forever change the standards of player compensation—first in baseball and then across all professional sports.
On behalf of the players, Miller began to press for increases in such contract provisions as the minimum salary and pension contributions by owners. In so doing, he was progressively beginning to disrupt the basic assumptions of player contracts and, by extension, the relationship between ownership and players. Not long thereafter, things reached a tipping point when Miller challenged the legitimacy of the reserve clause.
In 1970, Curt Flood was a star player for the St. Louis Cardinals who had been traded to the Philadelphia Phillies. Flood, however, did not want to move from St. Louis and informed the Cardinals, Phillies, and the baseball commissioner’s office of his intention to stay put and play out the remainder of his contract in St. Louis. Commissioner Bowie Kuhn ruled that such action was not within Flood’s rights as a player and ordered him to play for Philadelphia or not play at all. Flood chose the latter and sued Major League Baseball (MLB) for violation of U.S. antitrust laws.
The case of Flood v. Kuhn (1972) eventually reached the U.S. Supreme Court, which ultimately sided with MLB. The Supreme Court cited, if somewhat dubiously, MLB’s decades-old exemption from antitrust law. But losing in court did little to deter Miller and the players he represented. They instead took the owners head-on in a series of labor negotiations.
By 1972, a labor impasse boiled over when team owners refused to bargain with the players union on salary and pension issues. Now that they were firmly organized and unified by Miller, the players responded with the first league wide strike in American professional sports history. Only after nearly 100 games were lost to the strike did the owners finally concede to the players’ demands. (The players found the labor stoppage so successful a tactic that they used it again in 1981, 1985, and 1994; the owners took a similar tack in 1976 and 1989, when they locked out the players during other labor disputes.)
As the players gained increasingly equal leverage in negotiations with owners during the 1970s, they pushed for a growing number of concessions. Of these, none was perhaps as influential to the earning power of professional athletes as the advent of free agency.
In 1974, Jim “Catfish” Hunter, a pitcher for the Oakland Athletics, became the first player to qualify for free agency. Hunter and team owner Charles Finley negotiated a contract that included a clause that required Finley to make a payment into an annuity for Hunter on a certain date. When Finley missed the date and subsequently attempted to pay Hunter directly rather than honor the clause, Hunter and Miller filed a complaint charging that the contract was null and void because Finley had broken the terms of the contract.
The case was sent to an arbitrator, who sided with Hunter. The voided contract made Hunter a free agent, which created a bidding war for his services. When Hunter signed a contract, he did so with the New York Yankees for a guaranteed salary that was precedent setting in both size and duration: $750,000 per year for 5 years. Even the immediate implications of the deal were far reaching: Hunter not only became the highest paid player in baseball history, but he also was one of the first players to receive anything more than a 1-year contract—and a guaranteed one at that. More important, the deal effectively established free agency across all of baseball.
As free agency took shape in the mid-1970s, the concept of the reserve clause was undergoing its final days of existence. In 1975, pitchers Andy Messersmith and Dave McNally played under the terms of the reserve clause. But when it came time for them to sign their contracts, they, with Miller’s encouragement, argued that the reserve clause could not be applied if no contract was signed. Their case went before arbitrator Peter Seitz, who struck down the reserve clause and thereby resolved that the players could become free agents and sell their services to the highest bidder.
With the constraints of the reserve clause compromised and the rise of free agency, it was but a matter of time before these transformations would recast the expectation for player contract lengths and values and reconstitute the leitmotiv of the individual over the team.
On the Implications of Free Agency
The players’ gaining the right to freely offer their services to any team (on expiration of contract) had an astonishing impact on salaries. In 1975, the minimum salary in MLB was $16,000, and the average salary was $44,676; by 1980, the salaries had jumped to $30,000 and $143,756, respectively; within 10 years of the start of free agency, the salaries had risen to $60,000 and $371,571, respectively; and by the 20th anniversary, they had risen to $109,000 and $1,110,766, respectively. And while minimum and average salaries continued to rise year after year, nothing did more to demonstrate the extent of free agency than the 10-year, $252 million contract that Alex Rodriguez signed with the Texas Rangers in 2000.
