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No matter who signs him, Pujols will be overpaid in 2012

WUSTL strategy expert says baseball economics dictate unfair salary structure
By Neil Schoenherr

Albert Pujols, the St. Louis Cardinals first baseman and Major League Baseball’s most coveted free agent, is clearly the best player in the game. But whichever team signs him this offseason will be overpaying, says an expert on pay-for-performance at Washington University in St. Louis.

Albert Pujols

“For Albert Pujols’ pay to be equitable to others in baseball, he needs to be paid more than Alex Rodriguez, the current highest paid player,” says Lamar Pierce, PhD, associate professor of strategy at Olin Business School and co-author of the recent paper “The Psychological Costs of Pay-for-Performance: Implications for the Strategic Compensation of Employees.”

“However, since Rodriguez is now overpaid, and his performance, or lack thereof, is so easy to measure based on statistics, it leads to iterative escalation of pay across the league,” Pierce says.

“In five years, if Pujols has gone downhill, then someone else will be the best and the escalation continues until teams finally say enough is enough,” he says.

Rodriguez made $32 million in 2011. Following the 2007 season, Rodriguez renegotiated a $275 million, 10-year deal with the Yankees, breaking his own record for the largest contract in sports history.

In the paper, Pierce and his co-authors argue that paying each employee solely according to his or her performance is actually an inefficient strategy; it can lead to resentment or even sabotage on the part of employees who believe they are underpaid compared with their colleagues.

Thus, a standardized salary scale, combined with incentive programs, may be the best way to motivate employees.

The difference in baseball compared with a firm, says Pierce, is that people can quite accurately determine relative ability in baseball based on its well-documented metrics for performance.

“Thus it’s pretty clear who’s better than whom, at least for most players,” Pierce says. “For CEO’s or workers, it’s much less clear. This is why the problems we talk about in our paper are rare among salespeople, who have clear metrics to measure performance, and common among public service workers or factory workers.”

The issue with Pujols, Pierce says, is that while he does deserve to be paid more than Rodriguez based on performance, the fact remains that Rodriguez is paid too much.

“While someone might view such relative pay as equitable, this leads to excessively high salaries in baseball,” Pierce says. “The problem here is that when people think about relative pay, any overpaying for the top salary escalates the problem.”

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