Academic journal article International Journal of Sport Finance

Performance, Salaries, and Contract Length: Empirical Evidence from German Soccer

Academic journal article International Journal of Sport Finance

Performance, Salaries, and Contract Length: Empirical Evidence from German Soccer

Article excerpt

Abstract

The recent transfers of Christiano Ronaldo from Manchester United, and of Ricardo Izecson dos Santos Leite (Kaká) from Associazione Calcio Milan to Real Madrid-as well as the increasing financial problems of many of the top teams in the big five European leagues-have again increased the public's attention for the global football players' labor market. Therefore, the paper addresses two important, and highly contested, issues: player remuneration and contract duration (players are usually considered as overpaid and poorly motivated. Using two different unbalanced panels from the German Bundesliga league that cover six and 13 consecutive seasons respectively (1997-98 to 2002-03 and 1995-96 to 2007-08), I show, first, that the variance in player salaries can be explained, to a large extent, by the variance in individual performance. That is, salaries can be explained by career games played and games played last season, previous and recent international appearances, and goals scored. Moreover, player position, leadership skills, and region of birth clearly matter as well. The impact of these characteristics varies across the salary distribution. Second, I find robust evidence that player performance-measured primarily, but not exclusively, by a subjective overall player rating from Kicker, a highly respected soccer magazine-significantly increases in the last year of the contract. In addition, the variance in player performance is significantly lower in the last year of the contract. These findings suggest that moral hazard is a widespread phenomenon, even in professional soccer.

Keywords: salaries, contract duration, pay determination, moral hazard, soccer

Introduction

The development of player salaries in professional football in Germany

The escalating and/or skyrocketing salaries of professional football players have only recently become a highly controversial issue in Ger many. Perhaps surpr ising ly, this has not always been the case: When, in the summer of 1954, the members of the German national team returned home after their g lorious victory in the World Cup final against Hungar y, each player received a g ratification of 2,000 DM-about six months' pay of a male full-time employee (Müller-Jentsch, 1989). By that time, the enormous amount was considered by most people to be a well-deserved recog nition for an outstanding performance.

The public opinion, however, changed gradually. On July 28, 1962, when the representatives of the 21 different regional football associations in Germany agreed to introduce a single first division, they also introduced a minimum and a maximum salary-the former being 250 DM per month and the latter 1,200 DM per month.1 Moreover, the maximum transfer fee was set at 50,000 DM, of which a maximum of 5,000 DM could be paid to the player; all of these caps were finally abandoned in 1972. The salaries of the top players soon started to rise: In 1966, Uwe Seeler-at the time, he was captain of the national team-earned 50,000 DM, while midfielder Günther Netzer was paid 100,000 DM already in 1972. Five years later, top-scorer Gerd Müller earned 500,000 DM per season. In 1987, Rudi Völler was paid 1.1 Mio. DM, and in 1992, Andreas Möller made 1.7 Mio. DM. Upon his return from the Italian Serie A to the Bundesliga in 1995, Lothar Matthäus was paid 2.5 Mio. DM: An amount that he more than tripled until 1998.2 In 2001, Stefan Effenberg, as well as Oliver Kahn, were paid 9.5 Mio. DM (Sonnenberg, 2002).

This development, which can mainly be attributed to the development of the television revenue generated by the clubs, has, for most of the time, been accompanied by public discussion about the adequacy of player salaries. In addition, it has recently even attracted the attention of a number of politicians. Since the mid-1960s, the increasing liabilities of some first division clubs were considered as early signals of the forthcoming "collapse" of professional football due to "excessive" player and head coach salaries (Die Zeit, May 17, 1968; Der Spiegel, January 22, 1968). …

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