Draft Picks: Bricklayers or Gladiators?

With the draft upon us, there is a lot of chatter about ballooning rookie salaries for top picks. The consensus seems to be that top picks are not worth the cost and salaries should be capped. But there’s a good reason why the top players’ salaries are so high, and the explanation can be found in economic ‘tournament theory.’ A short example by economics professor Robert Schenk explains it nicely:

Say you’re a contractor and your company builds brick walls. Most of your bricklayers lay about 3 bricks per minute and make about $8 per hour. (You can think of this as the replacement level.) But along comes a guy who lays bricks twice as fast--6 bricks per minute. How much would you be willing to pay him? Simple fairness suggests $16 per hour. Certainly no more than that because you could just replace him by hiring two replacement-level guys and get the same production. So in this example rewards are based on absolute differences in productivity. Large differences in productivity result in large differences in rewards. Similarly, small differences in bricklaying ability would result in small differences in hourly pay.

Now consider two ancient gladiators entertaining the emperor in combat. Even if one gladiator is only slightly better than the other, he’ll very likely win, and the differences in rewards could be extreme. Here, in a winner-take-all system, absolute differences in ability do not matter, only relative differences.

What about sports like football? First, in many ways the NFL is a winner-take-all system. Whoever wins the game earns 100% of the win while the loser eats all of the loss, and there is only one champion left standing at the end of the season.

Second, football players are not like bricklayers. You cannot replace an All-Pro QB by sending two average QBs out on the field and expect the same productivity. When there is a constraint on the number of people that can be employed at one time, the value of the most productive people rapidly increases.

And when there is a constraint on the number of contributors combined with a winner-take-all reward structure, the value of the top performers will skyrocket. This is why the top NFL draft picks make so much more than the lower picks. Even if the abilities of the top picks are only marginally better than those of the picks in later rounds, there will be very large differences in pay.

It’s not much different than CEO compensation. If a company is in competition with other companies for market share, the shareholders should want the best CEO they can get--especially because a competitor with a slightly more visionary CEO will likely steal market share, even if your guy is still top-notch. And since you can’t replace a single chief executive with two average guys or a whole mob of slackers, the CEO’s pay is going to end up being wildly disproportionate to his actual ability. There can be only one guy at the top, only one winner of the tournament.

Note that I’m not claming that rookie salaries should be this high, just trying to understand why they’re so high. And I’m not comparing rookie pay to veteran pay. That’s another topic for another day.

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19 Responses to “Draft Picks: Bricklayers or Gladiators?”

  1. Michael Schuttke says:

    I actually think that, over the course of time, most first-round rookies will outperform their contracts (busts aside). First-year cap charges tend to be fairly reasonable, even for the higher picks, due to the "cap within a cap" of the rookie salary cap. Then, factor in longer contracts that can be negotiated up to six years with most being in the five-year range, voidable years, etc. and I think as compared to the veteran market (or am I the only one crazy enough to think that Darren Sprioles of the Chargers being designated a "franchise player" and the salary that comes with that is a bit out of line for his productivity), rookies are not all that overpaid.

    HOWEVER...the question, again, that I am fascinated by is value. You are right in saying that the "best gladiator/bricklayer" or, per this example, quarterback in a draft class will get disproportionately higher pay. The real question is though is he THAT much better than the second guy at his position? Not only that but as this is not a matchup of two gladiators but 22 at one time, the question of cost for the one gladiator has to be factored in compared to how that affects the others. In short, the best gladiator (quarterback let's say) in a draft may not look as good if his armor (will say the left tackle on the offensive line) is not good at protecting him. So would the $6million per year average quarterback, akin to the 3 bricks per hour bricklayer, perhaps ramp up his productivity with a better set of gloves (perhaps a top-notch wide receiver)? Conversely, will the larger wage of the 6 bricks per hour bricklayer (i.e. top five to ten selection) be negated by the inability to surround him with competent bricklayers around him (so as to build the wall in the project time/win the game).

