Show Me the Money! A Cross-Sport Comparative Study of Compensation for Independent Contractor Professional Athletes

Abstract:

Numerous pay equity studies have been conducted. Many have examined the compensation of professional athletes. However, few studies have compared athlete compensation across sports, which is the objective of this research. Focusing on independent contractor athletes, several analyses were performed to determine how one type of athlete’s (e.g., horse jockeys) earnings from competition (excluding sponsorships, appearance fees, etc.) compare to other types of contracted athletes, such as race car drivers, golfers, bull riders, tennis players, etc. Overall, this exploratory study sheds insight into how the different groups of athletes are paid, and, more importantly, provides a framework for future research that examines the compensation inputs (versus outputs) of each of these groups.

Introduction:

Salaries for professional athletes continue to escalate each year. From Alex Rodriguez’s record $252 million contract to David Beckham’s $50 million per year enticement to join the LA Galaxy soccer team, most sports fans believe that professional athletes, in general, are overpaid and not worth their salaries. Yet for the professional athlete, maximizing compensation is critical, given the short careers and health risks associated with professional sports. Thus, athletes and their agents often look to see what others within their sport are paid in an effort to negotiate for more money. Few, if any, have compared athlete compensation across sports. While a cross-sport comparison might not be necessary in team professional sports (e.g., MLB, NHL, NFL, NBA) given the strength of their collective bargaining agreements, independent contractor professional athletes (e.g., jockeys, bull riders, golfers, race car drivers) need this type of analysis. The purpose of this research is to compare independent contractor professional athlete salaries across sport using four perspectives: total payout to athletes per sport, percentage of winnings per sport, top individual earner by sport and mean earnings for the top 50 athletes in each sport. These perspectives will allow independent contractor professional athletes to better analyze the “fairness” or equity of compensation.

Background:

Ever since jockey Gary Birzer was paralyzed while racing in 2004, the jockeys’ guild and track owners have had an acrimonius relationship, to say the least. While much of the ongoing battle has centered on who should pay for the jockeys’ long-term disability coverage, the dispute has recently turned to jockey compensation. The jockeys believe they are underpaid, given the amount of overall purse money involved in the sport and the inherent health risks of racing horses. In contrast, the race tracks believe that the horse owners and trainers deserve the bulk of winnings, given their financial risk and knowledge. With the sides at a stalemate, Corey Johnsen, President of Lone Star Park at Grand Prairie and current President of the Thoroughbred Racing Associations (the trade organization for the tracks) commissioned this study. By collecting extensive data across a number of sports, Johnsen sought to provide a starting point for discussions between the tracks and the jockeys’ guild in an effort to resolve the dispute.

Review of Literature:

A number of management and economic researchers have investigated compensation equity or justice across many industries. While it is beyond the scope of this paper to cover all of this literature, this section highlights a few key citations.

Carrell and Dittrich (1978) were two of the first to provide a comprehensive look at pay equity. The authors looked at the components of pay equity, such as an individual’s perceived inputs and outputs. In addition, they examined how an individual adjusts performance when he or she perceives pay to be inequitable. Adding to the body of existing literature, Younts and Mueller (2001) measured the importance individuals place on compensation justice, in particular distributive justice (i.e., the outcomes or rewards received). Similarly, St-Onge (2000) extended the literature by evaluating the influence of several individual variables on pay-for-performance perceptions, specifically looking at actual pay-for-performance, trust in decision-makers, perceived procedural justice, outcome satisfaction and size. Using social equity theory, Sweeney and McFarlin (2005) found that an individual’s pay satisfaction was based on that individual’s wage comparisons with similar and dissimilar others.

Looking specifically at athlete compensation, the majority of previous studies have dealt with team sports, and, in particular, Major League Baseball, given its unique market structure and history (e.g., anti-trust exemption, owner collusion in the 1980s, etc.). For instance, Slottje, Hirschberg, Hayes, and Scully (1994) used Frontier estimation to measure wage differentials in Major League Baseball and discovered that free agency status significantly influenced wage inefficiency. Similarly, Scully (2004) examined the effects of free agency on compensation as a share of league revenue and the dispersion of compensation among players across the four major professional sports: MLB, NBA, NFL, and NHL. As expected, he concluded that both were higher when leagues permitted a free labor market. Looking more closely at one professional sport, NHL hockey, Idson and Kahane (2000) empirically investigated the effects of co-worker productivity by examining individual variables, such as height, weight, points scored, plus/minus ratios, star status, and team/coach variables, such as team revenues, coach’s tenure, and coach’s winning percentage in the league. They concluded that “estimates of the effects of individual attributes on compensation are upwardly biased when team effects are not taken into account in standard salary regressions” (p. 356). Lastly, Nero (2001) used multiple regression analysis to measure the salary effectiveness of independent contractor athletes in one sport: PGA tour golfers. In his study, he analyzed the impact of a pro golfer’s driving distance, fairways hit, putting average per green, and sand saves (i.e., the percentage of times a player uses at most two shots to score from a greenside sand trap) on earnings. He concluded that putting average had the greatest influence on a golfer’s earnings.

