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2018

Chapter Nine of Sports Economics begins with a story many may know (or not!).  The highest paid public employee in most states is either a head coach in college football or college basketball.  When we looked at revenue in Chapter Nine of the book, though, the amount paid seemed somewhat odd.  For example, Pete Carroll was paid $7 million by the Seattle Seahawks of the NFL in 2015; a team that had $377 million in revenue. That same year Nick Saban was paid $7.1 million by the University of Alabama. But the football program at the University of Alabama only reported $97 million in revenue.

While many of us think about the men's NCAA basketball tournament we should remember a similar revenue-salary story can be told in basketball.  USA Today recently reported the salaries of the head coaches in men's college basketball.  According to this report, Mike Krzyzewski of Duke University, John Calipari of Kentucky, and Chris Holtmann of Ohio State are all paid more than $7 million per year.  HoopsHype, though, says only three NBA head coaches -- Gregg Popovich, Doc Rivers, and Tom Thibodeau -- are paid this well.  But just like college and professional football, if we look at the revenues of men's college basketball and the NBA it is hard to understand why coaches in both levels of competition would be paid similar wages.

Well, it isn't that hard to understand. 

NBA teams pay their players 50% of their revenue. The NCAA, though, significantly restricts payments to college athletes. Therefore the money in generated in college basketball has to go someplace else.  One "someplace else" is in the paychecks of the head coaches.

Let's imagine a world, though, where college coaches were paid like the NBA. According to Forbes.com, the average NBA team generated $245.6 million in revenue in 2016-17 while HoopsHype says the average head coach is paid $5.9 million per year.  So the NBA pays on average 2.4% of its revenue to its head coach.  What if men's college head coaches were paid in the same fashion?

Universities report the revenue of each athletic team to the U.S. Department of Education. The last year the data is reported is from 2016.  If we assume those revenue numbers haven't changed too much (which may not be a great assumption!), then we can use these 2016 revenue numbers to calculate what each head coach in men's basketball would be paid if their pay was restricted to 2.4% of team revenue. 

For example, Duke University reported $34.3 million in revenue for men's basketball in 2016. If Coach Krzyzewski was paid 2.4% of team revenue his pay would be $823,498; or more than $8 million less than he is actually paid today.

Once again, USA Today reports what college men's basketball coaches are actually being paid by their schools. And here is what the thirty highest paid college coaches would be paid if they were paid like NBA head coaches:

  1. Mike Krzyzewski (Duke University): $823,498
  2. John Calipari (Kentucky University): $669,490
  3. Chris Holtmann (Ohio State University): $436,908
  4. Bill Self (Kansas University): $437,297
  5. Tom Izzo (Michigan State University): $420,115
  6. Sean Miller (Arizona University): $561,032
  7. Bob Huggins (West Virginia University): $163,895
  8. Larry Krystkowiak (University of Utah): $209,582
  9. John Beilein (University of Michigan): $404,903
  10. Archie Miller (Indiana University): $587,989
  11. Shaka Smart (University of Texas): $420,578
  12. Lon Kruger (University of Oklahoma): $315,788
  13. Gregg Marshall (Wichita State): $177,784
  14. Tony Bennett (University of Virginia): $204,811
  15. Avery Johnson (University of Alabama): $359,189
  16. Scott Drew (Baylor University): $217,789
  17. Frank Martin (University of South Carolina): $286,055
  18. Brad Underwood (University of Illinois): $378,902
  19. Buzz Williams (Virginia Tech): $225,720
  20. Mark Turgeon (University of Maryland): $424,729
  21. Dana Altman (University of Oregon): $266,927
  22. Cuonzo Martin (University of Missouri): $240,974
  23. Steve Alford (UCLA): $321,201
  24. Jay Wright (Villanova): $266,223
  25. Mike Anderson (University of Arkansas): $391,011
  26. Michael White (University of Florida): $339,960
  27. Bruce Pearl (Auburn University): $237,022
  28. Will Wade (LSU): $194,770
  29. Matt Painter (Purdue University): $243,510
  30. Mike Brey (Notre Dame): $93,289

A few notes on this list.  First, the average salary for this group is $3.5 million and this average pay works out to 27.1% of average reported revenues. If these coaches were paid like the NBA, though, the average pay of these coaches would only be $344,031.  So if these coaches were paid like NBA coaches then on average each would see a pay cut of about $3 million (similar to what I said about Sean Miller at the University of Arizona earlier this month).