The team’s bid, which exceeded the next highest offer by approximately $100 million, personifies the theory that free agency is an auction market for athletes. According to work popularized by Richard Thaler (1992), this particular type of auction is a common value auction, in which the item being auctioned is more or less of equal value to all bidders, though bidders do not know the market value of the item when placing their bids. To place a bid, however, each bidder must have independently and expertly estimated the value of the item prior to bidding. When the auction is complete, the winner of the auction almost always is the one who provided the highest estimate. But as Thaler propounded, the winner of the auction ends up the loser because either the winning bid usually exceeds the true value of the item and the enterprise therefore loses money, or the true value of the item is less than the independently and expertly furnished estimate.
Despite most bidders’ awareness of the “winner’s curse,” it fundamentally occurs because the thought processes of those doing the bidding—that is, ownerships—is irrational. The epitome of this reality is that the Rodriguez contract was eclipsed in 2007 when Rodriguez himself, who had by then been traded to the New York Yankees in 2004, signed a contract extension worth $275 million over 10 years. Most remarkable about the deal is not the numbers associated with it but that Yankees home games had been reaching sellout capacity and that every team Rodriguez played for had an improved win-loss record after he was no longer with them.
As such, the “winner’s curse” is, in this context, of enormous benefit to the players. Because free agent salaries in professional sports are set from the top down, Hall of Fame-caliber players inevitably command the highest salaries. But because the free agent market persists on a scarcity of talent available in a given year, even second-level talent can expect to be compensated at a disproportionately higher amount, relative to their actual value of performance.
Although professional baseball was the forerunner of almost every significant policy for the movement of players between teams, the labor market for all athletes in every professional league is, fundamentally, a result of bargaining between owners and players. Over time, both owners and players have tended to agree that free agency is a means through which to provide the greatest perceived individual economic benefit. For owners, the costs associated with procuring and developing young talent has become so high as to insist that their best protection is through policy that requires a newly professional player be bound to his original team for a short period of time; in MLB, for instance, the period is 6 years. When this period of time lapses, the player qualifies for free agency and, under the rules of restricted free agency, can negotiate a new contract with any team, including his original one.
The conditions under which an athlete qualifies for restricted free agency vary among the major professional sports leagues. But the rules generally hold that although the athlete has freedom to negotiate with any team and agree on terms of a contract, the athlete’s current team has an opportunity to match the terms of the deal before a contract is signed with the new team. Quite often, league rules specify that when a restricted free agent signs a deal with a new team, that team must compensate the athlete’s prior team with an equitable number and level of picks in future drafts of amateur players. This framework is different from that of unrestricted free agency, under which the athlete has either been released outright from the team, not been offered a renewal upon expiration of contract, or not been selected in the amateur draft. Unrestricted free agents are, therefore, permitted to entertain and decide for themselves about contract offers from any team, an opportunity that can be especially lucrative for those who are the top performers in a league.
Yet even within the span of time between the beginning of a professional career and becoming eligible for free agency, and though it is in ways reminiscent of the reserve clause, the athlete is not entirely constrained by the whims of the owner. During this period, contracts are typically structured to provide players with annual salary increases, while annual minimum salary increases and salary cut percentages are mandated by the league, and as a result of the collective bargaining agreements between owners and players unions, players have the right to have their contract grievances with the owners ruled on by an independent arbitrator in the first couple or few years of the original deal. Given that these mechanisms essentially compare one player to other players in the league and their salaries and that the market value for players has increased over time, athletes stand to earn better than an “honest day’s pay.” In fact, they possess an increasing opportunity to create generational wealth for themselves and their families.
Since athletes have become more and more successful at increasing their salaries, a good many teams have in turn had to repeatedly relinquish key players. At the same time, in an attempt to remain competitive in both the game and the business, managements have discovered combinations of human intuition and statistical measurement that predict player performance. One result has been that a variety of teams in a number of leagues have begun to develop cost-containment strategies specific to their rosters.
