Believe it or not, professional athletes are actually underpaid
- For a variety of reasons, perception doesn’t match reality when it comes to paying highly skilled sports stars.
In June, Forbes published its annual list of the world’s highest paid athletes. Of the top 25, nine are Americans employed by teams in the NBA or NFL. At first glance, $77 million in total income for LeBron James — he of the World Champion Cleveland Cavaliers and arguably the greatest basketball player on the planet — seems like a lot of money for someone who “plays” a game for a living. But as is often the case, things are not what they appear. In reality, James and many other athletes are actually wildly underpaid — specifically when it comes to their on-field salaries.
Please let that sink in for a moment.
James, who recently signed the first ever lifetime contract doled out by Nike — a deal that reportedly could pay him as much as $1 billion if certain shoe and apparel sales metrics are met — makes most of his money off the court. He made about $23 million to play about 100 games last season in Cleveland.
And he will be underpaid this season at about $31 million because that’s the maximum allowed under the collective bargaining agreement. Crazy, right? Not necessarily. I have provided investment advice and legal counsel to well over 500 professional athletes over the course of my career (over 100 All-Stars), and I have given this a lot of thought, so let’s explore some of the reasons why he’s underpaid.
First, we need to understand where sports fits into today’s society and how the industry has grown. Sports occupy unique cultural real estate and unify us in a way that nothing else does. No matter where we go, sports are inescapable. The industry gets exposure across all forms of media — 24/7 radio, TV, newspapers and the Internet. Sometimes this makes the industry appear much larger than it truly is. One recent study found that in 2013, the total revenue generated by all American sports (including college) totaled about $60 billion — good enough for about 60th place if it had been just one company among the Fortune 500 corporations. Because of the extensive media coverage, the business of sports feels a lot bigger than it actually is.
In the NFL, king of American sports, the Super Bowl is, for all practical purposes, a national holiday. The game’s broadcast is the most widely seen TV event every year, and about nine of the 10 most-watched other programs during the year are NFL games. The NBA and Major League Baseball are also enjoying record-setting TV contracts.
Sports are cross–cultural in a way that virtually nothing else is. Sports fans have no one demographic. They are rich, poor, Democrats, Republicans, men, women, and people of all ages; fans exist across the entire spectrum of our society. From the perspective of TV producers, the pro sports heroes are the ideal reality TV stars, and the games are the perfect product. The results are unknown, so gambling is huge, and most people want to watch live so it’s much harder to zap the commercials.
Many of these factors account for just how valuable team franchises have become over the last half century or more. In 1950, the Boston Celtics founder sold a minority interest in the team for a rumored $5,000. Today, the franchise is estimated to be worth at least $1.5 billion. (For what it’s worth, that investment has grown some 21 percent per year, compounded, for 65 years. Uninterrupted. Not bad!)
When former Los Angeles Clippers owner Donald Sterling was exposed for making racist comments, his fellow NBA owners rightfully publicly decried his conduct, but I imagine behind the scenes they were cheering. They knew a sale of the Clippers would generate a huge price, but most of them were still surprised by the blockbuster $2 billion bid eventually made by Steven Ballmer. By acquiring the Clippers for such a staggering price, Ballmer increased the value of each and every other team in the NBA and most, if not all, other pro team franchises in the U.S. The players, of course, shared in absolutely none of that bonanza. In addition, their bargaining power is always been restricted by the drafts which are not about competitive balance, but rather cost-containment for the owners.
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The athletes are paid — and by most standards rather handsomely — to perform services for a few years. Just do the job, cash the paychecks, and then when their short careers are over, move on. There is a widespread perception that professional athletes simply play; that they don’t work. Most people, constrained by their own experiences, fail to understand what it actually takes to succeed at the most elite level of sports competition. They reject the notion that what they do for recreation is in fact work which requires just as much dedication, effort, skill, and sacrifice as a normal person’s profession. Collectively we tend to view sports as fun and not work, and fail to understand how uniquely skilled the athletes are.
In a country of about 320 million people, there are only a maximum of 450 active NBA players at any given time during a season. That’s just about 0.00014% of the population, if you’re keeping score at home. In the NFL, on account of the larger 53-man rosters, it’s about 0.00053%. Even limiting the talent pool to age-appropriate adults, not very many people will ever find themselves playing on professional sports teams.
This tells us that “professional athlete” is one of the rarest job titles a person can hold. And at the highest levels of any given sport, the greatest players are even more precious and rare. In fact, they are irreplaceable.
Which brings us back to LeBron James. Let’s compare his unique contribution to those of David Letterman. Letterman is a skilled performer who was reportedly paid some $28M per year by CBS before he retired from late night TV. (Just about the average of James’ NBA salaries this season and last.) A few years ago, when Letterman fell ill unexpectedly, CBS brought in various guest hosts on short notice to fill in for him. The network got through it with little difficulty.
The Cavaliers without James for an extended period of time? Such a loss would be — and has been, as seen when James left for Miami in 2010 — catastrophic for the franchise, on and off the court.
Still, there will always be those who say that professional athletes should thank their lucky stars for what they have and any talk about them being underpaid is pure hogwash. Sure, compared to teachers, lawyers, doctors and just about anyone else they are overpaid, but not when compared to TV, movie and music stars. The players, pure and simple, are TV stars, and their compensation should reflect that. The contract that will kick in for the NBA and its owners in the 2016–17 season pays about $2.6 billion per year in revenue (up from about $950 million). When revenue triples, the players should (and do) share.
NFL contracts often look much bigger than they truly are. Most are not guaranteed; a player can be released without pay beyond the current year. A five-year, $100 million contract may be signed when both the player and the team know that a significant number of the years will never be played and the compensation for those years will never be paid.
Contrast that to MLB contracts, where most of the long-term deals are guaranteed. But those long-term contracts are not required until the player is eligible for free agency, which can only occur after the equivalent of at least six full seasons in the majors. A second-year All-Star can be paid just above minimum salary.
Professional sports revenues are rapidly increasing because of the seemingly insatiable appetites for unique TV programs. Pro athletes are the stars of those shows, and TV stars get paid a lot. Judge Judy makes about $45 million per year. The voice actors for The Simpsons earn about $60,000 for each hour they actually work. If they worked a normal full-time job, that would be about $120 million per year. Sandra Bullock earned $77 million for one picture, Gravity, while Will Smith made $100 million for Men in Black 3.
Let’s consider how unique and irreplaceable many of the athletes are and take account of all the restrictions placed on their bargaining ability. Then we’ll understand why, when compared to other entertainers, many of the top athletes are underpaid.