Salary Caps and Driving Innovation: What the U.S. Can Learn from the NFL and NBA

by: Michael Eisenberg

For almost a year now, Washington has been abuzz about compensation caps for Wall Street executives. I can give a long litany of reasons why I think that is a bad idea that creates disincentives for recruiting great people to run these companies at their greatest time of need. As I have written in the past, America (and my home country of Israel for that matter) needs to invest in innovation. Interestingly, salary caps may be a way to spur brainpower into innovation. However, it is an inversion of the populist approach to salary caps currently in vogue.

President Obama's administration could learn a lot about salary caps from the NBA and NFL and in the process can help America turn on the innovation engine that America really needs to climb out of this deep recession. You see, the place to enforce Wall Street salary caps is not on executives but on fresh college grads and MBAs like the NFL does on rookies. This helps spread the talent wealth in the NFL and NBA in a way that it is not currently allocated in American industry.
The fat paychecks that Wall Street was and is able to pay the best and the brightest college grads from MBAs, to mathematics majors and engineers has pushed that brainpower from technological, business and medical innovation to financial engineering. Analyst salaries at Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) are able to attract the best and the brightest away from pursuing engineering or energy jobs, where the brainpower could develop alternative energy sources, more sustainable agriculture and faster telecommunications and not just the next complex derivative. Imagine if all of America's best brains and management talent were focused on innovation and not financial engineering or lawyering.
The best way to do this is an investment of resources and disincentives to shift brainpower into productivity and ingenuity. The stick is an NBA-style salary cap for rookies so they do not get into the financial system coupled with an investment in PhD and post doc research grants. If ingenuity jobs will pay better than financial engineering it is obvious that most bright grads would prefer innovation over all-nighters preparing boring pitch books and number crunching for bankers.
It is not Jerry Maguire-esque but it is a good way to stack the incentive system to focus on innovation.