Conscious Insight From a Changing Experience: Mothball's Senior Thesis

The Efficiency of NFL Team Payroll Allocation

Economics Spring 2011

Prepared by

Charlie "Mothball" Wood

Athens, GA

Mothball7@gmail.com

4/22/2010

Abstract

This paper assesses economic efficiency in paying professional football players lucrative salaries in order to elicit maximum on-field performance. Under the current National Football League Collective Bargaining Agreement team franchises must allocate their player payroll within a fixed salary cap each year. Salaries should be representative of each individual player’s performance production level if efficiently allocated by team management. Exploring statistical data from the 2009 season, I construct a unique index combining variables of salary and performance to measure efficiency by player, position, and team success. My data range includes the majority of starting players from the season as well as team statistics. In order to properly test my hypothesis, I model my approach and interpret my results similarly to Haugen’s 2005 study “Team Success and Personnel Allocation Under the National Football League Salary Cap.”

The Efficiency of NFL Team Payroll Allocation

Efficient allocations of team salary among players determine success in the National Football League. Making the play-offs or consistently achieving above .500 winning records has distinguished the successful franchises over nearly a century of league existence. Inside the NFL labor market teams operate as competitive businesses: each striving for a majority share of the market by employing talented athletes to gain a competitive advantage over the other franchises. Professional football players manufacture the entertainment league customers demand; the product quality depends on their willingness to perform. Salary cap restrictions each season force franchises to structure pay scales appropriately among a 53-player roster. Rational logic suggests the most talented players should receive the highest proportions of team salary; i.e., salary received for their performance should accurately represent the revenue they generate for their team on Sundays. However a growing amount of the league’s top performing players each season receive some of the lowest salaries paid by their team. Even more surprising, the majority of successful franchises from the 2009 season maintained the lowest total salaries in the league. This glaring disequilibrium between salary wages and performance production indicates an inefficient economic trend growing throughout the NFL labor market.

The sports media construes this phenomenon by painting specific top-salary players as lazy and greedy once they receive their enormous payday. Over-paying a player who would have performed equally as well if he had received a lesser salary creates economic rent in this billion-dollar business. Consider the 2009 season: the top performing running-back, Chris Johnson, received a mere $400,000 in salary; while the highest paid running-back, Reggie Bush, received more than $3,000,000 and was not even the starter for his team. The social costs created from this salary disequilibrium diminish the importance of finding value players to contribute towards elite team performance.

Currently the NFL market faces a lockout between the players and owners in the league. Based around a revenue distribution conflict, the lockout has left fans in the dark about the nature of the league’s economic woes. In this paper, I establish an index to measure if the NFL labor market operates efficiently using empirical data from the 2009 season. Holding all else constant, if a team pays a player more salary, the Human Capital Theory suggests the player responds with equal increased performance production. However the recent observed trends in the NFL market spark a flaw in this concept. By assessing suspect efficient translations of wages into performance, I determine sources of disequilibrium in the NFL labor market. To my knowledge, a study of these measurable variables to create an observable model of economic efficiency has not previously been performed.

I. Football Labor Market

Despite economic hardship incurred during last year’s global recession, the 32 NFL franchises spent a staggering $3,417,540,230 solely on roster payrolls. Average salaries for each team ranged between $1.4 and $2.4 million dollars. Naturally gifted athletes dedicate their entire lives training to receive contracts for NFL employment.

Recognized in 1968, The National Football League Player Association represents all players in labor union negotiations with the NFL on salaries, benefits, and compensation. NFL salaries are comprised of game wages, investments, loans, endorsements, and other assets presented to the players. The Collective Bargaining Agreement grants players three tiers of different contract negotiation rights based on seasons accrued in the league. When a player signs with his first team, he qualifies into the rookie tier and is therefore required to sign a contract not exceeding four seasons. After three accrued seasons, a player with an expiring contract becomes a restricted free agent. His respective team has the right to retain his services through a restricted tender above the league minimum salary. If the team fails to tender him, any other franchise may negotiate a new contract. The final tier grants the player unrestricted free agent status allowing him to openly contract with any preferred team.

The conclusion of the Super Bowl Championship Game marks the beginning of the next season. A three-month long free agency period begins, allowing eligible players to sign with new teams. Generally the most talented free agents garner the largest salaries from bidding wars between teams. Common source information on performance statistics and salaries influences players to compare one another and use this as leverage to raise the nominal value of their contracts. Negotiations for a big name player especially tend to unreasonably inflate the nominal value of their final contract, diminishing the lower real value realized after payment. Guaranteeing the majority of a contract’s value to the player instills a negative incentive to relax and decrease his performance. A perfectly efficient contract should pay the player the exact amount their on-field performance merits. Franchises have the right according to the Collective Bargaining Agreement to terminate any player anticipated to make less of a contribution to the franchise’s ability to compete on the playing field (2006 p.41).

