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First, some fun NBA facts:
Good money if you can get it.
Even so, some players are underpaid.
Take LeBron James, who is on a two-year, $99,023,288 contract with the Los Angeles Lakers. Is LeBron “worth” $49 million-plus a year? The Lakers didn’t win the championship last year, or the year before. Preseason rankings predict they’ll finish third in the Western Conference this year.
If winning a championship is the metric – compared with, say, Nikola Jokic and his “meager” $47 million per year salary – you might consider LeBron overpaid.
But then there’s this. According to research conducted by US Naval Academy economics professor Scott Kaplan, LeBron’s economic value – and, to use another example, Steph Curry’s – to the league as a whole far exceeds their salaries.
One example? Ticket sales: Prices decrease by an average of $73 when LeBron doesn’t play away games.
Then dive a little deeper.
The salary cap limits the amount any player can make. The collective bargaining agreement also stipulates the minimum amount a player can make. As a result, top players are often paid lower than market value: according to Kaplan, the ratio of actual to expected salary is 2.8 percent to 56.9 percent.
Again, the metric is economic value generated, not wins or statistics on the court. Player popularity is also a key factor. Jokic won the MVP award two seasons ago, Joel Embiid last year, but neither are as big a draw as LeBron or Curry.
Which means neither generates as much economic value – ticket sales, merchandise sales, etc. – as LeBron or Steph. On the flip side, players making the minimum salary could be considered overpaid, since their on-court and economic value is marginal and highly fungible.
Add it all up, and some superstars are worth more.
Which leads to the more important point, especially to you.
When I was a manufacturing supervisor, Robbie was our most productive employee by a sizable margin. He was also rough around the edges. Sometimes surly. Often grumpy. Unwilling to lead, less willing to follow. Evaluated on any other attribute besides production, he was below average.
But he ran the (crap) out of his equipment, and that’s all I really cared about. Production generated economic value. Everything else – interpersonal skills, teamwork, communication skills, attitude, etc. – was, in his role, largely irrelevant.
But I could never get him a merit raise since he didn’t meet all the criteria for an “outstanding” employee.
We weren’t paying him enough.
And when he left, our bottom line took a hit that far exceeded the extra dollar or so an hour that would have kept him.
Now consider sales. Is it possible to pay a superstar salesperson too much money?
Generally speaking, the answer is no – unless you also think your business can make too much money. Applying an arbitrary constraint like capping sales commissions, or limiting the total amount a salesperson can earn in a year, often does more harm than good.
But lots of businesses do, like an entrepreneur I know who owns a $20 million company.
“After a salesperson reaches $80,000 in earnings we apply a sliding scale to commission rates,” he told me, “and we cap any salesperson’s total income at $95,000 per year.”
“Why?” I asked.
“Because that’s fair compensation for the job they do,” he replied.
“Maybe so, but isn’t that shortsighted?” I asked.
“Absolutely not,” he said. “Shortsighted would be allowing salespeople to make more than our top executives.”
“But if a salesperson sells more, doesn’t your company make more?”
“Yes,” he replied. “But there still should be limits to what salespeople can make.”
No, there shouldn’t be limits. Not if pay is based on performance.
Say you pay a 10 percent commission on sales. A salesperson who generates $500,000 in sales earns $50,000. You’re satisfied with $500,000 in sales because it makes your operating budget work, but you’d really like $700,000 and would be happy to pay $70,000 in commission.
But what if your top salesperson generates $1,000,000 in sales? You love the impact $1 million makes on your top line, but paying a salesperson $100,000 makes you feel a little queasy, especially if that amount is near (or over) what you make.
“Wait,” you think. “I’m running this place. I have the most responsibility. Why should she make more than me?” Then you think some more.
“Plus, we simply can’t afford to pay a salesperson $100,000. That’s crazy. So we should cap total compensation – or, better yet, drop the commission rate to 3 percent after $700,000 in sales, and 1 percent after $800,000.”
And at that point, you’ve lost the plot.
Not only can you afford to pay a 10 percent rate on $1,000,000 in sales, but in reality you can afford to pay more than 10 percent.
Your fixed costs – and some of your variable costs – are less a part of the equation since they’re spread across higher revenue.
Incremental sales are more profitable because they’re largely offset by direct variable costs: product costs, shipping, sales commissions, etc. If your business nets 20 percent on $500,000 in sales, generally speaking it should net even higher margins on $1,000,000 in sales.
That’s why you can afford to pay sales superstars more, not less. When sales pay is based on performance, too much is never enough.
Eliminate arbitrary constraints, especially constraints based on emotion rather than objective analysis, and pay your top salespeople more.
Pretend the NBA doesn’t have a salary cap. Should LeBron be paid more even if he doesn’t lead the Lakers to a championship?
In terms of economic value generated, absolutely. He generates more ticket sales, and higher prices, than nearly any other player. He sells more merchandise. He generates more publicity for the league as a whole.
If you’re a fan, you might not care about those things; you only – rightfully so – care about a superstar’s on-court performance. That’s your metric.
But if you’re a team owner, you care a lot about those things, because because it’s your business.
Just like your business is your business.
So pay your superstar employees more.
Because, when you look at what truly matters – and at the value they truly provide – they’re definitely worth it.