When a ballplayer lands an eye-popping contract, some fans and critics lament it with a question that’s been asked for generations: Why are professional athletes paid so much?
But are they really overpaid?
Some of the recent gargantuan contracts lend themselves to populist criticism. The Dodgers this year gave outfielder Mookie Betts a 12-year, $365 million deal. The Angels inked slugger Mike Trout last year to a 12-year, $426 million contract. Chiefs quarterback Patrick Mahomes recently signed a 10-year contract extension potentially worth more than $500 million.
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Even non-stars in the major leagues average millions of dollars in annual salary, and rookies and benchwarmers are paid hundreds of thousands of dollars, all per collective bargaining agreements between player unions and team owners/leagues. And their salary information is readily available for public and media consumption, more so than private-sector corporate compensation for CEOs and executives. Fan irritation at what they believe to be bloated player salaries is particularly acute when players fail to live up to the hype, and when expensive payrolls fail to win — an inherent risk in sports.
Meanwhile, the federal minimum wage for nonexempt employees is $7.25 per hour. That’s $290 for a 40-hour workweek and $15,080 for a year. In 2018, the average U.S. median income was $63,179, according to the most recent federal data.
Additionally, the cost for a family to attend a single live game in the NFL, MLB, NBA, and NHL has ballooned into hundreds of dollars that put them beyond reach of many. Stadiums and arenas increasingly cater to more affluent fans (and companies) with pricey suites, club seats and private gathering spaces.
These stark contrasts between the working/middle classes and modern-era Gilded Age professional sports fuel the complaint about overpaid athletes, and that grievance is particularly resonant because America right now is having a national conversation about income inequality and other disparities. And it’s a conversation underway amid a pandemic-fueled recession and staggering unemployment, with a federal government that has let additional financial help expire.
Opinion about how much athletes are paid really comes down to a person’s preference on the ideological spectrum.
If you ask an academic economist or free-market think tank wonks, many will tell you that pro sports are a meritocracy that usually rewards production at correct market rates – even if the market doesn’t quite include true free agency that is a player’s financial linchpin.
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And some economists will tell you those elite athletes that get the biggest contracts are … wait for it … underpaid.
Really?
Really, says Victor Matheson, a sports economics professor at the College of the Holy Cross in Worcester, Mass.
“Today, most of the current research suggests that players overall, at least in leagues where they have effective labor unions who have been able to negotiate CBAs with free agency, are paid relatively fairly overall, but that top players are wildly underpaid,” he said via email. “The LeBron Jameses and Steph Currys are paid way under what they bring to their teams in terms of revenue.”
James, 35, has a four-year, $153.3 million deal with the L.A. Lakers through 2022 – the 17th largest NBA contract, per Spotrac.com. Curry, 32, ranks second with a five-year, $201.1 million deal with the Golden State Warriors through 2022. Atop the NBA list is Russell Westbrook, 31, with a five-year, $206 million contract with the Houston Rockets.
Another sports economist, Southern Utah University’s David Berri, dug into some examples of how ballplayers are underpaid.
“The standard economic answer to this question is that in a market system a worker’s wage is determined by the amount of revenue the worker creates. The NBA produced about $8.7 billion in revenue in 2018-19, according to Forbes,” he said. “If half of that goes to the players and we think the players are primarily paid to produce wins, then each of the 1,230 wins the players produced that year were worth about $3.25 million. Giannis Antetokounmpo produced more than 20 wins for the Bucks that season. Therefore, he was worth more than $60 million.
“The NBA’s labor agreement, though, caps an individual player’s salary. Consequently, Antetokounmpo was only paid about $24 million. This means — according to the way economists think about this — he was definitely underpaid.”
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A similar story can be told about rookies in North American professional sports, Berri said.
“The labor market for these players is often quite restricted. This means a player like Luka Doncic was only paid $6.5 million his rookie season despite producing more than eight wins. Again, that means he was also underpaid,” he said.
It’s even worse in a non-major league such as the WNBA, he said, where players get only about 30 percent of revenue under its new labor deal.
Berri contrasted American major leagues to Europe, where the absence of labor market restrictions such as salary caps means players get up to 70 percent of league revenue.
Matheson takes the “they’re overpaid” criticism to its logical conclusion, which isn’t particularly populist.
“Suppose you just think that grown men shouldn’t make so much money just for playing a game,” he said. “Fair enough, but where do you think the billions in NBA or NFL, or MLB revenue should go instead? Do they think (Cowboys owner) Jerry Jones or (Patriots owner) Robert Kraft need a big raise?”
Jones and Kraft are emblematic of professional sports’ financial ecosystem: They’re almost all billionaires whose fortunes were created in other fields, such as finance and energy and tech, and those who have owned their team for a while have seen enormous growth in franchise value. Most teams are worth a billion dollars or more (although NHL and MLB clubs lag behind the other leagues).
