Friday, January 07, 2005

Cult of the CEO II: Coaching Edition

by Tom Bozzo

Brayden King's expanding series on the institutional underpinnings of executive pay now takes a bit of an anguished fan's diversion into the wild world of sports [economics], in which Brayden's beloved (but 2-14) 49ers may attempt to solve their ailments in part by poaching Southern Cal's head coach Pete Carroll with an industry-leading pay package.

For NFL coaches, industry-leading pay involves a salary in the vicinity of $5 million. This would exceed the total coaching budget of the team with the lowest-paid coaching staff, which will visit the more-or-less frozen "tundra" in the wild-card playoff round on Sunday afternoon. Could this be rational?

The Washington Post, noting that the Redskins' defensive coordinator is a possible candidate for the job, reports that Carroll is not interested. Could that be rational?

The second question strikes me as the easier one, at least as a matter of principle, and I'd offer a provisional yes. Total annual compensation for top college football coaches can exceed $2 million (1), and at least some of them appear to have job security rivaling that of the tenured faculty. (C.f. Joe Paterno's latest contract extension, which would keep him in business through his 81st birthday.)

Not that $3 million isn't a lot of money, but given diminishing marginal utility (2), it may not be enough pecuniary incentive to give up the marginal benefits of the combination of job security, being worshipped by (at least some?) players, and getting one's ass kissed by guys administrators with Ph.D.'s from elite universities, when you're already pulling in seven figures.

I hope to offer a few comments on Brayden's thoughts regarding the more intricate first question later, though my hungry toddler and crying infant contstraints will push this into the weekend. As a partial preview, I'd note that part of what drives compensation offers in contract theory is the role of a "participation constraint," which in elementary mathematical models can appear as a preference parameter that is magically dropped into the analysis, but in practice must be determined in part by the market via the value of one's next best opportunity.

Edited to remove a couple sets of scare quotes that would have made this post rival certain fine dining "menus." (Two steps forward, one back.)


(1) Much of that comes from endorsement deals and the like. UW head coach Barry Alvarez, for instance, draws "only" $500,000 of his reported ~$1.3 million annual income directly from the UW budget, according to the endlessly fascinating UW system Budget Redbook.

(2) Given the title of the blog, a handful of visits here arrive via Web searches pertaining to utility theory, and this may be the first time diminishing marginal utility has actually been mentioned in context here.
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