Performance Pay in Pro Sports

1.5 Credits · Level: Undergraduate

How do you motivate a professional athlete to maximize effort while managing injury risk? How do you reward individual excellence without undermining team play? This course teaches students to design effective incentive compensation plans by selecting appropriate performance measures and structuring contracts that align the interests of athletes and teams. Students begin by analyzing why incentive compensation exists and what makes it effective or ineffective, using real athlete contracts as case studies. Next, they learn frameworks from economic theory—particularly agency theory, moral hazard, and performance measurement—that explain compensation design decisions. Students then examine the evolution of performance measures, tracing how MLB, NBA, and NFL teams transitioned from traditional statistics (batting average, points scored) to advanced analytics (WAR, PER, EPA), and analyzing why certain measures succeed while others create perverse incentives. In the final weeks, students integrate these concepts to design complete compensation plans, balancing multiple objectives (individual performance, team success, injury management) within real- world constraints (salary caps, collective bargaining agreements). The course emphasizes the unique challenges of performance pay in professional sports. Performance is highly observable yet multi-dimensional; contracts are subject to salary cap constraints; careers are short; and injury risk is substantial. Students will develop expertise in choosing performance measures based on measurability, controllability, and strategic fit; structuring risk-sharing between teams and players; designing multi-dimensional incentive plans; and understanding how league rules constrain contract design. These skills apply broadly to compensation design in any organization that measures employee performance.