Team Effects on Compensation: An Application to Salary Determination in the National Hockey League

LEO H. KAHANE [*] Studies of salary determination largely model pay as a function of the attributes of the individual and the workplace (i.e., employer size, job characteristics, and so forth). This article empirically investigates an additional factor that may influence individual pay, specifically coworker productivity. Data from professional sports are used to evaluate this question because both salary and teammate performance measures are readily available. We find that team attributes have both direct effects on an individual's pay, and indirect effects through altering the rates at which individual player productive characteristics are valued. (JEL J31, L83) I. INTRODUCTION When complementary exists between labor inputs, individual productivity may be poorly measured by treating the individual worker separately from the character of the organization, or team, within which he works. Namely, individual productivity may vary when working in different settings to the extent that coworkers offer different degrees of assistance. [1] If such complementary between human capital inputs is present, say a team dynamic, it suggests the possible existence of both team and individual effects on productivity, and hence compensation. Empirical analysis of team effects has been hindered by the lack of data on individuals and their coworkers, including managers. One source, though, that contains much of this requisite information is data on professional sports teams. In this article, we exploit this unique attribute of professional sports data in order to empirically assess the effect of complementarities between labor inputs on individual compensation. Specifically, we use a team-sport setting to situate the worker in an organizational environment where we can observe the impact of coworkers on individual productivity, thereby allowing us to examine the separate effects of individual and team productivity on salary determination. The general question asked is whether individual attributes are valued, or rewarded, differently in different work environments--or, in our specific case, on different teams. This study will investigate these questions by empirically assessing the effects of coworker productivity, that is, the effects of the qual ity (productivity) of teammates, on individual compensation. Although a number of different highly team-oriented sports would serve our purpose, such as basketball, this particular study uses data from professional hockey to investigate team effects on compensation. [2] The remainder of the article is organized as follows. Section II outlines the empirical framework used to analyze the posited team effects, and discusses some of the theoretical issues relating to team effects on compensation. Section III describes the data used in the analysis. Section IV reports the empirical results, and Section V reports our conclusions and directions for further work. II. TEAM AND COWORKER EFFECTS As noted above, the goal of this study is to evaluate empirically whether average coworker attributes (1) affect individual salaries, (2) affect the rate at which individual attributes are valued by the firm, and (3) are complementary inputs to the attributes of individual team members. The question arises, though, as to why we might expect, on theoretical grounds, that individual players would earn any part of the team's contribution. The classic model of Alchian and Demsetz [1972] suggests that the capitalist manager will reap the returns from any incremental team output, as the primary function of the manager is to discover complementarities between inputs and enhance organizational output by optimally combining resources, and to monitor effort so as to reduce shirking. As a result, the manager will capture all of the returns that are not specific to the inputs, in which case we would not expect to observe team effects on individual compensation. Yet, although a manager acting as the residual claimant is one solution to the problem of reducing shirking in the context of complementary inputs whose effort is difficult to monitor, other models suggest that it may be desirable to compensate team members based on the value of team output in order to provide optimal incentives for effort (for example, see Akerlof [1982]). …