Are Rookies Overpaid?

I recently looked at what might explain why the top draft picks are paid disproportionately to their expected performance compared to later picks. But that doesn't address the larger issue--are rookies overpaid compared to their veteran counterparts?

A 2005 research paper called The Loser's Curse by economists Cade Massey and Richard Thaler tackled that question. In a nutshell, the paper compares rookie pay to the pay of a 6th-year veteran who could be expected to deliver the same performance as a rookie from each slot in the draft. (Performance is defined by a mix of measures including: being on a team roster, starts, and Pro Bowls.)

The conclusion of the paper is that team executives and scouts overpay for the top picks in the draft relative to the later picks, likely due to overconfidence in their ability to identify the best players. But what might surprise some readers is that rookies at every level of the draft are bargains compared to equivalently performing veterans.

This graph from the paper is the study's bottom line. The red 'compensation' line is the average annual pay for each draft pick. The blue 'performance' line is the salary a team would have to pay a 6-year veteran free agent for the same expected performance. The green 'surplus' line is the difference between the two pay levels.


The surplus performance peaks shallowly at the bottom of the first round and through the second round. That's where teams get the biggest bang for the buck. But still, the surplus is strongly positive throughout the entire draft. According to Massey and Thaler, rookies are a bargain compared to veterans.

There's a good explanation why rookies would be underpaid. Veterans are known quantities while there is a tremendous amount of uncertainty with draft picks. Think of it this way--Peyton Manning has been to nine Pro Bowls and Ryan Leaf to zero, for an average of 4.5 between the two players. Four Pro Bowls--that's not bad. But would a GM pay more for a guaranteed 4.5 Pro-Bowl-type player or for a 50/50 shot between a total bust and Hall of Famer? Just about every modern economic and psychological theory tells us that people will pay a premium for the sure average.

Unfortunately, that's not an option in the draft. Peyton Leaf just doesn't exist. But 6-year veterans do, and GMs will be willing to pay a premium for the reduced uncertainty in performance.

One note of caution on the paper. The draft years studied were 2000-2002, and rookie salaries have increased substantially since then. But veteran salaries have too. The question is whether rookie pay increases have outpaced veteran pay increases since then. However, rookie pay would needed to have increased over 15-20% faster than veteran pay to change the conclusions of the paper.

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20 Responses to “Are Rookies Overpaid?”

  1. Michael Schuttke says:

    I agree that the overall draft does in fact produce better value than veteran counterparts. However, the main point of Massey-Thaler is the top half of the draft producing nowhere near the "bang for the buck" as the lower half of the first-round.

    I was not able to run the numbers for veteran counterparts but I was able to run the numbers for the average "real value" (based on reaching minimum playing time standards) of the first five years of the contracts signed for all rookies from 2006-1008.

    The first overall pick in 2006 had a five-year real value of $40.8 million. In 2007, that number was $54.5 million and in 2008 it was $50 million (it should be noted that a quarterback, JaMarcus Russell, was selected first in 2007, accounting for the premium/spike in total amount there). So, from 2006 to 2008, there is an approximate 23% increase in signing the top overall pick.

    In terms of a top ten average, the real value of top ten picks over the first five-years of their contracts in 2006 was $26.31 million, $27.01 million in 2007, and $31.59 million in 2008. From 2006 to 2008, there is an almost even 20% increase in the overall costs of top ten picks.

    Now, again, MAYBE veteran salaries are increasing at the same rate, if not more. So, from what I could quickly gather, it is inconclusive to say that rookie pay compared to veteran pay proves rookies are a better value over the long-haul. What is clearly evident though is that a top-ten pick is becoming a very expensive roll-of-the-dice now.

    Performance per dollar is the key thing to building an overall strong team when you are playing in a sport with a salary cap. I just think it is far harsher on the overall state of a team to be selecting that high in the draft, year after year especially, than to move down, save money, and use the savings at other positions. I think no one would deny that the value in the draft, by and large, is better than what is found in free-agency it's just a matter of WHERE in the draft is the best value found, which Massey-Thaler addressed. Even if in the later part of the first-round, contracts from 2006 to 2008 show a 20% increase, that increase is far less harsh in terms of total dollars than in the top ten.

    Random idea...I think it would be interesting to compare both halves of the first-round, the rate of salary increases, and performance of those selections as compared to veterans. I doubt it would tell us anything different than what is already known regarding first-round value but I think it would help highlight the disparity in dollars of the top half of the round to the bottom is far greater than that of performance.

