Last February, Neil Barofsky, the former Special Inspector General of the Troubled Asset Relief Program (TARP), published a book (Bailout-How Washington Abandoned Main Street While Rescuing Wall Street) detailing his experience in both the Bush and Obama administrations. Within that book is a story of how AIG executives – who led a company that needed billions in government money to survive – were paid performance bonuses in 2009. Barofsky protested the payment of these bonuses, but was essentially told by people in the Treasury Department (as Barofsky put it): “If a Wall Street executive was contracted to receive a $6.4 million “retention” bonus, the assumption was that he must be worth it.”
In reading this story, it occurred to me that the study of sports and economics might help people see why the Treasury’s position on these bonuses was somewhat misguided. And the telling of that story is my latest post for Freakonomics (and Huffington Post).
The study of sports and economics often takes advantage of the large quantity of worker productivity data that sports provides. And the study of this data reveals:
- if you have enough data, worker productivity can be measured
- the operative word, though, is “can”. For much of the history of baseball and basketball, the data has not been well understood. Consequently, workers were not always paid what they were worth.
In addition – and this was not noted at Freakonomics – bargaining power also matters. For much of the history of North American professional team sports, veteran players had no free agency rights and consequently such players were often paid less than what they were worth.
Now consider the market for Wall Street executives. In this market we don’t seem to have data for the productivity of individual workers. And without this data, how can we know these individuals are paid what they are worth?
So it is possible that the folks at the Treasury department were correct. But the study of sports tells us that we probably do not have enough information for these folks to be sure the executives were being compensated “correctly.”
And we should extend this lesson beyond Wall Street executives. People are often sure that wages paid reflect a worker’s actual productivity. But the study of sports tells us that we should be cautious. People might indeed be paid what they are worth. But before we jump to this conclusion we should ask a simple question: what are this person’s “Wins Produced”? If you can’t answer that question (because you can’t measure productivity), then you can’t be sure that market wages truly reflect a person’s contribution.