In addition, none of these head coaches would be paid as much as a million dollars per year. And Mike Brey's pay wouldn't be much different than a professor at Notre Dame. Brey's school only reported $3.9 million in revenue in 2016 from their men's basketball team and his currently salary is 61% of this total. But if NCAA paid like the NBA, Brey would receive less than $100,000 per year. 

To the best of my knowledge, no college coach has come forward to advocate that the NCAA pay players and coaches as they are in the NBA.  And given these numbers, there isn't much incentive for any coach to advocate such a change.  But it is interesting to see what a less restricted market would look like.  The picture painted suggests that many NCAA coaches are not going to want to live in a world where NCAA athletes are better compensated for their efforts and coaches… well, they get much, much less.

Chapter Nine of Sports Economics begins with a story many may know (or not!).  The highest paid public employee in most states is either a head coach in college football or college basketball.  When we looked at revenue in Chapter Nine of the book, though, the amount paid seemed somewhat odd.  For example, Pete Carroll was paid $7 million by the Seattle Seahawks of the NFL in 2015; a team that had $377 million in revenue. That same year Nick Saban was paid $7.1 million by the University of Alabama. But the football program at the University of Alabama only reported $97 million in revenue.

While many of us think about the men's NCAA basketball tournament we should remember a similar revenue-salary story can be told in basketball.  USA Today recently reported the salaries of the head coaches in men's college basketball.  According to this report, Mike Krzyzewski of Duke University, John Calipari of Kentucky, and Chris Holtmann of Ohio State are all paid more than $7 million per year.  HoopsHype, though, says only three NBA head coaches -- Gregg Popovich, Doc Rivers, and Tom Thibodeau -- are paid this well.  But just like college and professional football, if we look at the revenues of men's college basketball and the NBA it is hard to understand why coaches in both levels of competition would be paid similar wages.

Well, it isn't that hard to understand. 

NBA teams pay their players 50% of their revenue. The NCAA, though, significantly restricts payments to college athletes. Therefore the money in generated in college basketball has to go someplace else.  One "someplace else" is in the paychecks of the head coaches.

Let's imagine a world, though, where college coaches were paid like the NBA. According to Forbes.com, the average NBA team generated $245.6 million in revenue in 2016-17 while HoopsHype says the average head coach is paid $5.9 million per year.  So the NBA pays on average 2.4% of its revenue to its head coach.  What if men's college head coaches were paid in the same fashion?

Universities report the revenue of each athletic team to the U.S. Department of Education. The last year the data is reported is from 2016.  If we assume those revenue numbers haven't changed too much (which may not be a great assumption!), then we can use these 2016 revenue numbers to calculate what each head coach in men's basketball would be paid if their pay was restricted to 2.4% of team revenue. 

For example, Duke University reported $34.3 million in revenue for men's basketball in 2016. If Coach Krzyzewski was paid 2.4% of team revenue his pay would be $823,498; or more than $8 million less than he is actually paid today.

