Learning from Teixeira’s $180M contract

I’m no big baseball fan, but, living in New York, it’s impossible not to notice the eye-popping $180 million contract Mark Teixiera just signed with the NY Yankees.

I’ve heard fans grumble about this in the context of rising salaries for sports mega-stars, but I think the frustration is generally misplaced. Financially, there’s a big difference between being an OK sports team with a .500 record or a team that wins the World Series (or Superbowl). So, without digressing into all the wonderful analysis in Moneyball (Michael Lewis’ best book by far, in my mind) – which showed how baseball teams could be very successful without marquee players – let’s take as a given that in sports, giving a star player a piece of the “winner take all” pie might make sense.

One step removed from this is the private sector, where CEO pay is supposed to be linked to performance. An interesting tidbit I hadn’t heard yet was in Robert H. Frank’s “Economic View” column on capping CEO pay in the NY Times, where he noted that one reason for the ballooning of CEO pay is that “companies themselves have become bigger…[and] CEO compensation at large companies grew sixfold between 1980 and 2003, the same as the market-cap growth of these businesses.” [Translation: the companies are 6x as big, they earn 6x as much, and the CEOs pay is 6x bigger]

There are about 1,000 holes you could punch in this argument, but bear with me for a second…

One of the central questions for the nonprofit sector – as batted around most recently in the discussions of Dan Pallotta’s new book Uncharitable – is whether compensation levels are too low.  And here’s where I think the discussion gets interesting: what if teachers, nurses, and nonprofit professionals provide an economic value to society that’s much greater than their compensation?  If so, society is systematically under-investing in the “preventative medicine” that could lead to outsized return on investment.

So here’s the idea: what if we did a better job quantifying the positive impact of things like a kid who goes to college instead of ending up on the streets; someone who ends up with a productive, paying job instead of on welfare; a person who kicks a drug habit instead of staying a junkie on the street? No doubt you could round up a set of econometricians to quantify the social value of each of these outcomes just like you can figure out that the Yankees will make a few hundred million more in profits if they win the World Series.

If so, why couldn’t you take this pool of capital (“potential social value”) and offer it up as:

• An incentive payment to staff (an “social equity kicker”) if certain targets are met
• A block grant of government funding that is given to the organization that delivers a set of desired social outcomes?
• A challenge grant to be matched by philanthropic capital against a specific problem

I know that some of these ideas have been tried, and others would be hard to implement without distorting outcomes or gaming the system. But I don’t hear a lot of talk about quantifying the economic value that social sector organizations create, monetizing that, and using that to create more positive social outcomes sooner.

And, as a positive byproduct, salaries in the social sector would presumably rise, making it more likely that some of our best and brightest would end up in social sector organizations rather than in investment banks or hedge funds.  That would absolutely be a good thing.