Owners are significantly wealthier than the best-paid players, but it’s players that generate the value for the entire enterprise.
“People are not coming to see the owners,” said Sam Pizzigati, co-editor at Inequality.org and an associate fellow at the Washington, D.C.-based Institute for Policy Studies, a progressive think tank launched in the 1960s. He’s written about sports economics.
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The question of pro athletes’ labor value and if they are overpaid really is one that requires context, he said.
“It’s all compared to what? Overpaid compared to owners? No. Compared to average people doing essential work? Yes. Compared to the titans of the business world? No. It’s all a matter of context,” he said.
The top-paid major leaguers earn a fraction of what private sector senior executives are paid, even if both are targeted by critics of wealth inequality.
Pizzigati said the world’s top 15 hedge fund managers last year were paid a combined $12 billion, and the top 10 CEOs at publicly-traded companies each took in more than $70 million in compensation last year.
For example, Tesla Inc. CEO Elon Musk last year had total compensation of $595 million entirely in the form of stock options, per a Bloomberg report. Next on the list is Apple Inc. CEO Tim Cook at $133 million in 2019, mostly in the form of stock awards.
While athletes are paid cash, the private sector typically compensates top executives with a mixture of salary, bonuses, stock awards and options, dividends and perks.
While ballplayers are relative paupers compared to Wall Street tycoons, their salaries are vastly beyond what regular citizens earn, Pizzigati said, and there are vast gulfs between baseball’s elite and the guys lower on the roster.
“When we look at baseball pay, what we see is the same phenomenon throughout society today – deep inequality. Most ballplayers aren’t making anything near (the top salaries). That’s the way it is in the economy as a whole. We’re a top-heavy society and that’s not good for society or good for sports,” Pizzigati said. “The world of sports reflects the inequality of our society as a whole. That undermines our well-being as citizens, consumers and sports fans.”
While the nation struggles with the COVID-19 pandemic that has upended American life, the ideological question of labor compensation is complex and thorny, but the roots of why players get paid so much are fairly simple.
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Players long had few rights for their entire career once they signed a contract, so they used the courts, arbitrators, and collective bargaining talks from the 1970s through the 1990s to earn the right to become free agents and have teams bid for their services.
“Free agency created basically somewhat constrained free labor markets,” said Andrew Zimbalist, professor of economics at Smith College and author of several sports finance books.
The ability to become a free agent means a player is able to freely offer his or her services to the highest bidder – if they have proven their skills worth it.
Owners have been willing to outspend each other on free agents for the best talent, further driving up salaries (and in the case of the USFL in the mid-1980s, dooming the league).
At the same time, the TV contracts for the major leagues grew from millions of dollars in the 1960s to billions starting in the 1990s, and a wave of new stadiums and arenas – with billions of dollars in taxpayer subsidies to build them – flooded leagues with additional money.
Labor deals typically call for players and owners to split, at varying ratios, the cash flowing into their leagues. For example, NFL players get 47 percent of their revenue; the NBA line hovers near 50 percent.
So while some fans may bemoan the immense contracts, it’s ultimately fans that generate the money to create those deals – they’re willing to put their cash behind their team loyalties and to see elite talent perform. And some people even pay to watch the Cleveland Browns.
The four major leagues (Major League Soccer doesn’t quite match the other leagues in revenue and salaries, but it’s getting there) each enjoy billions in revenue, led by the NFL with an estimated $16 billion last year (and a goal of hitting $25 billion by 2027).
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Since the season is underway, let’s concentrate on Major League Baseball’s revenue and compensation. Last year, MLB reportedly collected nearly $11 billion from all of its income sources. Some of that was from fans buying tickets and game-day purchases. A lot of it was from TV deals. Some came from licensing and marketing deals, some from digital operations, and a bunch from corporate advertising deals. Teams also collect regional sports network fees.
Baseball’s current national TV deals with Fox Sports, ESPN and Turner are worth a combined $12.4 billion over eight years, or about $1.5 billion annually, per Forbes. That’s going to increase starting next year when a fresh deal with Turner Sports is expected to boost its current $325 million yearly broadcast rights fee payment to $470 million.
What that means is more money is available for owners to pay players, and players can demand more money from owners. Or they can have another labor impasse that halts play – the current labor deal expires Dec. 1, 2021.
Baseball pays players under a variety of scenarios, often complex to the casual fan. At the core of the compensation system under the labor deal is a graduated set of minimum salaries based on service time in the majors, and after six years in the majors they are eligible to become full free agents – and that’s where the big contracts happen. Prior to free agency, players also become eligible for salary arbitration that allows them to negotiate better pay.
