Thursday, May 2, 2013

Why Lebron James is Underpaid

Perhaps the most popular refrain from people who do not follow sports closely is the following:

"Oh, those guys all make way too much money for playing some stupid game. No job is worth $20 million dollars per year."

This sentiment can be interpreted one of two ways. On the one hand are the people who think professional athletes just make too much money on the whole. While the sentiment of this statement is accurate (the US economy and society would likely be extremely similar if pro sports didn't exist), athletics on the professional level are a business, and the fact remains that people will pay a lot of money to see games. The linked article indicates that the Dallas Cowboys were worth a cool $1.81 BILLION dollars in 2013, roughly the annual GDP of San Marino. OK, that doesn't sound too impressive, but rest assured there is serious money changing hands in all major American leagues.

The second argument is that while the league may be appropriately valued, superstars in these leagues make way too much money. After all, there are only about 400 NBA players at any one time, so they already represent the top .0001% of basketball players in America, let alone worldwide. However, within these 400 players, some clearly bring a lot more value than others, and are in fact deserving of extremely massive salaries. Yes, friends, Lebron James (and his $16 million salary) is woefully underpaid.

To frame the discussion a little bit, there are maximum and minimum amounts that each NBA player can make, and there are maximum and minimum amounts that each owner can spend on their team. Unfortunately, the rules are extraordinarily complex and would distract if explained in full. In short, the NBA minimum salary is about $500,000 for a rookie, and the maximum amount depends on years of service, but goes up significantly over time. The top 10 salaries this year can be found here. Now, here's an infographic from the folks at that gives some perspective on the economics of superstar players in the NBA:

Looking at these comparison points, its pretty clear that Lebron is worth far more to the league than is reflected in his salary. But Lebron is clearly the best player in the league, a once-in-a-generational talent. Is he the only max player that has this effect?

As it turns out, no. Another study from Peter Keating details that athletes in general, but superstars in particular, are pretty underpaid across the board relative to the value of the teams they play for. Kobe Bryant makes far and away the most money in the league at over $27 million, and he may be properly paid (for a while he was overpaid, but had a pretty stellar season by conventional and advanced metrics this past year). But most of the rest of the top 10 players generate far more value for their teams than their salaries indicate. There are always exceptions (Joe Johnson and Rudy Gay spring immediately to mind), and it's these players that give professional athletes a bad reputation in this regard. But the next time your mere presence on an organization increases the value by $60 million dollars, you tell me how much you think you should be paid.

1 comment:

  1. pretty sure i increased the value of my firm by $60 million on the fateful day i started