The Top-Paid US athletes

Sports Illustrated released its annual listing of top-paid athletes today. For some, the findings are no surprise. For example, Tiger Woods holds on to the top spot, raking in more money than Phil Mickelson, LeBron James, and Floyd Mayweather Jr (ranked second, third, and fourth) combined. Also, NBA players made up 26 of the top earners (counting Amaré Stoudemire who was mistakenly listed as a baseball player).

However, the data leads to some interesting findings. Here are three observations:

The difference between low salary and high salary was small ($24.7 million, with a mean average of about $16.1 million and a standard deviation of $5.1 million) compared to the differences between endorsements (with a range of $104.9 million, a mean average of about $9 million and a standard deviation of $16.8 million). So while these top athletes’ salaries are relatively uniform, the amount of endorsement money they get is not.

This is illustrated more clearly in the following table.

The range in players’ endorsement money isn’t that surprising. What is more interesting is the relationship between race and endorsement. In a 1996 New York Times article David Falk, Michael Jordan’s agent, said “Very few companies call for athletes, and even fewer call for black athletes.” To see if that still held true, I divided the top 50 earners into two categories: Caucasian in appearance or not Caucasian (the second category includes Hispanic athletes like Alex Rodriguez). What I found was good news for those of us who hope for racial equality in sports: the mean salary for the Caucasian group was smaller than that of the non-Caucasian group. ($8.7 million vs $9.2 million). Moreover, when the top-sponsored athlete was removed from each category (Tiger Woods and Phil Mickelson) the sponsorship dollars still favored the non-Caucasian group ($5.9 million vs $6.1 million).

The above numbers seem to show that the business of sports has lost some of its racial baggage, since endorsements and salaries are higher for non-Caucasian athletes. But that’s not the whole story. If we start with the premise that salaries are a good indication of a player’s worth to a team, at least within his league (and I use “his” because a woman hasn’t yet broken the top 50 mark for earnings), then it should follow that the more talented athletes should rake in the greater share of endorsement dollars. But a closer look at the numbers shows that Caucasian and light-skinned athletes make more sponsorship money as a ratio of their salaries than non-Caucasians. Just look at the chart.

The ratio here is endorsements/salary, so a higher ratio indicates a greater amount of endorsement money over salary money. What we see is that, on average, a greater percentage of the Caucasian group’s total earnings come from endorsements. For an example of this, take two NBA players: Jason Kidd (white) and Jermaine O'Neal (black). Both make an identical salary, yet Kidd pulls in exactly twice as much money in endorsements.

Fifty data points is still a relatively small sample size, and the salary indicators point to an equal playing field, but these numbers should be a reminder to sponsors who use athletes in their marketing that the disparities that David Falk bemoaned may not have disappeared.

Economics of the Final Four

March Madness is starting soon, with Conference Championships ending on Saturday and Selection Sunday coming the day after. The post-season NCAA tournament is good news for fans, great news for the 65 teams that compete, and fantastic news for CBS. But is it a good deal for the host cities of the Final Four?

The answer seems like it would be an emphatic “Yes,” but in the book The Economics of Sports (2004), Robert Baade and Victor Matheson argue that promoters overstate the economic benefits of the Big Dance. Accordingly, they maintain that in only two of the 48 men’s and women’s tournament finals before 2004 did the host city experience significant positive income growth.

In the separate Handbook on the Economics of Sports (2006), Baade again argues that the NCAA Tournament (along with other “mega-events” such as the Olympics, World Cup, Super Bowl, etc.) fails to generate the expected income because of costly government subsidies (such as stadium financing and infrastructure), security expenses, operating costs, and the likelihood that a counterbalance to the gross spending of visitors occurs when residents not attending the event decrease spending because of local price increases and their desire to avoid venue congestion. On top of that, multiplier analysis can be used to estimate the amount of money retained locally. In Economics of Sport and Recreation (2000)Chris Gratton and Peter Taylor estimate that only 20 percent of additional visitor expenditure is retained as additional local income.

On the flip side, it’s easy to see why cities line up to host the Final Four. Besides the public relations benefits and the opportunity to attract visitors who may be coming to the city for the first time, host cities also make real money. In 2006, Indianapolis hosted the Final Four and reported an economic impact of $40 million, not including direct spending from media or corporate sponsors.

Maybe this year San Antonio, the host of the 2008 Final Four, will strike it rich. But my guess is that when the dust settles and they’re counting media and visitor spending revenues, it might be harder than they think to balance their checkbook.