Supply and demand rule the market place when salaries are set

By DAVID MOON, Moon Capital Management
December 17, 2000

Eight days ago, Colorado Rockies pitcher, Mike Hampton became the highest paid professional athlete, after signing an eight-year, $121 million contract. Three days later, Hampton became a footnote, when Alex Rodriguez signed a $252 million deal with the Texas Rangers. After buying my five-month old son a baseball glove and signing him up for the Rod Delmonico summer camp, the next thing to decide was which of the different angles to this story deserved comment:

  • Public financing of sports stadiums subsidizes players' salaries and owners' profits.
  • George Bush was an idiot for selling the Rangers three years ago for $250 million - the size of Rodriguez's contract.
  • What happens to these sports franchises if the demand for skyboxes ever softens?
  • Who in the world are Mike Hampton and Alex Rodriguez, anyway? I never heard of them.

But the real story is about compensation. Relative compensation. What are these players actually worth? Apparently, Texas Rangers owner, Tom Hicks, thinks Rodriguez is worth about $25 million a year. Hicks should know best; Rodriguez works for him.

But how can a guy who plays a game - the same game many of us played for free as kids - how can that guy be worth more for each at-bat than the annual salary for a starting school teacher in Knox County? The importance of the school teacher's job infinitely exceeds that of a pro athlete. How can society justify the relative compensation of the two professions?

Because the price (salary) of an employee depends on the same factors that drive the price of everything else: supply and demand. There are few people who throw a curveball and even fewer who can consistently hit one. If you are not satisfied with the pay of your current position, you ought to get a new job. If you don't like working at the Waffle House, you can go to Shoney's. Or you can go to medical school and become a doctor. But moving from the Waffle House to pitching for the Colorado Rockies just isn't a choice. There are 435 NBA professional basketball players in the entire world. Of all of the people who ever shot hoops or dreamed of dunking over Wilt Chamberlain, there are only 435 of them capable of working in that industry today. As long as anyone in this country is interested in watching basketball on television or in person, those 435 guys will make much more money than a police officer - a person who risks his or her life each day for strangers!

This is not new. Since the days of gladiators, court jesters and outdoor thespians, society well compensates people with popular - and rare ' skills. The strong economy, increased television revenues and trend toward public financing of sports facilities merely exacerbates the effect.

Both James Taylor and I play the guitar. His pay is hundreds of thousands of dollars an evening; I would have to pay my friends to listen to me. Taylor has a skill matched by few people on earth. Fortunately for him, people enjoy his skill and are willing to buy CDs and attend concerts. Is James Taylor performing a societal service as important as the emergency room nurse who saves lives every evening? No way. Our society produces many more professional nurses than professional guitarists, so the financial odds are stacked against the nurses.

In fact, in many ridiculously high-paid professions, there is a genetic limitation on the number of people who can enter the profession. Who is more important, your CPA or Shaquille O'Neal? But who makes more money? Unless your CPA is 7'1", weighs 315 pounds and can run, the Lakers are not going to call him. There are plenty of teachers who might have chosen to be doctors - and been good ones. Many accountants might have otherwise chosen to be doctors or television reporters or hair stylists. But there are few accountants who could have chosen to be NBA centers or NFL defensive linemen. It is supply and demand at work.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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