Risk Sharing in Athlete Compensation
Of all the intriguing trends in sports business, several happen to fall under athlete compensation. Not just how much athletes are making, but how they’re choosing to get paid and allocate risk.
The Planet Money podcast episode “All In” details the journey of a 21-year-old online poker player who made it to the final table of a major tournament. If you’ve ever watched World Series of Poker tournaments on ESPN, you know the field is a large mix of professionals, amateurs, and recreational players.
Otherwise unable to participate in this tournament due to the $10,000 buy-in, this young amateur had several of his friends stake him for the tournament. In return for his friends chipping in most of the $10,000 they would receive a significant portion of his potential winnings.
In professional poker there are two practices for players (or even non-players) to increase their odds of receiving a payout: swapping shares with other players or buying shares in other players. According to the podcast, roughly 50% of players in a tournament swap shares or have sold a percentage of shares in themselves.
There are several similarities to Planet Money’s more recent episode “Some-of-the-Money Ball.” While minor league baseball salaries have been in the news for different reasons, there is a new practice for receiving compensation. Organized by the startup Pando Pooling, players form pools where money is paid into a central pot and split between the group should any of them make it to the major leagues.
For a bit of background, minor league baseball salaries are considerably lower than major league salaries. Not only is the pay less but there is an entire farm system of players fighting for a spot in the major leagues, many of which will never make it to a roster.
A sample business pitch to a minor league player consists of not having to pay anything into the pool until they earn $1.6m. They would then then kick in 10% of future earnings until either the end of their career or until they've contributed $20m. What are the trade-offs? If a player were to partake in this model and become extremely successful, they would enjoy a career in the major leagues while paying 10% from their salary into a pool of mutually chosen players. Conversely, the worst case scenario is nobody in their pool making it to the major leagues. In that case nobody would have to pay anything into the pool.
What’s preventing more minor league baseball players from entering into these pools when similar arrangements are prolific among poker players? It’s possible that the practice is relatively new and yet to catch on among baseball players. It’s also possible that poker players view the tradeoffs differently. Or maybe it’s easier to judge someone’s chance of success in poker rather than minor league baseball. After all, one of the major factors in swapping shares or entering a pool with fellow players is selecting players with a similar skill level.
The tough part of sacrificing potential earnings is dealing with the cognitive dissonance of recognizing you can increase your chances of winning while still believing you will either win the tournament or make it to the big leagues.
There is great risk and uncertainty in making it through a poker tournament or the minor leagues. Holding multiple lottery tickets may be a probabilistically sound move while still betting on yourself. In Nassim Taleb’s The Black Swan, Taleb writes, “we humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely to randomness.” Athletes can use these new compensation methods to have randomness work in their favor.