Once again, USA Today reports what college men's basketball coaches are actually being paid by their schools. And here is what the thirty highest paid college coaches would be paid if they were paid like NBA head coaches:

  1. Mike Krzyzewski (Duke University): $823,498
  2. John Calipari (Kentucky University): $669,490
  3. Chris Holtmann (Ohio State University): $436,908
  4. Bill Self (Kansas University): $437,297
  5. Tom Izzo (Michigan State University): $420,115
  6. Sean Miller (Arizona University): $561,032
  7. Bob Huggins (West Virginia University): $163,895
  8. Larry Krystkowiak (University of Utah): $209,582
  9. John Beilein (University of Michigan): $404,903
  10. Archie Miller (Indiana University): $587,989
  11. Shaka Smart (University of Texas): $420,578
  12. Lon Kruger (University of Oklahoma): $315,788
  13. Gregg Marshall (Wichita State): $177,784
  14. Tony Bennett (University of Virginia): $204,811
  15. Avery Johnson (University of Alabama): $359,189
  16. Scott Drew (Baylor University): $217,789
  17. Frank Martin (University of South Carolina): $286,055
  18. Brad Underwood (University of Illinois): $378,902
  19. Buzz Williams (Virginia Tech): $225,720
  20. Mark Turgeon (University of Maryland): $424,729
  21. Dana Altman (University of Oregon): $266,927
  22. Cuonzo Martin (University of Missouri): $240,974
  23. Steve Alford (UCLA): $321,201
  24. Jay Wright (Villanova): $266,223
  25. Mike Anderson (University of Arkansas): $391,011
  26. Michael White (University of Florida): $339,960
  27. Bruce Pearl (Auburn University): $237,022
  28. Will Wade (LSU): $194,770
  29. Matt Painter (Purdue University): $243,510
  30. Mike Brey (Notre Dame): $93,289

A few notes on this list.  First, the average salary for this group is $3.5 million and this average pay works out to 27.1% of average reported revenues. If these coaches were paid like the NBA, though, the average pay of these coaches would only be $344,031.  So if these coaches were paid like NBA coaches then on average each would see a pay cut of about $3 million (similar to what I said about Sean Miller at the University of Arizona earlier this month).

In addition, none of these head coaches would be paid as much as a million dollars per year. And Mike Brey's pay wouldn't be much different than a professor at Notre Dame. Brey's school only reported $3.9 million in revenue in 2016 from their men's basketball team and his currently salary is 61% of this total. But if NCAA paid like the NBA, Brey would receive less than $100,000 per year. 

To the best of my knowledge, no college coach has come forward to advocate that the NCAA pay players and coaches as they are in the NBA.  And given these numbers, there isn't much incentive for any coach to advocate such a change.  But it is interesting to see what a less restricted market would look like.  The picture painted suggests that many NCAA coaches are not going to want to live in a world where NCAA athletes are better compensated for their efforts and coaches… well, they get much, much less.

One of the stories told in Sports Economics is that we can use data from sports to measure the economic value -- or what economists refer to as "marginal revenue product" -- of an athlete.  All one needs is a measure of a worker's productivity and data on revenue from the sport.  In fact -- as I recently demonstrated at Forbes.com -- sometimes you can make an estimate with just data on revenue.   

Sports Economics reviews three different approaches to measuring a worker's value. The one I prefer is the approach taken in Chapter Nine to measure the economic value of each member of the men's basketball team at Duke University. Here is how this was measured:

  • The U.S. Department of Education reports that revenue for the men's basketball team at Duke University was $33.8 million in 2014.
  • In the NBA (as well as the NHL), the players are paid 50% of league revenue.  If Duke University followed that approach, then $16.9 million would be paid to the players that season.
  • If this revenue was allocated according to how many wins each player produced for this team, then a player like Jahill Okafor -- who produced 6.5 wins in 2014-15 -- would be worth more than $3 million. Obviously, this is far more than the cost of attending Duke University.
  • And that means Okafor was paid less than the revenue he generated. That also means -- by definition -- he was exploited.

In November I applied the same approach at Forbes.com to the study of women's college basketball. This analysis indicated that Gabby Williams -- who produced 11.0 wins for the University of Connecticut in 2016-17 -- was worth about $550,000.  And once again -- as we saw with Okafor -- this means Williams was exploited.