Although Branch Rickey pioneered such systems during his years as an executive with the St. Louis Cardinals in the 1930s, perhaps the most popular of modern-day philosophies is that detailed in the book Moneyball: The Art of Winning an Unfair Game by Michael Lewis (2003). Lewis’s treatment is an examination of Billy Beane, who as general manager of the Oakland Athletics MLB franchise, has used sabermetrics—mathematical examination of baseball-specific statistics—to make decisions about which amateur players to draft and which free agents to sign according to a notoriously low budget by league standards. With this system, which has the capacity to illuminate traits of the game that may not be immediately apparent, the team is theoretically able to obtain large numbers of undervalued, serviceable players at all positions. It is, in practice, a cost-containment strategy that helped Oakland compete with high-spending teams and qualify for the playoffs regularly in the 1990s and throughout the first decade of the 21st century, despite having the second lowest payroll in baseball.
By now, several other roster cost-containment theories have also been applied with success throughout professional sports. One of these involves the notion of free agency avoidance, in which teams essentially resist pursuit of high-priced free agents, including their own, and instead purposefully plan to replace those players with other talent already in the organization. Another theory involves teams extending substantial longer-term contracts, with submarket signing bonuses, to young players before they are eligible for free agency. This theory inherently provides an element of security to both the team and the player; they both effectively bet against the uncertainty of free agency.
The successful management of such human resources and salary allocation theories is evidenced in sports that operate both with and without salary caps. For example, in the National Football League (NFL), which does limit the amount of money a team can spend on total player salaries, teams such as the New England Patriots, Pittsburgh Steelers, and Philadelphia Eagles have implemented cost-containment theories and consistently appeared in the playoffs during the late 1990s and early 2000s. As a further example, Bill Belichick, head coach of the Patriots, and his staff have managed roster concerns by actively seeking players at positions less influenced by free agency and shying away from overvaluing and overpaying players at quarterback, wide receiver, and cornerback positions. Still, despite the relative success of these methods of controlling player costs, no team is immune from the reality of the rising costs of player contracts.
Although numerous factors contribute to the values of player contracts, the dollar amounts and conditions basically settle on that most fundamental of economics concepts: supply and demand. As referred to earlier, there is a limited supply of individuals who are able even in the first place to perform at the professional level. When a team plans to acquire an individual who is among the best performers in the sport, the decision makers in the organization must prepare to deal with the realities of smaller supply and higher demand.
According to application of economic theory, the supply curve’s inelasticity in this relationship means the value of contracts will be determined by the demand curve. The increase of the demand curve expresses the rise in the individual player’s value and, to be specific, the value of the individual player’s contract. But this simple relationship tells only part of how and why player contracts are valued as they are today. What is further said to explain current thinking about player contracts dates to the early days of modern economic theory: the neoclassicists’ creation of marginal utility theory circa 1870.
Within marginal utility theory, which has taken to being called microeconomics since the establishment of Keynes’s economic synthesis, there is the marginal revenue productivity (MRP) theory of labor and wages. Marginal revenue is the return obtained from the last unit sold and is a function of change in total revenue divided by change in quantity. As applied to labor and wages in general, it holds that workers are paid according to the value of their marginal revenues to the enterprise. In the context of player contracts, this means salary is based on and differentiated by performance, productivity, and output. More simply, players are paid based on whatever is considered to be their contributions to the enterprise.
Assuming that ownership is willing to pay a productive player for adding to the financial earnings of the franchise, what exactly is contained in the player’s contribution? The answer has generally been to reduce MRP to the number of tickets sold to fans as a result of a player being a member of the team. But this is conceivably too simple an explanation. Given the amount of revenue streams flowing into the sports leagues and the business as a whole, it is increasingly difficult to ascertain a valid and reliable MRP for the professional athlete. This is in large part why those who have devoted a considerable amount of recent scholarship to understanding sports economics—certainly Andrew Zimbalist of Smith College and The Wages of Wins authors David Berri, Martin Schmidt, and Stacey Brook—have stated that salary structures are questionable and misguided and that there is by now a need to modify the way salaries are determined. At the heart of their arguments is the relationship among player salary, performance statistics, and which statistic matters most in determining player pay.