MLB, which fully guarantees player contracts, has no formal salary cap. So, player salaries are ultimately limited only by an owner’s tolerance for spending. Baseball does have its Competitive Balance Tax, better known as the luxury tax, intended to curtail repeated heavy spending on salaries in the name of parity, but it’s proven to be a largely ineffective tool to rein in payroll growth.
The other major sports leagues have variations of salary caps that more rigidly limit player salaries – an artificial limit on true free agency but also a tool to manage and protect finances in the name of parity.
Even with free agency, the presence of those salary caps, luxury taxes and even revenue sharing reduce or divert money that otherwise could have been spent on players, chipping away at their true market value, economists say.
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“All of those things retard player value,” Zimbalist said.
Baseball’s version of the free-agency system can be traced to St. Louis Cardinals outfielder Curt Flood’s failed antitrust lawsuit against MLB in 1973 and a 1975 arbitration decision that led to a 1976 deal between players and owners that birthed modern free agency. MLB’s 1975 average salary of $44,676 increased by 1980 to $143,756 – a 222 percent increase.
“Prior to free agency, players were vastly underpaid. The common economics term is ‘marginal revenue product’ which is how much additional revenue a particular player brings to his or her team through their actions on the field,” Matheson said. “A famous study by Gerald Scully in the early 1970s, essentially the first ‘Moneyball’-type paper ever written, found that top players were being paid only 10 percent of their marginal revenue product.”
MLB’s average salary first topped $1 million annually in 1995. Today, its minimum salary is $563,500. While the pandemic will temporarily depress the average MLB salary this year, in recent years it has been around $4 million.
This season, the average MLB payroll for the 28-man rosters during the pandemic-shortened 60-game season is $58.6 million, per salary tracking site Spotrac.com. Atop the list are the Yankees at $110 million while at the bottom are the Orioles at $23.8 million.
Last year, for the full 162-game season, the average MLB payroll was $138.5 million. Four teams had payrolls over $200 million, topped by the Red Sox at $229 million, per Spotrac.
The compensation for professional athletes differs from traditional pay because, Matheson said, fans have limited choices compared to other industries – a phenomenon known as “superstar economics.”
“We only have so much time to invest watching sports, so we only want to watch the best,” he said. “So we concentrate our sports watching on just a few teams and players (and technology allows us to do this). In an industry like education or clothes or restaurants where there is no obvious best, we spread out our spending among hundreds of thousands of food and fashion and education providers. Very few restaurateurs become ‘NBA rich.’”
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Discretionary income has grown over the decades, allowing fans to spend more on sports, he said.
“As the country and the world have gotten richer, we have more money to spend on things in general and on entertainment specifically. U.S. GDP/capita has grown from about $4,000 per person in 1900 to $65,000 per person in 2019. That leaves 16 times as much income for each of us to spend on sports. On top of that, once our basic needs are met, we spend disproportionally on discretionary activities like entertainment,” Matheson said.
Additionally, taxpayers have indirectly financed the riches enjoyed by players and owners. In the past 30 years, about $30 billion in public money has been spent on major league stadiums and arenas that produce more revenue than the old basic concrete hulks of the past, Matheson said.
“That money serves to increase league revenues, a part of which makes it directly into players’ pockets,” he said.
The ballplayer salaries, big or small, are subject to high tax rates, and they pay fees to agents and unions, which can halve the contract number in the headline versus the actual take-home pay. But it’s still more than most people earn. And most people who play sports don’t turn pro, and few of those that do become stars commanding the enormous free-agent contracts – which tend to come toward the players’ later 20s or early 30s. Their earnings window is brief compared to traditional careers, and injury is an ever-present risk.
“It’s not a difficult life, but it’s not always a bed of roses like fans think,” Zimbalist said. “The vast majority of players who circulate in college sports or minor leagues never make it to the pros, or just for a short period of time.”
Berri said there is a less discussed problem with American pro sports in that its riches incentivize kids and parents to concentrate on skill-building toward a goal that’s unlikely – becoming a pro athlete – and leaves them without salable skills in the non-sports market.
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“Because we rely on the market to signal to people what skills they need, we probably live in a world where we are wasting some potential human capital,” he said. “It is not entirely clear how to solve this problem. We could tax sports at a much higher rate to lower the wages earned by athletes and the revenues earned by owners. Doesn’t seem, though, that there is much political will to make that happen.
“As it is, we are left with the current system. From the perspective of the market, many North American professional athletes (male and female) are underpaid. From the perspective of society, though, we probably have more people trying to be professional athletes than is socially optimal.”
Will player salaries continue their upward trajectory? The economic recession and fan choice of doing other things likely will slow pay growth for a few years, Zimbalist said. TV deals may not be blockbusters in the future, and fans and corporate sponsors may be less willing to spend on sports if the recession worsens and continues for years.
“The proliferation of video entertainment options is going to blunt the growth of sports media revenue,” he said.
(Photo of Mike Trout: Angels baseball / USA Today)