Each team has the ability to apply a franchise tag on one free agent each off-season. Tagging a player rescinds his ability to negotiate joining other teams while retaining a roster spot for only the following year. Consequently, the player must be paid the average of the top five salaries at his respective position. Somewhat of a last resort option, exercised franchise tags overpay players resulting in stressed, inefficient pay structures.

Dissatisfied players ineligible for free agency sometime elect to hold out of their contract at the start of the season. Typically players who hold out utilize their elite past performance as leverage to force their team to restructure the salary scale in years remaining on their contract. These situations directly inevitably decrease the resulting contract’s real value; the franchise winds up overpaying the player, and as a result of missed practice time, the player underperforms. Although very few players hold out each season, the media manipulates their high profiles to engender a negative public opinion about their salary frustrations.

II. Influence of Salary Cap

Unlike other major league sports, the salary cap acts as a mechanism to counter-balance unlimited free agency to maintain parity throughout the NFL. The current Collective Bargaining Agreement defines the salary cap as the absolute maximum amount of salary that each team may pay players and/or player affiliates at any time during a particular league year (2006 p.7). The ceiling hard cap is set at 57.5% projected team revenues less League-wide projected benefits divided by the number of NFL teams. Clauses in individual player contracts dictate what percentage of salary paid to each player counts towards the overall cap value of his team. Imposing the salary cap has increased competition among the labor supply of players each off-season.

Managerial strategy under the cap aims to pay top talent as little as possible in order to maximize overall talent at all positions on the team roster. As John Haugen indicates, NFL teams must efficiently allocate salary cap towards combinations of players to be competitive (2005, 56). Time spent assessing players’ statistics, game film, and ability to contribute to the ultimate team strategy pays huge dividends when rising young players sign cheap contracts and successfully perform. Teams focus on building around three to five core players for the long run, while allocating each season’s available salary cap space to role players who can assist the core and maintain a balanced team in the short run. If teams follow this example of building compatible player combinations, then “theoretically teams should be spending the most on the players that help them the most” (Haugen 2005, 58) instead of just employing the most talented players.

The hard salary cap and revenue sharing agreements unique to the NFL result in a more competitive and efficient market compared to other major league sports. By analyzing amounts spent on types of player positions, Haugen calculates the marginal effect of additional money spent on each position group. The following microeconomic budget constraint model illustrates allocation of team resources under the NFL hard salary cap.

Graph 1. Allocation of Team Wages Given a Salary Cap Budget Constraint

The two groups, labeled “Elite Positional Players” and “Average Positional Players”, are imperfect substitutes: as the amount spent on one group increases, the amount on the other group decreases. Convex isoquants in the budget constraint graph represent this property. According to budget constraint model theory, the isoquant tangent to the budget constraint line, or salary cap, indicates an efficient allocation of resources. Isoquants not tangent to the budget constraint line on the graph are inefficient; isoquants beyond the line are unattainable due to the hard cap salary restriction. Managerial strategy allocating increased proportions of available salary to elite players in one position group depreciates the talent of another position. Haugen expands this model in relation to team wins to show that spending more money on elite players without proper allocation of funds to average players leads to inefficient outcomes of team under-performance.

Setting team season wins as the dependent variable and dollar figures each team spends each player position as the independent variable, Haugen’s OLS regression results are consistent with a concept examined in Michael Lewis’s study of Major League Baseball: it is not necessarily how much money a team spends but on whom it is spent that yields efficient outcomes (Lewis 2003). Combining the independent variables results in the following regression equation model:

Wins = α + ß($CB) + γ($DE) + δ($DT) + ε($K) + ζ($LB) + η($OL) + θ($P) + ι($QB) + κ($RB) + λ($S) + μ($TE) + ν($WR)

Following up this model with two additional regressions to control for multicollinearity, Haugen excludes variables found as insignificant in the initial regression. Results from these regression models are organized into the following table. Dollar amounts are expressed in millions of dollars.

