Last week, Tom Brady, quarterback for the New England Patriots, generated significant attention as a result of the manner by which he and the team extended his contract. Fans and reporters were surprised because Brady accepted a salary significantly below market value. Although unusual, students of economics may recognize this outcome as a lesson in marginal utility.
Marginal utility is the satisfaction a consumer gains from consuming one more unit of a good or service. Negative marginal utility occurs when the additional consumption of a good decreases total utility. For example, if thirsty, you would want a glass of water; however, after consuming the first glass, you would appreciate or value each subsequent glass of water less than the previous one.
NFL teams have limited budgets for paying their players. This is often referred to as the salary cap. The NFL‘s 2013–2014 season salary cap is about $121 million. Brady restructured and extended his contract at a below market price thereby allowing the team to spend more money on other players. His new 3-year deal guarantees him an annual base salary of $9 million with potential bonuses of $30 million more. Brady wrote to WEEI’s John Dennis, “Athletes are always talking about money at a time when everyone else is struggling so badly to make it. We all make way more than our fair share.”
He also wrote, “I really do just want to win, and that has and will continue to be the reason that motivates me and is the biggest factor in my decision-making process.” This is a typical case of diminishing marginal utility. Because of Brady’s superior financial condition, he will gain more satisfaction from winning than from additional income.
Brady’s actions also are indicative of motivational theory. Frederick Herzberg, a clinical psychologist and pioneer in the study of management and motivational theory, demonstrated that satisfaction and dissatisfaction at work result from different factors. ‘Hygiene factors’ are minimum requirements for achieving satisfactory working conditions. They include status, security, salary, work conditions, supervision, and other company policies. Improvements to hygiene factors may not improve long-term workforce motivation, but a decline in these factors can cause demotivation. Once hygiene factors have been met, workers look for additional motivators, such as achievement, recognition, advancement and personal growth. These factors ultimately lead to long-term employee satisfaction. With Brady’s financial needs met, he is focusing on other sources of satisfaction.
The game of football teaches us lessons in teamwork and dedication. It is refreshing to see examples of economics and management theory as well. Although Herzberg passed away in 2000, he would understand and support Tom Brady’s decision…and not just because Herzberg was born in New England.