There is no doubt that the terms, considerations, and values of player contracts have experienced explosive growth since the advent of free agency. They have, in turn, brought significant change to sports and the sports business. Prior to free agency, professional athletes had generally been subject to the benevolent interests of owners; the typical athlete’s acts of defiance amounted to some combination holding out for higher salary, overcoming the influence owners held over members of the press, and the occasional (though ultimately prohibited) acts of collusion in which owners tacitly agreed not to bid on each other’s free agents. Today, professional athletes are arguably no longer exploited, inasmuch as athletes and owners have an increasingly balanced amount of control over the rules and courses of making money from sports. This is perhaps as much a result of successful labor negotiations as of rising exposure across the various means of communication— radio, television, newspapers, magazines, and the World Wide Web—that reach and influence the sports fan and the public at large.
The Evolution of Athletes’ Endorsements
In addition to the labor triumphs achieved by professional athletes in the last quarter of the twentieth century, there has been no greater or more powerful transformation than that of professional athletes basing their salary demands on the revenue streams afforded by television broadcasts. When television sets penetrated the media market and became an increasingly mainstream household item beginning in the 1950s, teams and leagues found a fresh medium by which to transmit their product to audiences, especially those that were outside the range of a particular radio signal. The broadcast of professional sports events was a natural fit for programming executives, who rapidly signed teams and leagues to lucrative contracts. But although these deals almost immediately increased the income and value of teams and leagues, only a very small minority foresaw the unintended consequence they would have on the incomes of professional athletes.
The Impact of Television and Media on the Earnings of Professional Athletes
Because the boom in media rights deals made plenty of news, the public reporting of deals meant team revenue figures were no longer shrouded in secrecy, as they had been previously. So while owners celebrated having parlayed successful television broadcasts and distribution contracts, players and their representatives rejoiced in having a definitive figure to target in contract negotiations. That is, owners, who with closed financial books had been able to effectively cry poverty, could no longer do so with any sense of veracity.
In the United States, the NFL has thus far proven to be the most successful sports entity when it comes to consistently maximizing media revenue. But this success has come at the cost of a labor battle that spanned nearly two decades and spilled over into legal disputes to be tried in courts of law. However, one method to achieve labor peace emerged in 1992, when the NFL owners offered to open their financial books and give players a large share of the list of defined revenue streams.
The list was dominated by the league’s multibillion-dollar media deal, and the owners offered the players a 63% share (later as much as 65%) in exchange for the players’ agreement to cap their salaries at the 63% level. This salary cap, which was similar to the agreement reached a decade earlier within the National Basketball Association (NBA), guaranteed players the lion’s share of revenue from the league’s media deals and gave the owners cost certainty over their team rosters.
Yet despite the ostensible advantage a salary cap grants to both sides, salary caps have not proven to be as effective in providing cost certainty in all sports. After the NFL and its players association negotiated a collective bargaining agreement in 2006, the prospect of even a slight change in calculation has given rise to speculation that salary caps may not be as effective a tool of cost control as ownership has believed them to be until now. The potential sticking point is that salary caps are tied to overall revenue and contain minimum salary guarantees, and there are a host of other exceptions that have been—and could be even more so going forward—exploited by either ownership or player interests.
But while salary cap controversies and related contract negotiations persist on one hand, on the other hand, for athletes in most major professional sports, both with and without salary caps, compensation is tied to the overall media-earning capacity of their particular teams and leagues. In capped sports, the figures are, by definition, generally fixed; in uncapped sports, the figures are more variable, though ultimately based on media earnings. And in any case, because they have largely signed over their media income to players, owners have turned to new ways of maximizing facility-based revenue streams, a direct result of which is the boom in stadium construction, naming rights, and sponsorship deals during the past 20-plus years.
Owners are, however, not alone in gaining revenue streams through sponsorship and related deals. Since the earliest days of modern professional sports, all manner of corporations and organizations have intended to reach existing and potential customers by aligning themselves with athletes. Professional athletes tend to be able to draw people to an event, which provides the opportunity for organizations to do such things as promote their products and services or motivate and entertain customers and employees. In exchange for making an appearance and performing some relative function, whether in person or through some electronic medium, the athlete typically receives some form of compensation. Player contracts are by and large the primary embodiment of this because athletes possess the status to make their teams and sports more marketable.
