When we think of money and college sports, we tend to think only about basketball and football. In fact, defenders of the excesses we see in those sports -- with respect to salaries to coaches and university expenditures -- argue that these sports are necessary to support all the other teams universities field. People often argue that outside of football and basketball, athletes in other sports don't generate enough revenue to justify their scholarships.
A recent paper by Leo Kahane (editor of the Journal of Sports Economics) challenges this line of thinking. Kahane's paper looks at college hockey, which will hold the Frozen Four this week in Tampa, Florida (really, Tampa). This is college hockey's championship, an event which doesn't get quite the same attention as the NCAA Final Four for men and women. (Perhaps also because people don't associate hockey with Tampa?)
Before I get to Kahane's study, let me just note a few items from the first paragraph of it -- which I think captures the essence of the college sports business:
- The NCAA generates a substantial amount of revenue. In 2008, the NCAA had revenues of $4.4 billion.
- This revenue is used to pay salaries to administrators and coaches: Coaches from the Football Bowl Subdivision -- or FBS -- have an average salary of $1.3 million; while the last NCAA President Myles Brand was paid $1.72 million.
- A college hockey coach -- Dick Umile of the University of New Hampshire -- is the highest paid state employee in New Hampshire
I would add that in many states one suspects the highest paid state worker is a coach of a college team.
How is this possible? As Kahane notes, the compensation of the people who generate this revenue -- student-athletes -- is heavily restricted. The restrictions -- as past research has indicated -- result in the underpayment of some student athletes (i.e. many are paid less than what they receive in compensation) and much higher salaries for other state employees.
Previous studies have already found evidence for underpayment in college football, men's college basketball and women's college basketball. Robert Brown, who pioneered this line of research, recently updated his study of college football in a paper presented at the 2011 meeting of the North American Association of Sports Economists. Brown's update indicated that in 2005, players eventually drafted into the NFL generated revenues for their respective colleges that ranged from $187,760 to $2.59 million.
Kahane's work applies this same approach to the study of college hockey. Specifically, Kahane's study examines how the revenue generated by college hockey teams is impacted by players who eventually are drafted by the National Hockey League (controlling for factors such as schools size, conference and team quality).
And here is what Kahane found:
Empirical results... showed that top-flight college hockey players generate between $131,000 and $165,000 in added revenues to schools. The NCAA reports that the average value of an athletic scholarship for 2008 is between $14,000 for in-state public schools to $32,000 for private schools (National Collegiate Athletic Association, 2010). This implies that a premium college hockey player generates rents in excess of $100,000 per year for the typical institution.
To put this result in perspective, Brown and Todd Jewell -- in the Journal Industrial Relations -- found that a future WNBA player generated between $38,000 and $400,000 for her respective college team. So it's not just football or men's basketball where we see athletes generating substantial revenues for their schools.
As Kahane notes, these revenues tend to find their way into the pockets of the coaches. To illustrate, Nick Saban -- head football coach at the University of Alabama -- recently signed an extension that will give him $5.62 million per season. Saban just led his team to the BCS championship. New York Giants coach Tom Coughlin also just led a football team to a major championship (the Super Bowl). He is finishing a contract that paid him $21 million across four years (signed after he won his first Super Bowl title), so Saban's contract with Alabama is comparable to the upper echelons of NFL coaching.
As sports economist Andrew Zimbalist has noted in the past, this doesn't make a great deal of sense. The NFL only has 32 teams sharing at least twice the revenue generated by all NCAA sports (the NFL generated about $9 billion in revenue in 2010, about twice what Kahane reports the entire NCAA generated in 2008). Not only does college football generate less revenue, there are far more teams claiming a piece of the pie (there are more than 100 FBS schools). So the revenue per team in the NFL dwarfs what we see at the college ranks. And yet, the salaries of top coaches in both places are similar.
How is this possible? Coughlin's players face far fewer salary restrictions. Consequently, Coughlin's pay -- as a share of organizational revenues -- is far less than Saban's salary.
And this should be remembered next time you hear someone with the NCAA tell us they cannot afford to pay the players. The coaches and administrators all financially benefit from this current arrangement. Given that people respond to incentives, we should not expect coaches or administrators to voluntarily give up their pay to compensate the people who make that pay possible.