Revenue Sharing in Football Economics - Essay Example

Football Economics No business is more cloaked in mystery or shrouded in hyperbole than that of the National Football League. Revenue sharing, salary caps, signing bonuses, and incentive clauses are all terms that relate to professional sports and are often considered uniquely football in nature. The news is inundated with the stories of the exorbitant salaries that are commanded by the best players, but the largest percentage of the players make well below the levels that routinely make the headlines. In addition, with the exception of a few of the highest paid players, the salaries pale in comparison with other well known figures from the entertainment industry. Football players also face the reality of an extremely short career when compared with actors, singers, or even other professional sports. While they are playing their pay depends on the negotiated minimum set by the players union, the player's ability, incentives, and signing bonuses. Every player is guaranteed a minimum pay rate, but almost every player exceeds this amount. The Green Bay Packers had the lowest median pay rate during the 2007 season, yet all their players exceeded the minimum for a first year player of $285,000. The $285,000 minimum is for a first year player, an amount, which increases, based on the number of years in professional football. In addition, players are paid for their pre-season workouts and post season games. These extra incentives and bonuses helped bring the median pay of the highest paid Pittsburgh Steelers to over $1,1 million during that same season (USA Today, 2009). The team salary cap to some degree limits the amount of money the team is able to pay players, but many earn in excess of several millions of dollars such as Dwight Freeney of the Indianapolis Colts at $30.75 million (Weisman, 2007). While traditionally quarterbacks have been considered the franchise position and commanded the highest pay, in 2007 only 2 of the top 20 salaries went to quarterbacks (Weisman, 2007). Defensive players can often garner higher signing bonuses because "Freeney and a number of other defensive ends signed new deals as free agents, while quarterbacks rarely get to free agency (Weisman, 2007). Indeed on the Indianapolis Colts, where the highest paid player calls home, the star quarterback Peyton Manning earns just one-third that amount (USA Today, 2009). These incredibly high salaries come from a variety of sources. On top of a base salary are signing bonuses and performance incentives. For example, Dwight Freeney's base pay is only $750,000, but received a $30 million signing bonus (USA Today 2009). Most signing bonuses are paid out over a number of years to allow the team to average them out and stay under the salary cap. Many players also negotiate for incentive bonuses based on their level of performance during the season. This may be based on yards gained for a running back or touchdowns for a quarterback. Performance incentives can come in the form of individual or team performance, and performance based incentives are usually a small portion of the players overall pay. For many of the top tier players, the signing bonus is a large portion of their pay. It is also the most secure portion of their pay as it cannot be lost based on future unpredictable events such as injury or being cut from the team. The player receives their pay through a sequence of checks distributed throughout the season. The signing bonus is paid upfront, and the salary is pro-rated throughout the season. The player receives a check for one-seventeenth his yearly salary each week during then season. At the end of the season the player receives additional money for his performance incentives and post-season play. If the player loses his slot on the roster during the season and is cut from the team, he gets to keep the signing bonus but loses the remainder of the weekly checks. Determining the level of pay for any individual player is a complex system of supply and demand, level of ability, years in the NFL, and the salary cap. Team owners will manipulate salary and bonuses to stay under the complex set of rules that govern the NFL's salary cap. Often, there is almost no logic to the levels of pay. According to Depken (2006), "Many times, rookie players are paid more than veteran players; other times, veteran players with a lot of experience are paid more than younger players with better abilities" (p.85). If a team needs to fill a position where there is a shortage of players, they will pay additional to get a competent player. Likewise, a surplus of players at a position will drive the salary down. Rookies who are signed in as a first round draft pick and that have drawn attention from the media are in a position to command a higher level of pay than an average 5th round draft pick. Once under contract, the team will continue to pay the contracted pay as long as the player continues to make the team. If the player's performance suffers, the team may request that they accept a lower level of pay. A contract can be negotiated if they are in danger of being cut from the team. Another variable that affects player's pay is the length of the player contract. Typically they are 5 or six years in duration, but can be as short as one year. A