Yet over time, especially as the reach of sports and media has grown across the globe, endorsement income has also become an important part of the athlete’s overall earnings potential. It is indeed extreme, the case of professional golfer Tiger Woods, who, until derailed by self-destructive behavior that led to personal scandal, was estimated to earn upwards of $100 million per year in endorsement income. But to whatever extent Woods’s actions hurt his own earning power and may in the long term impact athletes’ endorsements, well-known and recognizable athletes—both current and retired professionals— can earn many millions of dollars annually for endorsing both sport-specific equipment and apparel and consumer products; this is typically in addition to receiving quantities of these items for free.
An athlete’s ability to act as a successful endorser is, on the surface, a function of likeability and recognition. But below the surface, the athlete-as-endorser is a tool that is used in an attempt to persuade other individuals to do something in the interest of whatever product, service, or organization is being promoted.
Robert Cialdini of Arizona State University has researched and developed accepted theories about how and why people tend to be influenced by others. Within his framework are the realities that people tend to behave as they see others behaving (so-called social proofs), are likely to outright obey the requests of authority figures, and are easily persuaded by other people they are fond of, especially if they find those individuals somehow attractive. One dominant theme of the literature on the subject is that people are willing to be swayed because it allows them to identify with successful others, which is a means by which to enhance one’s self-esteem. That is, when a person joins a renowned group and draws attention to membership in it, that person is likely to feel more satisfied with himself or herself.
Although the theories propounded by Cialdini (1993) are settled in a greater social context, they originate in his and his colleagues’ having verified that following a sports team victory, fans are more likely to brandish their team’s logo and share the recognition by saying, “We won”; following defeat, the same fans declare, “They lost.” These dual concepts—basking in reflected glory and cutting off reflected failure, respectively—help explain the traditional allure of popular and well-behaved athletes as endorsers and the rejection of athletes whose personalities are disagreeable or whose behavior runs afoul of the law or social norms.
Although the basic reasons for using professional athletes to make promotional statements remains the same as anytime before, the advancement of such a strategy and tactic looks very much different today than it did in 1960, when Mark McCormack, founder of International Management Group, began to craft the image of professional golfer Arnold Palmer into one suitable for all manner of endorsements. Palmer was not, of course, the first professional athlete to take on the role of product pitchman. But with McCormack acting as his agent, Palmer is considered to have become the first professional athlete to seriously market, promote, and license himself and his likeness—and to have built a corporate enterprise from it.
The effectiveness of Palmer as a spokesman is a result of advertisers’ having chosen to align him with products and services that he either used personally or had confidence in promoting to the public. But the underlying strength of the endorsement strategy rested on and concentrated on something more profound: Palmer as an upstanding human being rather than as a championship golfer. By focusing more on the former than on the latter, Palmer’s value as an endorser was guarded against any likelihood of poor performance on the golf course.
Countless professional athletes across virtually every professional sport have in the interim used the basic tenets of Palmer and McCormack’s strategy to convert image into income. And it may well be argued that NASCAR and the teams and drivers within it have individually and collectively built themselves up on much the same premise. What is undeniable, however, is that professional sports have grown to compete variously as part of or side by side with the entertainment industry, and athletes are by now equivalent to entertainers in terms of status, function, and compensation. For high-performing athletes, especially those who have a particular marketability, there are often opportunities to earn more money from endorsing products and services than from playing their sports.
Global Considerations and Future Directions
In today’s global economy, business concerns and information flows are no longer local, regional, or multinational, even if they are organized as such. Business and the flow of information are transnational, which means factors including marketing, pricing, and management do not know national boundaries. But if this analysis is United States-centric, it is only because professional sports in the United States have provided the basic model for the composition, image, and interests of today’s professional athletes the world over.
Professional sports teams in the United States, beginning with baseball, have increasingly set about finding players from outside the country. This has been a response, first, to the desire to expand the pool of available talent and, more recently, to increasingly high salaries being paid to players who might not pan out. It is ever more also due to the fantastic attempts by individuals and organizations within the sports business to tap new markets by attracting foreign fans who are conceivably interested in consuming anything that might be related to a favorite professional athlete playing abroad.
With the possible exception of premier football (soccer) players and Formula One race car drivers, both of whom benefit from relative free agency and concomitant auction markets for their services, professional athletes who compete in U.S. leagues are by and large paid a higher salary than their counterparts around the world. This is in great measure due to the victories of their organized labor unions over management. Yet it is fast becoming an old reality.
