{"id":3633,"date":"2015-09-08T14:21:33","date_gmt":"2015-09-08T22:21:33","guid":{"rendered":"http:\/\/hodakvalue.com\/blog\/?p=3633"},"modified":"2015-09-09T18:44:50","modified_gmt":"2015-09-10T02:44:50","slug":"going-against-the-tide","status":"publish","type":"post","link":"http:\/\/hodakvalue.com\/blog\/going-against-the-tide\/","title":{"rendered":"Going Against the Tide: Defending Coach’s Pay"},"content":{"rendered":"
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Against The Tide<\/p><\/div>\n

High pay is controversial because there are inherently two, generally opposed, sides to the debate. This was well illustrated in a recent WSJ article about\u00a0highly paid, star college football coaches.<\/a>\u00a0Given the topic, it\u2019s appropriate to label the two sides \u201coffense\u201d and \u201cdefense.\u201d<\/p>\n

Offense<\/strong><\/p>\n

This is a good name for an instinctive reaction that we all have; we are offended by other people\u2019s high pay. It\u2019s a natural response. The moment any of us hears that someone has made millions of dollars, our knee-jerk reaction is \u201cwho can be worth millions?\u201d We can’t help it. We also can\u2019t help trying to supplement that emotional reaction with logical arguments. This is almost always done via comparisons to other people\u2019s pay.<\/p>\n

Last year, the current Alabama [Crimson Tide] coach, Nick Saban, made $7.2 million, roughly 11 times the salary of Alabama\u2019s president.<\/em><\/p>\n

Messrs. Saban and Meyer make 50 times that of an average full-time professor at their respective schools; Mr. Harbaugh makes 32 times more than an average full-time professor at Michigan…<\/em><\/p>\n

Much is made of the fact that Alabama is a poor state with a median household income of $43,253, some $10,000 less than the national average. Public funding for higher education in the state was slashed by $556 million from 2008 to 2013, a 28% drop. Mr. Saban\u2019s salary has risen 80% since he arrived at Alabama in 2007.<\/em><\/p><\/blockquote>\n

What makes these comparisons compelling is that they bring the discussion somewhat closer to the\u00a0scale of our<\/em> pay. If we get paid much less than top college coaches, for example\u2014a better than 99 percent bet, even for readers of the Wall Street Journal\u2014then we get to share the outrage that these people are making so much more than we<\/em> are. I mean, who are these people? Are they really any better than us?<\/p>\n

Some people call this reaction an instinct for fairness. Some call it envy. Regardless of the name, it is the first thing that strikes us when hearing “millions.”<\/p>\n

Defense<\/strong><\/p>\n

And that is why any explanation or justification of\u00a0other people’s millions can be viewed as a \u201cdefense.\u201d<\/p>\n

The easiest, and ultimately only way to defend high pay is to\u00a0reference its negotiated nature. People don’t get what they deserve; they get what they negotiate.\u00a0This negotiation is invisible to us, a distant, unwritten prequel, by the time we are reading about something like\u00a0“$7.2 million.” When we say, \u201cI can\u2019t believe so-and-so is being paid that much,\u201d we are really saying one of two things:<\/p>\n

(1) “I can’t believe so-and-so was greedy enough to ask for or accept that much,” or<\/p>\n

(2) \u201cI can\u2019t believe the person paying them that much really needed to.\u201d\u00a0Both criticisms represent\u00a0a kind of an arrogance, if you think about it.<\/p>\n

On the one hand, we are accusing the person who made a lot of a moral failing that any of us would likely succumb to if we were in their position. In my experience, the people who complain most loudly about other people’s pay are the least likely to turn down a windfall were it to come their way.\u00a0On the other hand, we are accusing the person who paid the salary of being stupid, lazy, or corrupt with reference to their compensation decisions. We\u2019re calling the owners, who are generally very successful themselves, financial dolts. On its face, this seems implausible. So, the sensible thing is to first ask the people paying millions what they were thinking.<\/p>\n

Former Alabama President Robert Witt (now the chancellor of the Alabama university system), once told CBS\u2019s \u201c60 Minutes\u201d that Mr. Saban was \u201cthe best financial investment this university has ever made\u2026\u201d<\/em><\/p>\n

Mr. Saban had an immediate financial impact on Alabama. In 2007 the school was closing a $50 million capital campaign for its athletic department. After Mr. Saban arrived, the campaign exceeded its goal by $52 million. Alabama\u2019s athletic-department revenue the year before Coach Saban showed up was $68 million. By 2013-14 it had risen to $153 million, a gain of 125%. (The athletic department kicked $9 million of that to the university.) Mr. Saban\u2019s football program accounted for $95 million of that figure, and posted a profit of $53 million.<\/em><\/p><\/blockquote>\n

In other words, they were thinking that offering those millions in salary\u00a0would pay\u00a0them back in dividends. That bet doesn’t always work, but it was clearly working for Alabama. And these owners are considering all of the revenue streams likely to be impacted by their hire, the way any professional team owner would look beyond the gate receipts and TV licenses.<\/p>\n

Mr. Witt said Mr. Saban also played a big role in the success of a $500 million capital campaign for the university (not merely the athletic department) that took place around the time the football coach was hired…<\/em><\/p>\n

Ohio State has benefited in a similar way since luring Mr. Meyer, 51, out of a brief retirement in 2012. The university\u2019s athletic-department revenue was up 14% to $69 million during the season last year, one in which Ohio State won the national title. In the aftermath of the title, the school\u2019s merchandise sales totaled $17 million, some $3 million more than the previous year. More than half of that money goes to academics.<\/em><\/p><\/blockquote>\n

So, the defense of high pay is that if we give the recipient a portion of his or her value to the\u00a0organization, the organization will benefit. That is true\u00a0whether we are talking about coaches, or players, or real estate agents, or investment bankers. Economists call this paying for the individual’s\u00a0marginal revenue product, <\/em>and a principle of economics is that society as a whole is generally better off if every person is paid according to his or her marginal revenue product. Paying too much is a waste; paying too little risks ‘misallocation’ of that person’s talents.<\/p>\n

The End Game<\/strong><\/p>\n

Whether we are talking about college football coaches, professional entertainers, or corporate executives, the debate often comes down to what game you’re playing. If you\u2019re playing the game of fairness or envy, then you simply don\u2019t want some people to make too much more than others, regardless of the economic consequences. If you\u2019re playing to maximize overall social welfare, then you allow people to earn a significant portion of what they make for others, and let the chips fall where they may.<\/p>\n

One might admit to a mix (or confusion) of motives in order pursue some middle ground. But in football, at least, no one scores in the middle ground.<\/p>\n","protected":false},"excerpt":{"rendered":"

High pay is controversial because there are inherently two, generally opposed, sides to the debate. This was well illustrated in a recent WSJ article about\u00a0highly paid, star college football coaches.\u00a0Given the topic, it\u2019s appropriate to label the two sides \u201coffense\u201d and \u201cdefense.\u201d Offense This is a good name for an instinctive reaction that we all […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,5,10,25],"tags":[],"class_list":["post-3633","post","type-post","status-publish","format-standard","hentry","category-economics","category-executive-compensation","category-invisible-trade-offs","category-reporting-on-pay"],"_links":{"self":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3633","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/comments?post=3633"}],"version-history":[{"count":11,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3633\/revisions"}],"predecessor-version":[{"id":3644,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/posts\/3633\/revisions\/3644"}],"wp:attachment":[{"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/media?parent=3633"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/categories?post=3633"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/hodakvalue.com\/blog\/wp-json\/wp\/v2\/tags?post=3633"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}