    The reality is that there is a finite set of resources that must be extended to the fullest measure possible so as to build the best possible team overall. Unlike one-on-one gladiators, football is a team game with many interconnected parts moving; if one part of the engine does not run smoothly, all other parts begin to be affected.

    So, again, my question is value...it's not so much will a Matthew Stafford or a Mark Sanchez (both likely to go in the top ten this year) be bad quarterbacks. Perhaps they will, perhaps they will not. The question is are they THAT MUCH better than a Josh Freeman who is likely to go in the back half of the first-round and, with the additional cap savings of selecting a player in that part of the round, will your overall team be better spending that money saved at other positions?

  2. Anonymous says:

    I disagree with the last paragraph of the previous comment. The question is NOT "are they THAT MUCH better than a Josh Freeman...". This would be the question if the issue were how high the rookie salaries are compared to players lower in the draft. This is not the question, however (if it has been the question in this article then the wrong question is being asked).

    The problem that people have with high picks is that the rookies are making more money, or as much money, as their veteran counterparts. Therefore, busts do become part of the issue. The main argument is: Why should a rookie get so much money when he is unproven at this level, while veterans who have been proven at this level are earning the same amount or less?

    I completely agree that a left tackle taken at the 1st pick is more valuable than a left tackle taken at the 20th pick. But I disagree that a left tackle taken at the 1st pick is even as valuable as a pro-bowl left tackle from the previous year. Yet, these salaries would make it seem that this is the case.

  3. Michael Schuttke says:

    Anonymous: See, I just do not know though if, just by position in the draft, one can say that the left tackle taken at the first pick is INHERENTLY more valuable than the left tackle taken at the 20th pick. Why does just position itself merit value? I would argue it doesn't; what matters is performance.

    Now, to use last year as an example, I think Jake Long (taken first by Miami) will have a better career than Sam Baker (taken 21st by the Atlanta Falcons). The question is though can Long outperform his CONTRACT to the point that Baker likely will? That is more what I am getting at.

    I am not saying a top-five, top-ten pick is inherently bad; I am just questioning why it is an automatic view that the selection is somehow inherently good. I also question if the player selected higher is that much better than the next player selected to justify the contract difference. I think sometimes, yes, the premium you pay for that best player at a position in a particular draft is worth it if the dropoff in talent is rather large. By and large though, I agree with you in that the top-ten range of the draft is paid disproportionately more than both rookies in their own class that compare on a productivity level, let alone the cited Pro Bowl veterans you mentioned that are often paid less.

  4. Michael Schuttke says:

    Again, my big thing is what is the best way to built the best all-around TEAM. I do see the logic in giving the best talent in the draft the biggest contracts. However, perhaps the savings from our example of the left tackle taken at number one versus the left tackle selected at 21 can be used to get an even better left guard for the guy playing next to the left tackle taken later. Perhaps, with that veteran inside next to him, the rookie at 21 actually outperforms the player at one. Even if he doesn't, if even the performance is fairly close, can the savings be used to, again, build a better all-around TEAM....that is more where I am coming from with my views on paying a premium for projected performance.

  5. Unknown says:

    I think the real problem is that the pay at the top of the scale places the top 10-20 picks in the upper echelon of their positions, without ever having played a single down of professional football. Assuming the Lions take Stafford at #1 overall, his rookie contract will be comparable to Peyton Manning and Tom Brady's current contracts. So, the real question is this: is Matt Stafford worth Peyton Manning/Tom Brady money? The answer is an emphatic no. Brady and Manning have won Super Bowls. They've set records. They're guaranteed as first-ballot Hall of Famers. They have, simply, paid their dues and earned their contracts. Stafford and Sanchez and every other player in the draft has not, which is why there is such an uproar about top-15 draft pick contracts.