Although leagues abroad follow the United States in many ways, they tend to have different issues with player movement because they permit the largely unencumbered free flow of players between leagues. In the United States, the existence of one high-professional league per sport means there are a finite number of available roster spots on a team and, by extension, in the league. This phenomenon, combined with the prospects of media exposure, explains, for example, the unprecedented contracts extended to Alex Rodriguez, the first of which doubled the previous record for a sports contract, which was a 6-year, $126 million agreement signed in 1997 between forward Kevin Garnett and the NBA’s Minnesota Timberwolves.
The years since the advent of free agency have been a great period of time for the earnings of professional athletes, most of whom have increasingly benefited by attracting owners and sponsors that are willing to compete against one another for the athletes’ talents and services. Their status has become more profitable and their access to financially rewarding opportunities has risen steeply. And the farther up the talent and status scale a player has gone, the better the pay. But this much is also true for athletes who compete in individual sports.
Both in and across the team and individual sports labor markets, there is, as in any labor market, inequality of income distribution. The enormous amount of information pertaining to the salaries of professional athletes has permitted reliable Gini coefficients—measurements of inequality in income distributions—to be computed, and the results demonstrate that plenty of inequalities exist. Generally speaking, even in consideration of capped sports, individual versus team sports, and the economic policies specific to each, there is a significant discrepancy between 90% of earners and those in the top 10%, who anyway lag well behind the top 1% (to say little of those in the top 0.1%). Yet given salary increases over time, and despite the few instances of stagnation or decrease, most professional athletes can be assured of receiving better than a living wage.
Consider, for example, that the average salary for an MLB player is at present more than $3 million; when Donald Fehr became executive director of the MLBPA in late 1985, the average player’s salary was a little more than $300,000 (approximately $600,000 in 2008 money). The billions of dollars committed to salaries in today’s domestic and foreign sports leagues and associations tell nothing of the days when a good many athletes supplemented their incomes by taking jobs during the off-season, which was the impetus for the creation of preseason training camps. Players now typically train year-round and may even receive additional compensation for doing so.
Even so, there is a line of argument that asserts athletes are being exploited because they are being paid wages lower than the MRP, the revenue that is generated. There is, in addition, subtext about the existence of prevailing structures of race and gender discrimination. Although there is not by any means a final word on the matter, it is becoming clear that the argument over whether professional athletes are any longer paid lower wages because they are of ethnic and racial minorities appears to be obsolescent: Alex Rodriguez is Latino; Tiger Woods is of African American and Asian descent; and NBA players, who are the highest paid of all league athletes in the United States, are a majority black. To be clear, disparities in salary due to racial, ethnic, and even language biases is an existent though decreasing issue in the context of player salaries. However, the same cannot be said for gender. Although female participation in sports has risen dramatically since the latter part of the twentieth century and women’s professional leagues have been created in reflection of that change, female athletes are not as well compensated as their male counterparts. One overarching reason for this is because, whatever social stereotypes predominate, professional women’s sports have yet to achieve the levels of viewership and, by extension, revenue that men’s sports generate.
To be sure, as private investors and public institutions in many parts of the developed world have for the past two decades-plus invested in sports teams and leagues, demand for top players has become increasingly competitive. The U.S.-based leagues have not yet ceased to be the market leaders, but they are beginning to experience realities of the open market that have existed for quite some time almost everywhere else. Most notably, several players in the NBA and the NHL have decidedly gone to play—and be paid handsomely—in elite European leagues. And the implications of acquiring the best talent available has become so fierce that teams in more than a few sports are willing to pay posting and transfer fees across teams and leagues simply for the right to negotiate with a player. Yet no one can say with any certainty whether any of this experience is likely to ring true in years come.
Conclusion and the Challenges Ahead
Throughout history, professional sports have generally not let outside factors, such as the economy, control business. Executives and personalities have taken charge of external forces, especially during periods of downturn, and acted to endow their assets with various capacities to gain wealth. Having been more proactive than reactive, they have tended to not let economic factors affect business performance any more than those factors set limits on how they conducted their business.