Table 1. Haugen Regression Results

Source: Haugen (2005, 58)

Multiple observations can be inferred from Haugen’s results. Positional Beta coefficients numerically indicate how much an increase in money spent on each position affects a team’s total wins. The significance columns in the table represent the coefficients’ p-values. Kickers and tight ends have a larger degree of influence on team success as inferred by their significantly high Beta coefficient values. On most teams, kickers end up scoring the majority of points yet only represent a small fraction of team salary. Tight ends have multiple responsibilities in a variety of different game situations. The few players considered elite at performing these responsibilities garner larger salaries because the position is fundamental to an offense. Another interesting observation is that, in the first two regressions, the coefficient for punters is negative and significant, and in the 3rd regression, the same can be said for kickers. This means that for every increase of $1,000,000 spent on punters (or kickers in the 3rd regression) a team wins ~1.3 fewer games. Perhaps the most striking observation from these results is that players commonly perceived as most important to a team – quarterbacks, runningbacks, wide receivers, and linebackers – do not have significant Beta coefficients. The results indicate teams tend to overpay or underpay players at these positions with inefficient disregard to positional synergies. Therefore Haugen concludes spending more on focal positions does not generate substantial marginal production, but the significant results obtained from kickers and tight ends suggest efficient managerial strategy can have some level of control over successful outcomes in the NFL.

III. Player Contractual Inefficiencies

Individual player’s situations can have an enormous influence on the NFL labor market and franchises’ ability to succeed. Over the past few years I have observed several flawed trends that must be accounted for prior to my empirical analysis. Contractual incentives appear to be a significant culprit in the creation of inefficiency among team players. Depending on the scale of incentive salary versus guaranteed salary defined in every player’s contract, players naturally respond to the incentive and distort the product the NFL strives to produce each week.

Quarterbacks commonly have clauses in their contracts linked to their statistics at the end of the season. When the player achieves the requirements of the incentive clause, additional salary is rewarded. For example, if the incentive is to achieve 4,000 passing yards, then the quarterback might attempt several risky throws to gain increased yardage to fulfill the clause requirements, disregarding his team’s objective of winning. Because making risky throws would not affect the player’s salary, he might be inclined to achieve his incentive agreement rather than making plays to win the game. Negative outcomes stemming from contractual incentives directly influence team success. Green Bay Packers runningback Ryan Grant provided specific evidence of this phenomenon during a 2008 game. In order to earn an incentive bonus worth $2 million, he needed 41 rushing yards in the final game of the season (Graben 2011). Grant repeatedly told his quarterback not to check out of running plays, even when the defense was prepared to stop that certain play. Contrary to this example, New England Patriots coach Bill Belichick agreed to pay a player’s incentive clause before the final game of the season regardless of if he achieved it. This managerial decision eliminated the potential for selfish play, realigning the player’s objective with the team’s objective to win the game.

Rookie salary trends represent perhaps the most glaring flaw in the NFL labor market. Every year the NFL holds a seven round draft in April where each team selects new players from eligible college pools. Determined by the prior season’s win/loss record, least successful teams retain higher draft order positions. Traditionally rookies selected in the first round automatically receive multi-million dollar contracts despite having never played an NFL-caliber snap. The term draft bust describes a player who is selected early in the draft and paid an enormous salary, then never lives up to the potential and hype the player received once in the league. JaMarcus Russell was drafted number one overall in 2006 by the Oakland Raiders and received a contract that guaranteed him over $32 million. The $32 million he received turned out utterly wasted on his lazy work ethic and inability to perform in the NFL; Russell no longer plays in the league. Teams who consistently lose and receive good draft position as a result, tend to continue poor management of player combinations. By preserving the negative cycle of error prone drafting resulting in dead weight salary loss, this trend of inefficient rookie salary structures persists to deepen the social costs busts create. On the other hand, successful teams with later draft order continue to generate success on the field from less talented drafted players. They represent the influence of strong management and the ability to identify diamond in the rough players whose low costs create increased value.

Conversely, there are instances when paying a certain player a high salary can be beneficial to team success despite inadequate translation into performance production. Last year, the Atlanta Falcons dealt a contract worth $57 million to free agent cornerback Dunta Robinson. In his first season with the team Robinson’s statistics regressed and he did not perform like a top five player as his yearly salary amount suggests. However the Falcons’ defense improved dramatically despite his lack of performance production. Examining this odd occurrence reveals a subjective benefit created by Robinson’s presence on the field. Opposing teams refused to challenge him by avoiding throwing the ball his way, thus eliminated his side of the field to defend and allowing the other Falcons defenders to produce better statistics. The incredible 14-2 season the team accomplished this year might serve to justify such an expensive hiring; however, examples similar to this instance rarely occur and usually result in an expensive, inefficient contract.

