Work Incentives and Salary Distributions in Major League Soccer

Abstract

Economists have argued that the size of superstar contracts in professional team sports may not only anger veterans on the team, but also adversely affect overall team performance (see, for examples, Wiseman, F., and Chatterjee, S. (2003). Team Payroll and Team Performance in Major League Baseball: 1985–2002. Economics Bulletin, 1(2), 1–10 and Sommers, P. (1998). Work incentives and Salary Distributions in the National Hockey League. Atlantic Economic Journal, 26(1), 119). Where team performance requires considerable cooperation among players, pay tends to be compressed relative to individual marginal products. In contrast, where team performance relies heavily on individual stars, pay among players may be more widely dispersed. (A standard reference on optimal pay structure is E. Lazear, Personnel Economics, 1995.) In professional soccer, cooperation and teamwork are essential. But, is pay relatively more dispersed among players on the more successful teams? This note examines the relationship between payroll and performance in Major League Soccer in 2011 and 2012. Beginning in 2007, Major League Soccer (MLS) adopted the “Designated Player Rule.” The rule initially allowed each MLS team to sign one player, with only $400,000 of the player’s salary (however large) counted against the team’s salary cap. The rule was dubbed the “Beckham Rule,” after Los Angeles Galaxy soccer star David Beckham, who was the first player signed under this rule. Beckham’s base salary in 2007 was $5.5 million (at a time when the team salary cap was $2.1 million). In 2010, each MLS team was allowed two designated players; teams could even sign a third designated player, if they paid a $250,000 luxury tax. The rule has thus enabled well-heeled MLS teams to sign lucrative deals with international stars, while dramatically changing how some team payrolls are distributed among team members. To determine whether or not greater income disparity among players resulting from the “Beckham Rule” has had any effect on overall team performance, Gini coefficients Atl Econ J (2014) 42:471–472 DOI 10.1007/s11293-014-9432-4