  2. Unknown says:

    You know I read that paper a few years ago, I'm not sure I really agree totally with its conclusion

    its seems that the conclusion of the paper is that late first/second round picks are better than top overall picks because they are more effecient than top overall picks

    I grant that

    but maximum effeciency isn't the goal, maximum production is

    effeciency that doesn't use up the salary cap is wasted

    if all draft picks are effecient relative to veteran, it would seem to me that what you would want to do is maximize their production at that rate, not maximize their effeciency,

    because the replacement veteran production won't be more effecient than the supposedly ineffecient drafted production

    I sent the authors an email stating as much back then and pretty much got blown off

  3. Daniel says:

    I think the top picks in the draft are grossly overpaid. For someone who has never played a down in the NFL and based on the numbers has a less than fifty percent chance of even starting three seasons in the league, QB draft picks are way overpaid.

  4. Zach says:

    At six years/$78 million, Matthew Stafford will be paid $13 M per year. In 2008, only four players were given more money than that: Peyton Manning, at $18.7M; Tom Brady, at $14.6 M; Carson Palmer, at $13.98 M; and Aaron Rodgers, at $13.96 M.

    I haven't read the paper, but the graph says that the data was taken from the 2000 to 2002 seasons. If you were to do a study based on the last two or three years, odds are the conclusion might be different.

  5. drichters says:

    Phil,

    Maximum production is not the ultimate goal, maximum profit is. I'm not disagreeing with your comment at all, I'm just noting that a 1st round rookie might inspire ticket sales more than a similarly producing veteran does.

  6. Michael Schuttke says:

    Drichters: I have always found that argument, namely that high picks cause an increase in ticket sales, to not hold water over the long-term. The Detroit Lions have had a LOT of high draft picks and last year there were quite a few empty seats in their stadium. Perhaps those were paid for empty seats; who really knows? Bottom-line though is that winning is what makes a franchise worth seeing perform on the field.

    I think there are rare players who, just by the type of athleticism they possess, that can sell tickets regardless of their team's success. Who wouldn't pay to see Barry Sanders in his heyday with the Lions, or watch Michael Vick (pre-arrest obviously) scramble around with the Falcons? Again though, those caliber of athletes who are "exciting" to watch are very, very rare.

  7. Chase says:

    It's just as obvious that rookies are *not* overpaid as it is common to hear that they are overpaid. If they were overpaid, teams simply wouldn't draft them.

    If Matt Stafford, at six years and $78 million, was not a good deal, Detroit wouldn't sign him to it. Period.

    Personally, I still think Stafford and all other rookies would fetch more money on the open market. People claim that rookies are overpaid because they haven't done anything yet, but that's a red herring. Thomas Jones won't get a big extension depsite having done a whole lot in his career. When you look at veterans, you realize that teams pay for future production, not past production. And for the majority of players, they're age 22-26 seasons are a lot better than their age 32-36 seasons.

  8. drichters says:

    Michael Schuttke,

    I agree with you in that I assume ticket sales are better for winning teams, no doubt. And sure, the lions have high picks and poor attendance (I actually have no idea about that, but I'll assume it for argument sake). The relevant comparison would be the Lions actual attendance vs what it would have been if they traded away the picks for veterans (which of course we don't know). My guess would be even worse attendance than they have in actuality. Attendance is of course driven by multiple factors, and with the economy the way it is in Michigan right now, I don't know if there is anything the Lions could do to have good attendance.

  9. Dustin Dawind says:

    Interesting article. A couple of points I'd like to mention...

    1. I wish the authors had used a different measure of "performance." I'm not sure that # of starts and # of games played are good metrics. The main problem I have with each metric is that early draft picks are more likely to get to play/start for reasons not related to performance. For one thing, they are (on average) going to worse teams where they are fighting for a roster spot against weaker competition. Also, the team will feel pressure (from both fans and management) to play the high draft pick *because* they are paying him so much. For example, had Brady Quinn gone to Oakland at #1 in 2007, he'd probably have a lot more game experience by now. But, I don't know that he'd be any better (or worse) as a QB.

    2. Chase, I don't agree with your example. As an organization, Detroit really has no choice but to sign Stafford. The media fallout and negative fan reaction they would get from not signing the #1 draft pick would be a greater overall cost to the organization than what they might save financially by holding out for a lesser contract deal. I don't believe that any team would've signed Stafford for more money in an open market system, but I guess there's no way to know that for sure either way.

  10. Brian Burke says:

    I agree with Chase. There's a risk Stafford might be a flop, but there's a good chance he'll be great. All things considered, he should command a hefty price. The risks and uncertainties are built into the salary levels. Otherwise teams would offer lower rookie salaries and let a guy hold out until he turns blue in the face--like Oakland did with Russel.

    One other observation. What would Stafford's going rate be if there were no draft, just an open bidding war for all college players? Wouldn't the Jets and other teams with a need at QB be ratcheting up bids for him?