The concept of Pareto Efficiency implies changes in input allocations will make some outcome better off without depreciating other outcomes. If the economic system lacks Pareto Efficiency, then certain variables must be altered to achieve this equilibrium. Revenue sharing in the NFL attempts to establish Pareto Efficiency. Teams that have lower income and spending money are proportionally distributed additional money from the higher income franchises. Continuing to create mechanisms inside the NFL labor market that induce parity is part of the reason more customers are drawn to the NFL every year. Another example of such mechanisms, the NFL’s Performance-Based Pay Program, attempts to reward over-achieving players whose performance greatly exceeds their salary. Created by the 2002 Collective Bargaining Agreement, the program distributed approximately $109.5 million to eligible players in 2009 (National Football League 2010). Effective only during salary cap imposed seasons, the program computes performance-based pay rankings using this player index:

Total Plays on Offense, Defense, and Special Teams

Full Season Salary + Prorated Portion of Signing Bonus + Earned Incentives

The produced number equates to a ranked position. All results are sorted by descending order of over-performance rank and pay is accordingly distributed. Since its existence, the program offers incentives for low-income players to max out their performance production. Creating my own ranked player index off of this official program influences my own measure of efficiency among players regarding their positions.

IV. Empirical Analysis

The Human Capital Theory states that laborers will receive a wage that corresponds to their projected output (Haugen 2005, 28). Awarding a talented player with a salary higher than another at the same position indicates a higher expected performance value. If the player underperforms and returns less performance value than expected by his salary level, the team is inefficiently allocating their resources.

My player efficiency index defines salary by combining the player’s 2009 base salary with any signing bonuses received or incentive clauses earned. The amounts are ranked by position, breaking down all NFL rosters to analyze different categories of players. A player-rating system based on offensive and defensive statistics comprises the measure of individual performance production. These statistics are adjusted to proportionally represent contribution to the respective team. Combining both ranks for each player into a list determines the final rankings. Uniformly using rankings enables my research to examine real values, eliminating the discrepancy between nominal salary levels across the different positions. To determine efficiency:

Salary Rank at Position

Performance Rank at Position

A result equaling one indicates a perfectly efficient player whose salary 100% translates equally to his performance. Assuming the NFL is efficient, the results of my index should not be significantly different than one. Since rosters include multiple players at each position, I choose sample sizes large enough to represent the different populations of starters and backups. The population in my empirical analysis is assumed to be normal. Position groups were randomly sampled by drawing numbers without replacement; selected numbers correspond directly to the population salary rankings of all players in the league who play that position. Since teams usually maintain only one kicker per season, my data represents the entire population of 37 kickers who attempted field goals or extra points that season. The following table describes the duties each position group included in my analysis performs.

Table 2. Positional Duties

Quarterback - Offense - Throw ball to offensive players, hand off ball to players, manage game calling decision delegated from coaches, call plays

Runningback - Offense - Advance ball towards end zone, catch passes, block and protect quarterback

Wide Receiver - Offense - Catch passes and advance ball towards end zone, block for other teammates during situational plays

Tight End - Offense - Same duties as Wide Receivers, position requires greater size as majority of duties are to block and protect quarterback

Linebacker - Defense - Tackle ball carrier, cover opposing offensive players, cross line of scrimmage to disrupt quarterback

Defensiveline - Defense - Opposes the offensive line, create a wall to impede opposing offensive advancement, disrupt quarterback

Kicker - Special Teams – Kick extra points after touchdowns, attempt 3-point field goals when team is unable to reach endzone

Upon initial evaluation of my results, one specific error in the index immediately stood out: any deviation from the mean efficiency represents inefficiency. Despite creating additional productivity from over achieving players, under-valuing them also is inefficient according to the Human Capital Theory. The limit constraint for over-valued players also distorts the results of my data because the lower bound cannot be less than zero. Reassessing the original formula to correctly account for over-valued players and represent overall inefficiency, my index simplifies to:

Salary Rank – Performance Rank

Incorporating the previously used 2009 data, my updated index properly eliminates the pervious bias. An index value resulting in zero would indicate a perfectly efficient player. Under-performing players are represented by negative values and over-achieving players by positive values. To correctly account for the produced negative values, the standard deviation of each sample measures the level of inefficiency in each position. Higher standard deviation values indicate greater disequilibrium in the NFL labor market for that position. Broken down into seven position groups, the updated results are presented in the following table; full data tables for each position can be reviewed in the appendix.

