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Abstract
This paper studies the relationship between NBA players' salaries and their performance on the basketball court. In other industries executive compensation has been found to have a weak yet significant link to company performance. We find a positive and significant relationship between an NBA player's salary and a player's points per game and rebounds per game for 1997-98 basketball season. These results may be improved by considering qualitative factors and including more years of data.
Introduction
When the salaries of NBA players are compared to the wages of the average person, it causes many to wonder if these players are actually paid these large salaries due to their performance as basketball players. Average salaries per player are over $2 million and the star players receive eight figure salaries. In other industries most studies have found a significant yet weak link between the compensation of top employees and the company's performance (Core, Holthausen and Larcker [1999], Akigbe, Madura and Tucker [1995], Hubbard and Palia [1995], Guay [1999], Enis [1993], Haugen and Senbet [1991], Jensen and Murphy [1990a] [1990b], Murphy [1985]).
This paper investigates the pay performance relationship of NBA players for the 1997-98 basketball season. We find a positive and significant link between NBA players salaries and their points per game and rebounds per game although the coefficient for assists per game was insignificant in the regression results.
NBA Teams
NBA teams operated under a salary cap of $26.9 million in the 1997-98 season. Many of the teams exceeded the cap using the Larry Bird rule where each team is entitled to pay its franchise player above the cap. The Chicago Bulls had the highest team salary of $61.3 million (from Table 1) for 1997-98. The Bulls won the championship in 1997-98. Of course they had Michael Jordan who was paid $33.14 million accounting for over 50% of the team total.
The lowest team salary was the Los Angeles Clippers. The Clippers paid players a total of $24.5 million and suffered a miserable record of 17 wins and 65 losses for 1997-98. But, can the team's performance explain its salary structure across the league? We ran a simple regression using the total salary of each team as the dependent variable. We regressed it...