  11. Dustin Dawind says:

    Brian, I guess I just question the 'risks and uncertainties are built into the salary levels' part of your argument. Here's how I look at it: If Stafford turns out to be great, he's worth maybe $20 million/year. That's more than Peyton, Brady or any other QB makes now. Hard to imagine he could be worth more than that. If he turns out to be an average starting QB, he's worth maybe $7 million/year (16 QB's make more than that now, one for every 2 teams). If he's a bust, he's worth $1 million/year or less.

    Thinking purely in terms of expected values, it seems like Stafford would have to have like a 56% chance of being Peyton/Brady good to justify $13 million/year. ($20m*0.56+$7m*0.22+$1m*0.22m=$13m)

    To me, a more realistic probability distribution would be something like 30%/50%/20%, but that would only give an expected value of $9.7 million/year.

    Anyways, that's my thinking. Maybe a model with more than 3 levels of QB goodness would yield more interesting results, but it still doesn't seem like it would justify $13m/year for an unknown commodity.

  12. Brian Burke says:

    Dustin-That's a really good point. I guess if Peyton or Brady signed a new contract now, they'd be able to command a lot more than their deals they signed a few years ago.

    On that point--In the NFL, because salaries are based on a proportion of total league revenue, there's a time-value of money (or 'football money') more than just plain inflation.

    Maybe a better way to compare is to normalize salaries according to the team salary cap at the year the contract was signed. Complicating things, I'd bet multi-year contracts are based on an expected increase in league revenue. Stafford's contract is probably no different. His contract will span a future period of time where revenues, and therefore salaries too, are expected to increase steadily.

    I bet this stuff is more complex than even stat-heads like us can appreciate.

  13. Unknown says:

    Obviously, the draft has to have positive surplus all the way through. Otherwise people actually wouldn't want draft picks at all, which would be extremely silly.

  14. Dustin Dawind says:

    Well, in the late rounds of the draft, many of the draftees don't make the team. I would interpret this to mean that the surplus would clearly become negative: the team chooses not to pay their 7th round pick, because they can get better performance/dollar from someone else. The pick itself doesn't cost anything, so of course the team will always pick someone.

    In the early rounds, it would still make sense to pick a guy with a slight negative surplus, since he's younger and has more productive years ahead of him. Suppose that guys in their 6th year always had optimum performance/$. You'd still want to draft a young RB, because your 6th year RB probably doesn't have many years left in him. Otherwise you'd have to keep trying to trade/sign a new 6th year RB every year, and most teams want more stability than that.

  15. Dustin Dawind says:

    Another way to look at a negative surplus is that it's like gambling. The average surplus of a $1 lottery ticket is negative. (In that what you expect to get back is, on average, worth less than other things you might do with your $1). But, people buy them for the chance that they'll be in the minority who get a positive return.

  16. Jason says:

    I think a lot of it is the short-term vs. long-term value. Looking at "who's good now" when discussing 6-year contracts doesn't make much sense.

    Consider this: Your team *must* sign either Peyton Manning or Matthew Stafford to a 6-year, $78 million guaranteed contract. Which do you do?

    99% of GMs would probably take Peyton. But he's 32 and has a bit of a gimpy knee. Still, I don't doubt he's better than Stafford now and will be for the next two or three years, at least.

    But then what? Does 35-year-old Peyton suffer a serious injury? Or does he just break down physically? By that point, does Stafford pass him? And is he the better QB for the remainder of the 6-year deal? Who will be the better quarterback from 2012 to 2014? Manning or Stafford? I think it's debatable. Dan Marino was pretty mediocre after age 35, and Brett Favre had one good year in his 36-39 seasons.

    Theoretically, if you sign a guy to a six-year deal and he's good (or great) for three of those years, it shouldn't matter if he's good for years 1-3 or years 4-6 (or 1, 4, and 5). But that's not how a lot of people look at it.

  17. drichters says:

    I don't think it is appropriate to speculate too much about years 4-6. It is a 3-year $41 million deal. The extra years are phony and I have no idea why the NFL is structured such that the big contracts as reported are complete fiction.

    Rather it is fine to speculate about the players value, but whether Stafford (or whoever) plays well or poorly he will not be paid the final years of the contract. He'll sign a new 15 year $700 million deal that is really a 3 year $50 million deal...

  18. Anonymous says:

    way to overpaid!!!!!!!!!!!!!

  19. Brian says:

    I'd love to see your analysis on the effect that eliminating the NFL draft would have. Some people on Profootballtalk.com are using your analysis, above, to make the claim that the draft is overrated. After reading your analysis, I'm not so sure you'd agree with them.

    It would also be interesting to see an update on the analysis. It appears that rookie bonuses are outpacing veteran pay, at least at some positions.

  20. Joe says:

    Jason, I agree with your comment if you were signing players to 6-year contracts with no team options.

    However, using your example, if both contracts have team options after say 3 years, then you want the player who is best for the first 3 years. As drichters notes, one should really consider the guaranteed section of any NFL contract. Hence why nearly everyone would choose Manning over Stafford.

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