Easy access to credit and other economic factors that existed during the first three quarters of the twentieth century allowed professional sports entities to think and behave as they traditionally had. But significant economic and social transformations in more recent years have led to upheaval of much of what everyone knew to be true. One question that is beginning to be asked is, “Do companies that pay athletes to endorse products and services really benefit from the relationship?”
The existing research is mixed regarding whether athlete endorsements are any longer a defensible corporate decision from a marketing, advertising, or branding standpoint. Now more than ever before, in an era of increased media exposure and player scandal, the company risks gaining negative public attention over the athlete who engages in behavior that is not consistent with the corporate image. But even more profound is that such endorsement deals will be so overused as to be ineffectual, should they continue to proliferate at the rate they have in the past. The problem is, primarily, that companies may well be left with little to distinguish their investments—even if they employ the most renowned athletes and those whose images and values unquestionably connect with the corporate brand. The prospect of this actually happening cannot be dismissed, because collapse eventually emerges in any market in which participants overpay for products or services that do not hold the possibility of producing a fair return on their investments.
Although this and other observations and conclusions outlined in this analysis are based on a wealth of data and literature, there is, altogether, little evidence that today’s facts are being interpreted by anything but yesterday’s theories. Thus, there is a need to examine and think through the basic assumptions of the sports business and, specific to this discussion, how athletes are compensated for their services.
The first challenge of this effort is to cast a new and functional economic theory for the sports business in general and for player contracts in particular. The formulas for how professional athletes should be compensated for their performance and contributions are often complicated and rather unscientific. But if the proud achievement of billions of dollars being exchanged throughout the sports business is any indication, they have served the interests of both athlete and owner quite well for quite some time. Now given the fits and seizures of the shift to a transnational and knowledge-based economy, the question is, “How much longer can traditional principles and policies be sustained?”
The highest levels of professional sports effectively function as monopolies. As with the majority of monopolistic enterprises, the activity and innovation that begot prosperity was so successful for so long that they find it reasonably difficult to abandon those practices and habits. Thus, if leagues and owners continue to increase the price of admission to games and access to content in order to turn a consistent profit while keeping up with increasing player costs, are they destroying the mutual trust they have with fans? Are the player contracts themselves corrosive because the wages and benefits paid out through them are increasingly so disparate from those of the average fan? Will these circumstances generate waves of contempt that turn athletes who are paid millions of dollars from heroes into villains? If the answers are yes, can players then expect to be paid as much tomorrow as they are today?
Such questions prompt the second challenge, which is to deal with the justification for the terms of player contracts. A long-standing argument has been that professional athletes have a limited window during which to cash in on their skills. This may well be so; a good case for this could certainly be made for any period prior to free agency. Yet some athletes go so far as to announce that such contracts are necessary if they are to “feed the family.” What they mean to say is that the contracts are necessary to feed the family according to a certain standard. This too may be fine, because there is sound argument in paying high-performing individuals according to whatever is deemed an appropriate market value. But in light of today’s salaries, benefits, retirement policies, and the access to opportunities afforded to even the least competent professional athletes, the question is whether the rationale matches the reality. When it no longer does (and it may already not), customers—be they fans who attend games or owners who woo players to their teams—reject what is being marketed to them. As a consequence, the entire system lurches toward instability.
A third, but related, challenge is to produce a better and more honest definition of what in the sports business is meant by short term and long term and what is needed to balance the expectations of both—regardless of whether player contracts are guaranteed. Although much of the subject is beyond this analysis, it nevertheless signals here the need for conscious development of programs that educate and assist professional athletes, whatever their level of financial success and length of professional career, in every aspect of transition to life after their playing days are over. A spectrum of professional athletes, from the extremely well known to those who appeared in the ranks momentarily, have found themselves impoverished by wrestling with the frustrations of trying to find post-career outlets that in even a small way replicate the sense of competition, camaraderie, and notoriety associated with being a professional athlete.
These are not, of course, the only challenges facing the incomes and earnings of professional athletes at the outset of the twenty-first century. But in considering the rapid and impressive changes to athletes’ salary and endorsement prospects, these challenges are certainly high among the list of priorities going forward.
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