Table 3. Overall Position Salary and Performance Efficiency

QB / RB / WR / TE / LB / DL / K

Mean: 0 / -0.4 / 0.63 / -0.026 / -0.037 / -0.173 / 0.27

Sample Size: 51 / 70 / 73 / 78 / 81 / 75 / 37

Min: -40 / -60 / -58 / -62 / -68 / -63 / -23

1st Quartile: -6.5 / -21.75 / -24 / -27 / -36 / -35.5 / -8

Median: 1 / 0 / -1 / -5 / 4 / 7 / 1

3rd Quartile: 7.5 / 22.75 / 25 / 31.25 / 38 / 30 / 7

Max: 30 / 57 / 65 / 57 / 69 / 63 / 29

Standard Deviation: 13.479 / 29.274 / 31.502 / 31.918 / 39.218 / 36.568 / 13.048

Variance: 181.68 / 856.968 / 992.375 / 1018.753 / 1538.08 / 1337.2 / 170.3

The nearly identical standard deviations of quarterbacks and kickers are the closest to being considered efficiently paid positions in relation to the other positional groups. Since teams maintain only one starting player for both these positions, management would spend more time and effort to identify the right guy for the job. Consistent with Haugen’s research, talented kickers significantly influence success if managers allocate salary efficiently to them. The other skill position groups’ standard deviations are higher due to the different types of players at each position. Depending on a team’s strategy, these players can be interchanged based on the nature of the offensive and defensive schemes. When a highly paid player underperforms at one of these multi-personnel positions, replacing the player with a lower cost overachiever tends to be easier than replacing an integral piece of the puzzle like the quarterback. Although success might be achieved with a lower cost replacement, the original managerial misjudgment allocating higher salary to the less effective player still creates dead weight loss from the disequilibrium.

A graphical manifestation of the index values from my analysis provides an easier way to observe the salary and performance disequilibrium between the sampled positions. The following two graphs represent contrasting trends in the data. Additional position graphs, as well as data tables, can be found in the appendix.

Graph 2. Quarterback Salary and Performance Efficiency

Graph 3. Runningback Salary and Performance Efficiency

The shapes of these graphs indicate several of the observed trends in NFL salary economics. Quarterbacks face more scrutiny by teams considering there can only be one starter. Nowadays, the main ingredient to team success greatly relies on elite quarterback performance; therefore teams try their best to find the correct guy and pay him appropriately. Although the graph shows the inefficiency across the salary board, the nearly uniform balance among quarterbacks creates a notion that salary is more appropriately allocated. Comparing the quarterbacks graph to the runningbacks graph emphasizes the intensity of inefficient salaries effects. Highlighted by the skewdness on both ends of the salary range, the runningbacks graph illustrates how lower paid players produce more value than elite big names. In addition to providing increased value, teams who construct positional players with lower paid players avoid the detrimental economic rent associated with allocating immense salary proportions to one top-name player. Corresponding with the concept presented by the Salary Cap Budget Constraint Graph, teams are better off if they allocate evenly across all positional groups. The difference between players paid top ten salary and players in the mid 30s-40s is millions of dollars. Marginal production of the top 40 salaries is minimal, while the marginal cost of paying those players high salaries increases. Instead of paying a few elite players to lead the team, spreading the available salary across the entire team maximizes a team’s chance for success. Compare the Washington Redskins, who spent the majority of their salary cap on three or four star players, to the Packers, who allocated their salary cap across every position. In 2010, the Packers won the Superbowl, while the Redskins failed to even achieve a winning record.

V. Conclusion

Inefficient systems create economic and social costs for everybody. Correcting the flaws proposes overhauling many processes that have become standards in the NFL labor market. Teams with proper allocations of roster salary minimize the effects of contract inefficiency. Perhaps in the future my results can be examined to break down players’ contracts with their teams in relation to previous seasons. Comparing the trends of contract inefficiency over the history of the NFL would narrow down the exact causes of this problem. My analysis identifies the NFL labor market has been stuck in disequilibrium from inefficient contracts awarding uneven salary for performance.

References

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National Football League. 2010. “Vikings’ Sullivan leads NFL’s performance-based pay list for 2009” NFL.com. Accessed March 2, 2011 http://www.nfl.com/news/story/09000d5d81719d15/article/vikings-sullivan-leads-nfls-performancebased-pay-list-for-2009

National Football League Players Association. 2006. “NFL Collective Bargaining Agreement” Accessed January 28, 2011 http://static.nfl.com/static/content/public/image/cba/nfl-cba-2006-2012.pdf

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Appendix

Graph 4. Wide Receiver Salary and Performance Efficiency