The impact of salary dispersion and
performance bonuses on NFL
organizations
Joel Maxcy
University of Georgia
Mike Mondello
The Florida State University
Pay Dispersion and Firm Performance
 Competing

Hierarchical Pay Structure
–
–

Hypotheses
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.
MLB
A.
B.
C.
D.
Bloom (1999)
Depken (2000)
Debrock et al (2004)
Frick et al (2003)
Each finds that increased dispersion
worsens team performance
Empirical Work: Team Sports
2. NBA
A.
B.
Berri and Jewell (2004)
Frick et al (2003)
Salary compression does not effect or
worsens team performance
Empirical Work: Team Sports
3.
NFL
A.
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
–

Compensation based on performance
–

Holmstrom, Baker, Gibbons, Murphy
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
–
Shirking literature implied positive effect
 Team
–
performance
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.
2.
3.
Signing bonuses – up front payments are rewarded
to players for signing a contract or extending a
previous one; only source of guaranteed pay
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
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
2007
2006
2005
2004
2003
2002
2001
2000
Total
$707.86
$794.81
$217.16
$176.10
$130.37
$110.70
$73.44
$94.05
per Team
$22.12
$24.84
$6.79
$5.50
$4.07
$3.46
$2.37
$3.03
% Total Payroll
23.93%
27.82%
9.04%
7.55%
6.18%
6.11%
4.29%
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
DWPCT
PAYROLL per TEAM (x$1M)
Incen. BONUS per TEAM (x$1M)
PAYROLL to CAP
BONUS TO CAP
CV
WPCTt-1
REVENUEt-1 (x$1M)
REVENUE(x$1M)
ROSTER
NEW COACH
CONFERENCE
AmCBA
Observations
254
254
254
254
254
254
254
254
224
254
254
254
254
Mean
0.0034
$69.33
$9.07
0.849
0.098
1.236
0.5
$161.37
$167.70
60.724
0.189
0.504
0.252
Standard Deviation
0.231
15.416
1.055
0.085
0.099
0.195
0.189
38.184
35.758
4.391
0.392
0.501
0.435
Model 1: Dependent Variable = DWPCT
3b. FIXED EFFECTS
Coefficient t-ratio
PAYROLL
0.396b
2.463
BONUS
0.318
1.519
a
CV
-0.203
-2.586
WPCT t-1
-0.978a
-13.229
REVENUE
0.001
1.401
ROSTER
-0.006b
-1.973
NEW COACH
0.012
0.369
CONFERENCE
-0.12
-0.816
AmCBA
-0.127b
-2.522
Adjusted R-squared =
.40730
Likelihood Ratio 65.933a
F-test
3c. RANDOM EFFECTS
Coefficient
Constant
0.585a
PAYROLL
0.356b
BONUS
0.294
CV
-0.077
WPCT t-1
-0.829a
REVENUE
0.001
ROSTER
-0.008a
NEW COACH
0
t-ratio
2.91
2.356
1.554
-1.121
-12.167
1.525
-2.627
-0.001
P-value
0.0145
0.1299
0.01
0
0.1624
0.0496
0.7121
0.4154
0.0123
2.036b
P-value
0.0036
0.0185
0.1202
0.2624
0
0.1274
0.0086
0.9989
Model 2: Dependent variable =
Revenuet
CONFERENCE
AmCBA
Adjusted R-squared
-2.94
42.37a
0.333
-0.74
4.96
0.46
0
4b. FIXED EFFECTS
PAYROLL
BONUS
CV
WPCT
WPCT t-1
ROSTER
NEW COACH
CONFERENCE
AmCBA
Adjusted R-squared
Likelihood Ratio
Coefficientt-ratio
-14.524
-0.707
a
81.267
2.657
23.541b
2.295
16.143c
1.754
5.576
0.59
2.694a
6.874
-8.222c
-1.965
-35.779b
-2.025
32.903a
4.738
0.663
186.63a
F-test
P-value
0.48
0.008
0.023
0.081
0.556
0
0.051
0.044
0
Coefficientt-ratio
-36.116
-1.367
-15.411
-0.769
72.300b
2.448
19.271b
1.971
c
16.582
1.857
P-value
0.172
0.442
0.014
0.049
0.063
7.695a
4c. RANDOM EFFECTS
Constant
PAYROLL
BONUS
CV
WPCT
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?