Analysis:

1. To compare jockey compensation to other independent contractor professional athletes, eleven sports were chosen (see Table 1). Salary data was compiled using primary research, including telephone and face-to-face interviews with representatives from various sports and secondary research utilizing websites, sports journals, magazines, and newspapers.

Table 1: Independent Contractor Sports for Comparison

Results:

Total Payout per Sport

Table 2 reveals the total payouts (excluding additional income such as endorsements or appearance fees) for horse racing (NTRA: National Thoroughbred Racing Association) and the independent contractor athletes in eleven other sports in 2005 and 2004.

Table 2: Total Payout by Sport

As illustrated, the amount of money paid out (i.e., purse money) in horse racing far exceeds the other sports. In fact, the second and third ranked sports, NASCAR and PGA, have purses approximately 25% of those of the NTRA. However, when the payouts for jockeys-only (i.e., the percentage of the purse that is paid to the jockeys by the owners) is compared to the athletes in the eleven other sports, the amount is much less than the compensation paid to PGA golfers and NASCAR drivers (see Figure 1).

Figure 1

Percentage of Winnings Per Sport

Figure 2 provides another perspective of the data in Figure 1. When we analyzed the dollars paid to jockeys as a percentage of the total purses (payouts), we found that jockeys, on average, received 7.5% of the available purse. This is much lower than a number of the other sports. Figure 3 provides the breakdown of purse percentage for first, second, and third places. As shown, NTRA jockeys receive 6% of the available purse for winning a race and 1% and .55% for second and third places respectively. In contrast, PRCA and PBR athletes received at least 20% of the purse for a second place finish.

Figure 2

Figure 3

Note: NTRA represents just the jockey’s percentages

Top Individual Earner by Sport

While using one individual in each sport is not an accurate representation of all athletes within the sport, comparing the top earner provides a glimpse of the earning potential per sport. As Figure 4 reveals, the top jockey, John Velasquez did not earn as much as Tiger Woods (PGA), Roger Federer (ATP), Maria Sharapova (WTA), Annika Sorenstam (LPGA), or Tony Stewart (NASCAR). However, he still makes nearly $2 million per year in earnings.

Top 50 Earners by Sport

Given the drawbacks of looking at the top earner in each sport, the top 50 earners in each sport were compared (see Figure 5). As shown, the average salary of the top 50 jockeys ranks fifth and is approximately $500,000 per year.

Figure 5

Note: NTRA represents just the jockeys (excludes owners and trainers)

Conclusions, Limitations, and Future Research:

Although a very simplistic bivariate analysis was used, this research provides important information for both sides of the jockey compensation debate. From the perspective of the tracks, over $1 billion is paid out in purses each year, with millions going to the jockeys, making horse racing a very lucrative sport. In contrast, from the jockeys’ perspective, they only receive 6% of the purse earnings, if they win, and 7.5% overall. While both sides have their stance, this research should allow the two sides to come together and begin discussions on how to solve this labor dispute. For instance, there might be a way to re-distribute the earnings to allow the second and third place finishers to earn more.

As with any research, there are limitations to this study. For one, this analysis excludes additional monies that athletes receive outside of competing (e.g., appearance fees, endorsements, etc.). Secondly, this research was limited by the bivariate analysis.

In the future, researchers should comparatively examine the sponsorship/endorsement dollars that independent contractor professional athletes receive across the twelve sports. This would provide a more thorough comparison of the total compensation these athletes receive. In addition, more sophisticated statistical analyses are needed to compare athletes across sports via multiple regression analysis or related techniques. As Porter and Scully (1996) pointed out, an individual athlete’s performance is difficult to measure because it is “a serially repeated and rewarded event. Among the individuals competing in professional sports, the distribution of earnings is determined by the distribution of awards for performance, the distribution of talent (expected performance), and by work effort (the number of competitions undertaken)” (p. 149).

Hopefully, future researchers will be able to examine in more detail the pay equity of independent contractor professional athletes.

References:

Carrell, M. and J. Dittrich (1978). Equity theory: The recent literature, methodological considerations, and new directions, The Academy of Management Review, Vol. 3, 202.

Idson, T. and L. Kahane (2004). Teammate effects on pay, Applied Economics Letters, Vol. 11 (12), 731.

Nero, P. (2001). Relative salary efficiency of PGA tour golfers, American Economist, Vol.45 (2), 51.

Porter, P. and G. Scully (1996). The distribution of earnings and the rules of the game, Southern Economic Journal, Vol. 63 (1), 149.

Scully, G. (2004). Player salary share and the distribution of player earnings, Managerial and Decision Economics, Vol. 25 (2), 77.

Slottje, D., J. Hirschberg, K. Hayes and G. Scully (1994). A new method for detecting individual and group labor market discrimination, Journal of Econometrics, Vol. 61 (1), 43.

St-Onge, S. (2000). Variables influencing the perceived relationship between performance and pay in a merit pay environment, Journal of Business and Psychology, Vol. 14 (3), 459.

Sweeney, P. and D. McFarlin (2005). Wage comparisons with similar and dissimilar others, Journal of Occupational and Organizational Psychology, Vol. 78, 113.

Younts, C.W. and C. Mueller (2001). Justice processes: Specifying the mediating role of perceptions of distributive justice, American Sociological Review, Vol. 66 (1), 125.