Friday, October 19, 2007

Joe Torre and the Stickiness of Wages

Joe Torre's decision to turn down the NY Yankees' offer of $5 million to manage the team in 2008 could be read as simply a manifestation of the stickiness of wages. In good times, salaries go up, but when bad times hit, firms have difficulty lowering salaries, at least where employees have bargaining power. That's right, I think, but the episode tells us something important about what makes wages sticky in general.

First, the facts (for non-fans of baseball and/or the Yankees): Torre has been the manager of the Yankees since 1996. During that time, the Yankees were the only team to reach the playoffs in every season. They won 4 World Series titles under Torre, although none since 2000, and the Yankees have been eliminated in the first round of the playoffs in each of the last 3 seasons. Over the last 3 years, Torre received $19.2 million, easily making him the highest paid manager in professional baseball. However, before the Yankees were eliminated by the Cleveland Indians earlier this month, Yankees principal owner George Steinbrenner said that losing the divisional series to the Indians would mean that Torre would not be re-hired. Nonetheless, after two weeks of silence, the Yankees offered Torre a one-year deal for $5 million, with an extra $3 million if the Yankees reached the World Series in 2008 (plus an extra year at $8 million guaranteed in that event). Even without the bonus, Torre would have remained the highest paid manager in baseball by a wide margin.

Why did Torre decline? I doubt that Torre simply had gotten used to earning $7.5 million and thus felt that he couldn't get by on a "mere" $5 million. Among other things, it's hard to imagine another team offering him more. Instead, it's reasonably clear to me---and to most other Yankees fans, I suspect---that Torre found the pay cut, and the incentives, insulting. To suggest that he needs the lure of an extra $3 million to reach the World Series is to say that Torre's professionalism and competitive drive do not already motivate him to try as hard as he can to capture a title.

No doubt George Steinbrenner's motives will be closely analyzed, and I suspect many will conclude that the offer was structured as it was with the deliberate intention of insulting Torre, so that he would turn it down, leaving Steinbrenner free to say that he didn't fire Torre. Whether this ruse---if that is what it was---succeeds, remains to be seen.

But here I want to suggest another inference we might draw from this episode. I think we can generalize to the stickiness of wages in other contexts. Of course, to someone earning a less princely sum, the prospect of a 33% pay cut (Torre earned $7.5 million in 2007) is objectionable principally because he or she relies on the money. Yet I don't think that purchasing power alone accounts for the stickiness of wages in other contexts. Rather, when an employer proposes to cut workers' salaries, workers feel devalued, in just the way that Torre did. Employees may reluctantly accept the cut, as unions sometimes do, if the alternative is job loss, especially if the employer can make a plausible claim that cost-cutting is essential to the firm's continued existence. But absent such an external justification (which, by the way, seems to be clearly absent in the case of the Yankees and Torre), wage cuts are generally regarded as insulting.

Posted by Mike Dorf

14 comments:

AF said...

I think this is only partially right. The difference between Torre's situation and most wage cuts is that in Torre's case the cut only applies to him. It's hard to see how across-the-board wage cuts are "insulting" in the same way. I think the issue with across-the-board cuts is more akin to loss aversion -- a general distaste for things getting worse. I'll admit that the feeling of distaste may be similar to the feeling of insult, but not personal insult as with Torre.

Michael C. Dorf said...

i agree with af's comment. a feeling of insult is likely to be most acute where it is targeted at one or a small number of individuals.

Tam said...

I can think of one scenario in which a wage cut targetted at a single individual might not be insulting. It's the situation where the star player on a team is asked to take a pay cut (probably through restructuring, to load the contract on the back end), for the sake of the team, so that they can sign other role players. Indeed, under other cultural norms, it might even be considered an honor to be making so much money that a partial pay cut to your salary as one person can significantly impact the team's ability to get other players, and to be asked to make such a sacrifice. It's a problem akin to my fellow associates complaining that their taxes are too high - I tell them being in a high tax bracket is a good problem to have, and that they should be proud of their contribution (even if it's involuntary) to the country's tax revenue.

Anyway, this is decidedly not the situation with the Yankees (who are not starving for cash) nor with Torre (who is by no means the highest-paid member of their organization).

egarber said...

i agree with af's comment. a feeling of insult is likely to be most acute where it is targeted at one or a small number of individuals

I think this makes sense. Speaking as someone who works in a corporate setting, I'll add that the "insult" can take forms beyond mere average salaries.

For example, if a division or department feels their people are typically snubbed for advancement, that can create a sense that they live in the bowels of the Titanic as a second class. It can cause real talent retention problems, since at least in a good job market people can bolt. Of course if the company is big enough, some of those workers can simply move into another role, so that's one way the company can still hold on to good people.

Well, since I'm drifting off-subject, I'll throw out this scenario with Torre:

I don't think it's out of the realm of possibility that he could sit out a year, and then join up with the Braves again (he managed the team in the early 80's). Bobby Cox's contract is up after '08, and the organization might be ready for a change. Ted Turner was moronic when he prematurely let him go the first time.

That Mad Dog show guy (from the FAN) was on Letterman the other night talking about the possibility that Torre could bide his time in '08.

Part of me has always thought that Joe yearns to manage in the NL again -- with the added strategy dynamic involving double-switches, bench management, etc.

Prof Dorf, feel free to thank me for turning DOL into a sports blog :)

Paul said...

"Ted Turner was moronic when he prematurely let him go the first time."

Given that managers, at their best, merely don't hurt a team, why should anyone be regarded as "moronic" for letting one go. You have a few managers that can really damage a team - Jim Tracy and Dusty Baker being the two most prominent that spring to my mind. The rest are largely interchangeable.

egarber said...

Given that managers, at their best, merely don't hurt a team, why should anyone be regarded as "moronic" for letting one go.

You'd have to be a Braves fan back then to know. We had dreadful teams in the late 70's heading into the 80's. Torre comes down here and we win the Western division in 82. The next couple of years we finished 2nd and 3rd, but the team was hanging around throughout the season -- something not thinkable before Torre got here.

After he left, we sunk again before rebounding in the 90's.

So to me it was very moronic to can the one guy who had finally brought us some success.

Paul said...

Correlation != causation.

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