  6. Tom G says:

    With 660 starters and 1600 roster spots, there are a lot of areas where a team can find extra production. Finding several guys on the second day who will work for $8/hour, but still can lay more than 4 bricks per hour could make more of a diffence to a team than the one star in the first round

    Also, because there are so few truly great players and because the nature of the sport demands they make so much money, it is essential for a team to wait and use its resources only on the right ones, rather than whoever lands in their lap

  7. Jim Glass says:

    It’s not much different than CEO compensation. If a company is in competition with other companies for market share, the shareholders should want the best CEO they can get -- especially because a competitor with a slightly more visionary CEO will likely steal market share, even if your guy is still top-notch.Yes -- but there's a flip side that drives salaries up maybe even more powerfully even for CEOs who don't have an edge on the rest, but are "only" average.

    If your CEO is just a little bit less good than average, your company can be wiped out by all the competitors who have leadership that is just a little bit better.

    It happens in the business/finance world all the time. Companies can collapse a heck of a lot faster than they can grow. How much are you willing to pay to avoid that?

    Saving a buck can cost you 100% of what you have.

    In other words, it's not just "winner takes all" it's also "loser loses everything", maybe even moreso.

    I'm not sure how directly that translates into sports compensation ... but it sure matters with CEO pay.

  8. Anonymous says:

    I'm unsold on the CEO analogy from the get-go for a couple reasons:

    1.) A QB's play is his product. This is not neccessarily true of all CEO's e.g. an average CEO who is brought in (perhaps due to retirement of his predecessor) to run a company that already has a clearly superior product to the competition. He 'wins' without being the best and by definition is overpaid (has low value).

    2.) There are certain industries where poor CEO performance is de facto rewarded e.g. the airline and auto manufacturing industries for many years (and the banking industry in 2008) relied on federal government bailouts to rescue failing companies. That 'free' government money often allowed them to emerge even stronger than their competitors -- basically rewarding failure. I'm not sure you can justify some of these outrageous CEO packages with a motto of "my failure will be worth it" -- it would be like a terrible QB touting the first round draft pick he 'earned' you by losing so many games as justification for his contract.

    Finally, if the value of a QB vs. his compensation must be weighed in comparison to the contribution of the other 21 members of his team to the organizations success what of the CEO's (who's day-to-day activities often have very little to do with the actual work of the company i.e. he does not create or deliver the product . . . kind of like an armchair QB) to the cast of thousands doing the actual work?

  9. Anonymous says:

    If every company with a marginally better CEO definitively 'wipes out' all the competition in their business sector why are there so many poorly-run companies still around? Similarly, why would we still have Pepsi *and* Coke -- Miller *and* Bud? Shouldn't the company with the 'little bit better' CEO have 'wiped out' his direct competition by now?

    If one believes that the proposition that there are many poorly run companies out there surviving is false I have a list of companies (most of whom I've worked for) whose continued existence I'd like to have explained, lol.

    It just seems like a little bit of a 'halo effect' is being placed on CEO's here.

    To get back on topic, I think it's a poor analogy to athletics as most executives certainly don't get down into the mud and lead from the front in any discernible fashion in the way a professional athlete -- especially one in a premier position -- does.

    I believe Napoleon said that oftentimes it is not the most competent army which triumphs on the battlefield; just the least incompetent. If that's true than you can probably afford to pay your less-incompetent executive quite a bit less for similar results because, frankly, he could be doing better.

  10. Anonymous says:

    "Companies can collapse a heck of a lot faster than they can grow. How much are you willing to pay to avoid that?"

    Based on recent events you can spend an enormous amount of money and still not avoid it . . . which is why CEO salaries are under fire.

  11. Brian Burke says:

    Nobody's saying QB = CEO. I think CEOs and athletes are similar in that demand for their services are a function of their relative ability/potential and not their absolute ability. Plus, they cannot be replaced by combining the output of multiple less productive contributors.

  12. James Muraska says:

    If you can build bricks at twice the speed as your co-workers, you should be rewarded accordingly, although you won,t be. Can you build bricks twice as fast and do it correctly as speed and quality should be rewarded. I am a very good 52 year old bricklayer and do not believe I have ever been paid what I am worth since I began at 15 years old. I get paid the same as someone whom works half the speed and virtually no expeirence.

