Great Quarterbacks Aren’t Actually Paid that Much
In just the past few months, NFL quarterbacks have been signed to contracts that pay them a jarring amount of money. Justin Herbert of the Los Angeles Chargers just signed a contract for 5 years that is worth a total of $262.5 million ($52.5 million per year); former NFL MVP Lamar Jackson signed with the Ravens for 5 years, $260 million; and Jalen Hurts of the Philadelphia Eagles reached a contract agreement for 5 years and $255 million. Go back a few years and you see even more examples, including Aaron Rodgers (4 years, $200 million) and Patrick Mahomes (10 years, $450 million).
At face value, this seems like an incredibly large salary for tossing a pigskin. These figures are especially shocking when you consider that the current running back market is such that the top players at the position are struggling to sign for even $12 million a year. What explains this insane amount of money being spent on great quarterbacks?
I was listening to Nick Wright on his podcast “What’s Wright? With Nick Wright”, my favorite sports podcast. Despite not having an economic background (as he points out), he understands key economic concepts like “thinking on the margin” and “opportunity cost” that we preach to our undergraduates.
Employers, acting as rational economic agents, pay salaries based on a variety of factors, but most notably: the employee’s opportunity cost, the player’s marginal product of labor, and the employers’ opportunity cost. The employee’s opportunity cost is the opportunity cost of their time, so what else they could be doing with their time other than being an NFL quarterback for their specific team. (There’s also the alternative of not being an NFL quarterback, but the salary earned from playing in the NFL is almost always higher than any other alternative). The marginal product of labor for an NFL quarterback is how much extra value (in terms of points, number of wins, likelihood of success, etc.) this player brings to the team. This is why it doesn’t really pay to have two highly paid quarterbacks on your team, since the second one does not add much marginal value to the team, even though they are highly skilled in their own right. For NFL teams, their opportunity cost of signing their quarterback (player X) is who else they could sign to play the position if not for player X. This is where marginal analysis can really come into play.
Is the cost of signing Justin Herbert really $52.5 million a year? Well, in pure monetary terms, yes. However, compared to an average quarterback, the Chargers are only paying him an extra $20 million. Let me explain.
The opportunity cost of paying a top-tier quarterback (assuming you want at least some baseline level of performance) is the salary you pay the top-tier quarterback minus the cost of a competent quarterback.
So, what is the going rate for basic competency in the NFL?
Derek Carr recently signed with the New Orleans Saints for 4 years/$150 million. (In reality with not-fully guaranteed contracts that are often used in the NFL, it’s really guaranteed to be 3-years for $100 million dollars, or $33.33 million per year). Derek Carr is the epitome of a baseline competent quarterback. According to Mike Sando of the Athletic, who yearly polls 50 NFL coaches and front office personnel, Carr ranked 14th in the NFL.
Daniel Jones also recently signed a large contract with the New York Giants for 4 years and $160 million. (Taking the whole contract in mind, it’s really 3-years for $112.5 million, or $37.5 million per year). In the same aforementioned poll, Jones ranked 20th among starting NFL quarterbacks, putting him right around average to just below average.
So, it costs anywhere between $33.34-37.5 million per year just to have a basic, competent quarterback in the NFL. The real cost that NFL teams like the Chargers, Ravens, and Eagles face with their superstars is not the $50ish million, but instead the $50 million minus $33.33 million (or, $16.67 million). At the margin, that’s not too bad! You are facing a cost roughly the same for a superstar quarterback (compared to the counterfactual competent one) about as much as you would pay for a high-quality wide receiver or offensive linemen.
In short, don’t be fooled by the headlines. Top-level superstar quarterbacks are not being paid that much money relative to other quarterbacks. If anything, they are paid too little (due to the artificial constraints imposed by the NFL by way of a salary cap); but, alas, another point to be made a different day.