One day after Jim Harbaugh was fired by the NFL's San Francisco 49ers, he signed a seven-year contract to coach at the University of Michigan. According to the Michigan Athletic Director, Harbaugh will be paid a guaranteed annual salary of $5 million, plus healthy bonuses for team success, a $2 million signing bonus and an unspecified amount of deferred salary. The AD said Harbaugh's compensation package is similar to what he got from the 49ers.
How can it be that the head coach of the University of Michigan Wolverines is paid the same as the head coach of the San Francisco 49ers? The 49ers, after all, have yearly revenue in excess of $300 million. The Wolverines' revenue is closer to $90 million. Can the coach's incremental value really be similar in the two cases? No.
Here's what's happening. Eighty-five of the athletes on the Michigan football team receive a full-ride scholarship, on average worth around $40,000 a year. (There are another thirty or so "walk-on" athletes who receive no scholarship.) According to various estimates, the top players on the best college teams have a market value well over a million dollars.
Since the athletes can't be paid, they are recruited without explicit financial incentives. Rather, the coach or his assistants makes a pitch to most promising high school footballers based on the college's reputation, its facilities, its national exposure and its likely performance. A significant part of its exposure and its performance is expected to be related to the coach's renown.
Thus, the Jim Harbaugh's, the NIck Sabin's, or the Urban Meyer's of the college football world have an advantage in recruiting the best high school players. The coach's reputation is a part of the currency (in lieu of dollars) that is used to build a leading college football team. And, hence, the coach's salary reflects the value of the athletes he brings to the school (who are not allowed to be paid.) The salary is then further boosted by two other artificial, extra-market factors: university and state subsidies to intercollegiate sports (the median operating deficit of FBS athletic programs is over $11 million) as well as a variety of federal tax preferences.
The solution is not to pay the athletes (though they deserve better benefits and fewer arbitrary restrictions.) The solution is an antitrust exemption that would allow the NCAA, or another governing body, to set a limit on coaches' compensation. There is no reason for college coaches to be paid for value produced by the players.
What would happen to the quality of college football if there were a salary limit that stipulated coaches could not be paid more than, say, three times the national average salary of full professors? Absolutely nothing. The reason is that the best alternative employment for the top college coaches, in almost all cases, would pay less than $450,000. A few might go to the NFL, but they would replace NFL coaches who would then become available at the college level.
So the talent pool of college coaches would be unaffected by such a salary limit. Colleges would save a few million dollars on the head coach, but there would be more savings from downward pressure on the compensation of the assistant coaches (who together cost $2 to $5 million annually at the top fifty programs) and of the athletic directors.
More money for athletics means less for academic excellence. Between 2005 and 2012 the average salary of head football coaches at the top 25 football schools increased over 60 percent, while the average college spending on academics per student dropped by two percent. If we are serious about maintaining the historical excellence of higher education in the United States, and the competitive economic benefits it yields, then we must take a careful look at the illogical, inefficient and harmful resource diversion engendered by college sports.