  13. Anonymous says:

    "... You cannot replace an All-Pro QB by sending two average QBs out on the field and expect the same productivity..."

    Case in point, Miami's wildcat.

  14. Anonymous says:

    looks like the "Hawks, Doves, and Home Field Advantage" link in "required reading" links here instead.

  15. Anonymous says:

    I've been fascinated by CEO compensation for a while now. I would like to see somebody come up with a VORP stat for CEOs. I think CEO performance is probably most valuable in a startup company situation and that most established companies could probably pay some smart low-level employee 100k/yr and get the exact same results as they would with their current CEOs. A few months ago the Wall Street Journal had an article about CEO compensation and a few recent studies of such. Like most studies written about in news articles, most of the relevant data was left out of the article so the reader has no idea if the study is valid or not.... but in the end it seems the studies fell back on the 'intangibles' and 'clutchiness' of CEOs being the justification of their pay. Pair this with multiple studies of upper-management and CEO IQ (which is not significantly above average) and you'll start to smell a rat. I think that most CEOs are being payed for the past performance of a few super-geniuses like Bill Gates and Henry Ford.

  16. Anonymous says:

    CEOs don't compare well - except maybe to NFL owners. Many of them get to set their own pay by naming their own compensation committee members - many of whom serve together as execs or board members at other companies - while making 500 times the pay of a line worker - and rarely getting laid off - even when costing the company millions with bad decisions. Taxpayer representatives bend over backward for company and stadium tax-breaks and subsidies. You can surely name other examples like free use of the company jets, yachts and homes. Players should get as much as they can - and then some. College players should strike for wages, healthcare and a share of the profits from ticket, jersey and video game sales.

  17. Anonymous says:

    CEO's performance is no where near as measureable as a football player of any position. In addition to the issue mentioned above that a firm already has a structure, SOPs, and a product or service, much of the success of a firm depends on external conditions. Think for example of an oil company when prices are historically high. Profits and thus bonuses (and thus salary) is determined in a way that has no parallel in sports.

  18. Unknown says:

    I would also add to this "Arms Race theory" (for lack of a better title). If you want to talk about the price of an F16 vs and F18 you can scale price based on abilities and how much "better" one is than the other.

    When we start talking about an F-22 Raptor, all that is out the window. You aren't paying for "how much better" is it. You are paying for the mere fact that it dominates. No one else has anything comparable, and thus you have a game changer that can dictate situations. (Side note: this is also why whiny comparisons of America's military budget are pointless. Yes we spend more. Its only costs a little for the #2 to be better than #3. It costs exponentially more to be the clear and decisive #1)

    Back to Football. Take RG3 (in 2012). You aren't paying for how much faster he is than the next guy. You are paying for the fact that he is SO freakishly fast that he dictates situations. In his case, RG3 forces linebackers to wait on a blitz, and forces defensive lineman to only rush on direction (outside) because an inside rush is no longer a viable option. That special weapon completely changes the rules of the contest. The next fastest guy does not. Thus the QB running a 4.7 is not all the much better than the QB running the 5.0, but the QB who just ran a 4.3/4.4 worth WAY more.

    Q: In a room full of knives, how much more is a gun worth? A: Any price

  19. scp1957 says:

    "The main argument is: Why should a rookie get so much money when he is unproven at this level, while veterans who have been proven at this level are earning the same amount or less?" -- Anonymous, 4/23

    In large part, for the same reason that specific formulations of gasoline sometimes diverge markedly in the American market, which is that the market isn't unitary. In actuality, they're distinct markets, even though the products are fungible OVER THE LONG-TERM. That's because they're also effectively perishable. Hoarding them for a better price isn't remotely practicable, so the supply/demand curves can fluctuate enough to have dramatic price differences.

    Here, there is a separate market for the newcomers. Hope springs eternal in the minds of fans and owners, desperation in those of coaches and GMs, and everyone loves that new car smell. The amazing thing was how the buyers in that particular market could be made to fall into line with their peers, however reluctantly. That, my friends, is a matter for psychologists.

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