What’s a Wall Street Executive's Wins Produced?

(Photo: Keith Allison)

LeBron James was recently given his 4th Most Valuable Player award by 120 sportswriters. Well, at least 119 sportswriters agreed LeBron was MVP. Gary Washburn – of the Boston Globethought Carmelo Anthony was the league’s MVP in 2012-13.

It doesn’t take much effort to establish that LeBron was more valuable than Melo. The numbers tell us (numbers taken from theNBAGeek.com) that LeBron in 2012-13 was a much more efficient scorer from the field; and a better rebounder, passer, and shot blocker. LeBron was also better with respect to steals and personal fouls. Yes, Melo scored more. But that is just because Melo took many more shots than LeBron. Unfortunately, people tend to think that players who take many shots have a huge impact on outcomes in basketball (consequently, players have an incentive to take as many shots as their coaches and teammates will allow).

Although no other sportswriter shared Washburn’s view that Melo was MVP, 102 of the 120 voters thought Anthony was one of the five most valuable players in the league. So Washburn was not alone in his belief that Anthony is a “great” player.

The numbers, though, suggest otherwise. But rather than belabor the story those numbers tell (again, the numbers at theNBAGeek.com make it clear Anthony was really not that productive), I wish to employ the debate about the relative merits of Carmelo Anthony to make a very different observation.

Neil Barofsky (the former Special Inspector General of the Troubled Asset Relief Program (TARP)) recently published a book (Bailout: How Washington Abandoned Main Street While Rescuing Wall Street) detailing his experience in both the Bush and Obama administrations. In his book is the following story (from page 138 of the book):

ON MARCH 14, 2009, the news broke that Treasury had authorized the insurance giant AIG to pay $168 million in “retention bonuses” to employees in its Financial Products division, the very unit whose reckless bets had brought down the company. Taxpayers had put up $170 billion (including $40 billion from TARP) to keep AIG’s collapse from precipitating a meltdown of the global financial system, and now the executives from the division that had caused its ruin were going to be paid lavishly.

..When we discussed the payments with (Neel) Kashkari and the TARP team, they didn’t seem to begrudge the AIG executives the bonuses at all. They told us that the payments were necessary to keep the “uniquely” qualified executives in their jobs to do the delicate work of unwinding the enormous mess they had created. As to the reaction from Congress, Kashkari dismissed it as being “political.” By that point, Kevin (Puvalowski) and I were used to these types of reactions from Treasury. The Wall Street fiction that certain financial executives were preternaturally gifted supermen who deserved every penny of their staggering paychecks and bonuses was firmly ingrained in Treasury’s psyche. No matter that the financial crisis had demonstrated just how unremarkable the work of those executives had turned out to be, that belief system endured at Treasury across administrations. If a Wall Street executive was contracted to receive a $6.4 million “retention” bonus, the assumption was that he must be worth it.

When we say a person is “worth” what they are paid, we are arguing that the person’s wage is equal to their Marginal Revenue Product (MRP). MRP is comprised of two factors: Marginal Product of Labor (or a person’s productivity) and Marginal Revenue of Output (or the value of that productivity in the marketplace).

When it comes to sports – as Gerald Scully demonstrated almost 40 years ago – we can use data to measure an athlete’s MRP. Specifically, marginal productivity can be assessed by looking at how a player’s statistics impact wins (see the calculation behind Wins Produced to see how this can be done with respect to Carmelo Anthony and any other basketball player). And the value of this output can be determined by looking at how wins impact team revenue.

How would we do something similar for a Wall Street executive? One might look at how a company performed with and without the executive. But how would you know if the changes you observed were about the executive or someone else in the company (or just luck)?

One could assume that markets are efficient, so whatever the market decided to pay these people must be “correct.” Beyond the observation that assuming an answer isn’t much of answer, let’s return to what we already know about sports.

Consider the now-classic Moneyball story. As detailed by Michael Lewis, the Oakland A’s – with a very low payroll – were able to compete with the best teams in baseball because the A’s were able to purchase undervalued assets. Specifically, the A’s discovered that players who excelled at on-base-percentage could produce wins without costing Oakland much money. Unfortunately for Oakland, as economists Jahn Hakes and Raymond Sauer detailed, the market in baseball adjusted.

This story highlights something important about the history of baseball’s labor market. Since the 19th century, the data has existed to measure a professional baseball player’s on-base percentage. But it was not until the 21st century that this data was understood by most decision-makers. In other words, the labor market in baseball was not efficient for over a century.

A similar story can be seen in the NBA. Published research has indicated that scorers – who are not tremendously efficient (like Carmelo Anthony) — tend to be overvalued by decision-makers in professional basketball. Again, decision-makers do have access to data that would allow better player evaluations. And again, the labor market in the NBA does
n’t appear to be efficient.

Each of these stories tell us that at some point there was (and in the case of the NBA, still is) a disconnect between a worker’s wage in professional sports and their impact on outcomes. The sports market comes with an abundance of information and fairly clear incentives to get it “right.” After all, in sports, bad decisions lead to an abundance of negative press and fan reaction.

What about the market for Wall Street executives? Well, there doesn’t seem to be an abundance of information about the productivity of these people. And if a firm gets a decision about an executive’s hiring and pay wrong, who is going to know or care? After all, how many AIG executives can you name?

It may be the case that the AIG executives and other Wall Street employees are worth what they are being paid. But since we can’t measure their productivity objectively – or we don’t know the “Wins Produced” for these people – we cannot be sure that wages and MRP are consistent.