player's salary remains in effect for the length of the contract, so the player may wish to have a shorter contract in some situations. If a player believes that his first year performance will be of such a caliber that he can demand more in his second year, he may opt for a one-year contract. However, while no contract is a guarantee, a six-year contract does give to the security of a known salary as long as you can make the team. If the player suffers a bad year or two, he will continue to receive a level of pay based on his signing. The haphazard formulas, extreme pay discrepancies, and what could be considered an excessive level of pay does sometime make sense when looking at a team's performance. The revenue sharing system of the NFL has made an adequate amount of revenue available for teams across the board, even in the smaller markets. In addition, the salary cap prevents any one team from significantly outspending another and insuring some level of parity. By carefully managing revenue, the salary cap, and the individual salaries and bonuses a team can effectively manage their money such as the 2006-2007 Indianapolis Colts. Peyton Manning, Reggie Wayne, and Marvin Harrison were their three highest paid players in 2006 (2006 Indianapolis Colts salaries, 2007). Because of their outstanding offensive ability they were able to capture the Super Bowl in February 2007. In addition, these three players are destined to become members of the NFL Hall of Fame. While the salary cap and excessive pay demands has placed additional pressure on team owners to better manage their revenue, it has also required a conservative approach that often produces results when effectively managed. While it is easy to believe that a player making $30 million a year is an outrage in these hard economic times, the truth is that many could be making as much or more in business. While some do earn more than many CEOs, their playing years are limited as well as their ability to continue to earn at this level. Business leaders often get additional retirement pay, stock options, and lucrative severance packages as a way to shield their true pay from the public, while a football player's pay is advertised as part of the mystique of the game. (Bebchuck & Fried, 2006, p.21). In addition, a player faces the risk of a career ending injury on every play, and has no golden parachute to ease them out of football. No professional players has can come close to getting the kind of over $200 million severance package that Home Depot's Robert Nardelli received after he was fired for poor company performance (Grow, 2006). An NFL player that succeeds will often make far less than a CEO from a Fortune 500 Company that fails. Why would any society be willing to pay a grown man $30 million to play a game that is fundamentally a boy's game It is the fan that promotes the pay level based on their level of interest in the game. The NFL players are the best at what they do, and what they do is provide exciting entertainment. In fact, the Census Bureau and the Internal Revenue Service classifies football players in the same category as musicians, singers, songwriters, and dancers (Zimmer & Zimmer, 2001, p.203). In a comprehensive study by Zimmer and Zimmer (2001) the researchers noted that NFL players, on average, make significantly less than professionals in the other categories that are at the top of their field. (p.213). When viewed as entertainers, football players are at the low end of the pay scale, while professional football has become one of the leading forms of entertainment in the United States. In conclusion, what may seem to be an excessive level of pay for a football player is actually below average for their industry. Many entertainers, as well as business leaders, earn far in excess of the NFL stars. Their pay is a complex mix of salary, signing bonus, and performance incentives that are negotiated based on the player's and the team's needs. A player may opt for a high signing bonus or a shorter contract depending on their ability and outlook for the future. Careful management of all these variables has shown that a winning football team can be financed through efficient salary management. References 2006 Indianapolis Colts salaries (2007). Retrieved October 24, 2007, from http://www.sportscity.com/NFL/Indianapolis-Colts-Salaries Bebchuk, L. A., & Fried, J. (2006). Pay without performance: The unfulfilled promise of executive compensation. Boston: First Harvard University Press. Depken, C. A. (2006). Microeconomics demystified. New York: McGraw-Hill Professional Grow, B. (2006, May 23). Home Depot's CEO cleans up. Business Week. Retrieved October 24, 2007, from http://www.businessweek.com/investor/content/may2006/pi20060523_284791.htm USA Today salaries database (2009). Retrieved January 12, 2009, from http://content.usatoday.com/sports/football/nfl/salaries/teamdetail.aspxyear=2007&team=12 Weisman, L. (2007, December 2). NFL salaries report: Ends earn top-tier money. USA Today. Retrieved January 12, 2009, from http://www.usatoday.com/sports/football/nfl/2007-11-29-salaries-report_N.htm Zimmer, M., & Zimmer, M. (2001). Athletes as entertainers: A comparative study of earnings profiles [Electronic version]. Journal of Sport and Social Issues, 25(2), 202-215. from Sage Publications. Read More