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David Berri

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What Sports Illustrated Didn't Tell You About Paying College Athletes

Posted: 11/11/11 08:05 PM ET

So far, the biggest game of the 2011 college football season was when the Alabama Crimson Tide hosted the LSU Tigers. The game featured the top two ranked college football teams and was played before a sold-out stadium. It was also watched by 11.5 percent of all households on national television.

Without a doubt, such an event generates substantial revenues. But the people who everyone came to see -- the college athletes on the field -- were prohibited from receiving this revenue. This prohibition comes from the NCAA, which has decided that college athletes must not be paid for their work. It's certainly seems okay for the NCAA to promote these athletes and generate as much revenue as they can from their efforts. But if these athletes try and take some of the revenue they generate -- as Cam Newton's father tried -- then this is a huge scandal and clear evidence that the athlete doesn't know right from wrong.

Sports Illustrated, -- in the November 7th issue -- made an effort to correct what seems to be an obvious injustice. In "Pay for Play", SI writer George Dohrmann presented a "feasibility model" designed to see if there is any money available to pay college athletes. Unfortunately, Dohrmann's approach is flawed from the outset.

Early in the article, Dohrmann makes the following two statements:

The vast majority of athletic departments do not generate enough profit to pay athletes. The fact is the majority of schools would need to cut expenses significantly to pay athletes even a nominal amount.

Thinking back on the LSU-Alabama game, one wonders how this is possible. It certainly looked like large numbers of people paid to watch the game. And certainly there was some sort of fee to broadcast the game on national television. Where did all this money go?

To Find the Money, Look at the Sidelines

One obvious place to look is the people walking the sideline. In 2009, Nick Saban signed an extension that increased his pay to more than $4 million per season until 2017. In January of 2011, Miles also signed an extension that maintained his average salary of $3.75 million across an additional three years.

Economist Andrew Zimbalist -- in an article published in 2010 at the Harvard Business Review -- notes that it is not unusual to see football coaches in the Football Bowl Subdivision (FBS or formally Division I-A) paid extremely well. As Zimbalist notes,

... virtually every head football coach in the FBS -- including those of perennially losing teams -- earns more than $1 million, plus lavish perks and the potential for significant outside income.

One might argue that this level of pay reflects market forces. Zimbalist, though, finds this argument less than compelling. According to Zimbalist, there are five reasons -- yes, five -- why the salaries of coaches DO NOT reflect free market forces. As Zimbalist argues...

... collegiate athletics market forces are artificially influenced by several factors: (a) no monetary compensation is paid to the workforce, the athletes; (b) intercollegiate sports benefit from substantial tax privileges; (c) there are no shareholders demanding dividend distributions or boards demanding higher profits; (d) athletic departments are nourished by university and state financial support; and (e) coaches' salaries are negotiated by athletic directors whose own worth rises with the salaries of their employees.

These forces result in a level of pay for coaches at the college level that cannot be explained by the level of revenues generated by the college teams. Again, we turn to the words of Zimbalist:

The outsize pay packages defy one of the central principles of a competitive market. College football and basketball coaches earn, on average, almost the same amount as their NFL and NBA peers, although college programs generate a fraction of the revenue of professional teams. The top 32 college football programs bring in $40 million to $80 million, whereas NFL teams generate an average of about $230 million. The disparity is even greater in basketball, where the top 30 Division I teams average about $15 million in revenue, one-tenth the average NBA team revenue of approximately $150 million.

Zimbalist's work makes it clear that college coaches are paid beyond what one would expect from a reasonable examination of the revenue the coaches generate. And it is obvious why this is possible. In college sports, the workers -- or the players on the field -- are not paid.

Of course, players do receive a scholarship. However, published research -- from Robert Brown and R. Todd Jewell -- makes it clear that at least some players are worth far more than the scholarship the players receive. These two economists estimated* the amount of revenue created by a premium college football player in 2004. This estimate - utilizing data from the mid-1990s -- suggested that a college football player who is ultimately drafted into the NFL will create more than $400,000 each year he plays college football. And again, this is an estimate based on data from more than a decade in the past. Today it must be the case that elite athletes are worth much more.

The NCAA, though, has passed a rule that every firm would love to pass. Workers cannot get paid! And that means the revenues the players generate are free to go someplace else.

A Free Market Approach to the Pay of College Athletes

Of course, Sports Illustrated claims there is no way to pay athletes what Brown's research indicates they are worth. After all, college athletics doesn't generate a profit. The problem with this approach is that decision-makers in college sports don't have much of an incentive to generate profits. Any revenue that comes into these programs tend to be spent on enhanced living facilities for student-athletes, better weight rooms, expanded stadiums, and yes, salaries to coaches and athletic departments. Much of this spending doesn't necessarily lead to better outcomes. And if the NCAA market was a free market -- where economic losses led firms to go to out of business -- much of this spending wouldn't happen.

And this leads one to wonder: What if the NCAA was a free market?

Then the Cam Newton "scandal" would be the norm. Elite players would do what every worker does in the labor market. They would sell their labor on an open market and accept the offer they deem to be "best".

Should there be a limit on this compensation? Well, is there is a limit on your compensation? And is there a limit on the compensation received by the coaches? Of course not!! That's not the nature of a free market.

Now a free market approach doesn't necessarily mean all players will be paid beyond a scholarship. Many athletes -- especially those in sports other than football and basketball -- do not generate much revenue. And those athletes in a free market would be treated in the same way universities treat music students or those receiving academic scholarships. But for the elite players -- or those generating the wins and revenue that make the pay to coaches and others possible -- a free market approach will lead to higher wages. And, of course, this approach means that coaches will ultimately get less (which tells you why coaches do not seem to spend much time advocating a completely free market approach to athlete compensation).

Dohrmann does argue that if players were paid, the teams with the money would sign the best players and competitive balance would suffer. Again, the data tells a different story. A few years ago, economist Jim Peach looked** at competitive balance in college football and found that from 1950 to 2005, 50 percent of the top 8 finishes in the AP final poll were claimed by just 12 different schools. Similar stories were told in basketball, baseball, and women's softball. In other words, the NCAA currently doesn't have much competitive balance. And paying players is not going to change this reality.

Paying the players that generate the revenue, though, is the right thing to do. When
that happens, some of the problems associated with college football will go away. And when that happens, maybe fans of the game can spend a bit more time talking about the game; and less time wondering if the players they enjoy watching are really breaking a rule that the fans would never accept at their place of employment.

*Brown, Robert W. and R. Todd Jewell. "Measuring Marginal Revenue Product of College Athletics: Updated Estimates," in Economics of College Sports, edited by Rodney Fort and John Fizel (Westport, CT: Praeger Publishers, 2004).

**Peach, Jim. "College athletics, universities, and the NCAA." The Social Science Journal, 44, (2007): 11-22