One last observation: the story of this year’s MVP vote illustrates another issue with measuring a worker’s productivity. Clearly, I think Melo is not that great of a player and that opinion is based on what I think the data says. But others – who have access to the same data – may disagree with my assessment. This disagreement suggests yet another problem with the measurement of a worker’s MRP. Even when objective data exists, reasonable people (and not so reasonable people) will disagree on what that data says.

When it comes to Wall Street executives, we don’t seem to have objective data to evaluate the productivity of the individual. And when we review the case of Carmelo Anthony, it seems clear that even if such data existed, we might not be able to agree on what that data means. So maybe no one should be so sure that those executives “earned” those bonuses back in 2009.


The bonuses payed to these executives are another form of economic irrationality that you, the authors of Freakonomics, have detailed in your books. It is obvious to anyone that the performance of these executives was abismal, even criminal some would argue, and it is what led to the financial crisis. Incredible that these politicians and executives are the ones who are running the country.


While I'm not one to run to the defense of evil bankers, the question is now how these guys did; it's how these guys did compared to someone else who could have been there. And just because something is bad doesn't mean all other options are good/better.

I mean, who would you have running the banks? The people who took out mortgages they couldn't afford in hopes of getting in a bubble destined to pop -- the very root of the problem in the first place? Because, to be honest, the only difference between the bankers chasing profits and homeowners chasing profits is one of scale.


The difference Cory is that the bankers are the so called "experts" and "geniuses" that had Ivy League education and were payed (and are stilled) being payed exorbitant salaries for their supposed wisdom.

I do not deny that the homeowners share some of the responsibility, but the bankers should get the majority of the blame. Also consider that fact that the majority of the homeowners lost their homes. They have have had to pay with their tax-dollars for the bailout of these too big to fail banks. Meanwhile no banker was sent to jail no were there any consequences for their actions . And to top it off they continue to get payed enormous salaries to try to fix the mess they created. How do you think this sets a precedent for the future? If we condone this behavior history is bound to repeat itself.

Boy George

Given the damage that many of these Wall Street Executives have done to the economy, their 'wins produced' should be a negative.

The economy, the finances of many 'regular' folks, and the country would be better off without them.


I think you may be missing something in your sports analysis. From the point of view of a team's owners (at least those to whom the team is a business enterprise rather than an ego enhancement), winning games is secondary. Putting bums on seats comes first (along with TV revenue &c). So the most valuable player is not necessarily the one who scores the most, but the one who makes the game as exciting as possible.

I'm no sports fan, but I suspect that a team so powerful that it defeated all opponents by wide margins would attract fewer fans, and hence less revenue, than one which had a string of cliffhanger victories and narrow defeats.


Please look into MJ and the Bulls. They did very well economically despite dominating the league (too bad their owner is a cheap ass and hasn't supported the team since then).

Impossibly Stupid

I really hate these sports-related posts. The simple fact is that there is a huge negative value in all these silly ball games. Nothing externally productive is accomplished, so the label "MVP" is meaningless outside of the game. Everyone involved in sports is *vastly* overpaid, regardless of how much money is irrationally pouring into that market.

Likewise, there is no rational *mechanism* that is being implemented to tie compensation with performance. There is no market that votes for executive pay. The customer doesn't set a CEOs wage, nor do employees or even other, lower executives. Its a circle-jerk of other CEOs who sit on each other's boards that agree to reward each other more and more, all completely regardless of company performance.

It's the same in politics. Have you ever voted for how much your Congressional Representative should be paid? No, they always vote *themselves* nice pay raises, while at the same time voting against any increase in minimum wage.

These are all unsound, unscientific economic practices. And they'll all keep right on escalating until you *do* start directly tying value into compensation, or until the whole system implodes. You can start by ignoring spectator sports completely, deservedly crashing that market. Then maybe, just maybe, we could get the CEOs and politicians to realize that they're in a bubble that can just as easily burst. Can you do that for me, Freakonomics: no more sports posts?


caleb b

Yeah, let's all boycott the NBA and not buy anything ever again....that'll show em.

Impossibly Stupid

It would certainly show them more than mindless spending. That kinda is, you know, the economics of the matter, which should be the topic more than sports boosterism. But who am I to let reality intrude on your desire to revisit the Colosseum as your empire fades?

Jerome Solanum

LeBron grabbed more defensive rebounds than Carmelo. I thought that alone should be enough for you to consider him a better player!

Alan T

Is anybody paid what they are worth?

There seems to be a disconnect between the wages of ordinary workers and their MRP. The real median wage in the U.S. is about where it was in 1973, yet real per capita GDP has increased by more than 85%. See http://research.stlouisfed.org/fred2/graph/?s[1][id]=USARGDPC

Caleb B

You need to also adjust GDP by inflation as well....in order to compare it to real wages. Also, you need to adjust if real wages are measured by household, as these are different than the 70s. Please look at Cafe Hayek for a discussion on the growth of wages. I think you'll see compelling evidence that the real wage has grown considerably.


So, suppose the markets are rational and we were able to use them in some way to accurately judge someone's contribution to a company. There's still the secondary question of how much should $1 in additional market capitalization be shared between shareholders and the employee who contributed the additional value. I recently learned that a publicly traded company I used to work for as an engineer was about to release a new product enhancement that was my idea. On the day it was announced, the stock jumped about 1%, or maybe $10 million in market capitalization (you're welcome, shareholders!). I'd be happy to let shareholders keep 90% of the newly created value and keep 10% for myself, but the reality is that though the associated patent has my name on it, many others helped bring it to market, so who should get the credit? We disproportionately credit/blame the most visible people in an organization when that is rarely the full story.