Then this past week I used a somewhat similar approach at Forbes.com to measure the economic value of women in college hockey. Because I don't have data on how many wins each hockey player produces, though, I took a slightly different approach. If we assume the NHL can measure wins (not entirely sure that is correct!) and that the NHL is paying players for their wins production (not entirely sure that is correct!) then we can use the distribution of salaries in the NHL to see how revenue would be allocated in women's college hockey if colleges followed the NHL model.

The results indicated that -- on average -- the women of Team USA generated more than $140,000 in revenue their last year in college. And given the value of a scholarship, that suggest many of these women were exploited.

There have been two objections raised to this analysis.  First, people wonder about teams who have expenses greater than their revenues.  In discussing expense data in colleges we must first note -- as mentioned in Chapter Nine ofSports Economics -- that this data seems problematic.  Specifically, for about half the women's college basketball teams analyzed the revenue data self-reported to the U.S. Department of Education was exactly equal to the expense data that was self-reported. This is odd because - as any student of economics should understand -- the process that determines a firm's revenue is largely independent from the process that determines its costs.  For these two numbers to be exactly equal suggests something unusual happening. 

In Sports Economics it was argue that "something unusual" was related to the non-profit status of schools. Non-profits -- like universities -- have an incentive to spend all their revenues.  So as revenues rise so will expenses.  And if athletic departments can, they will spend even more than the revenues that are accrued.  In other words, expenses can exceed revenues.

Can workers be exploited if expenses exceed revenues? Again -- as any student of economics should understand -- that is most definitely possible. A worker's value is a function of how much output that worker produces and the revenue that output generates. It is entirely possible for a firm to receive more revenue from a worker than it pays the worker in wages; and through mismanagement of the rest of the firm end up having total costs in excess of total revenues. When that happens, the worker is still exploited. 

Let me give an example to illustrate this point. Imagine you worked for a firm and you generated $50,000 in value but the firm only paid you $30,000.  By definition, you are exploited.  But let's say your boss now told you that the firm was losing money. Does that mean you are no longer exploited?  Of course not. You are still generating more money than you are paid.  The fact your boss can't manage the firm doesn't change the definition of exploitation.

Now that we understand what it means to be exploited we should emphasize that not all college athletes are producing more revenue than what they receive in a scholarship.  This leads to another issue people have raised.  Should players who are not exploited be paying for some of their college education?

I imagine that is a possible outcome. But I think that's unlikely. One issue to remember is that the revenue numbers reported to the U.S. Department of Education are about ticket sales, broadcasting revenue and donations (yes, donations count!).  But these numbers do not include a measure of how sports promote the name of a university. For example, how many people in the nation would know about Gonzaga University without its men's basketball team? That marketing effect is part of the value of athletics to a college. Therefore, it might make sense for a school to spend more on athletes than the explicit revenue the athletes generate.

So how much should athletes ultimately be paid?  Patrick Hruby offered this answer to that question a few days ago.

"So what is the best plan for paying players? No plan at all. If Kentucky wants to offer basketball recruits $500,000 signing bonuses, fine. If Notre Dame doesn’t want to offer football recruits a penny more than their athletic scholarships, that’s also fine."

I would agree with this plan.  Outside of college sports firms and workers are free to negotiate any deal that is consistent with the nation's labor laws.  So, if Duke University wanted to pay Jahill Okafor $3 million, that should be fine. Likewise, the University of Connecticut can pay Gabby Williams $550,000 and the University of Wisconsin can pay Meghan Duggan more than $230,000 or Hilary Knight more than $700,000.

Of course, it's possible these athletes might also negotiate a salary that is less than these values. In the end, though, this should not be the business of the NCAA or the government.  What wage these athletes get paid should simply be the business of the schools and the athletes.

Of course, if those deals result in an athlete generating more revenue than they are paid then once again, we would say they are exploited.  But the reason now would be different.  Now we know college athletes are exploited because of the rules created by the NCAA.  If exploitation existed when these rules were eliminated we would then have to think harder about what is going on in the labor market. And that will be a story we will discuss, if and when that ever happens!