There are useful comparisons to be made—and important conclusions to be drawn—when we examine failed investments in both the public and private sectors. The settings may appear unrelated: professional baseball, college football, public education, welfare programs, and government contracting. Yet they increasingly share a common economic defect: they guarantee payment or subsidy while weakening the connection between compensation and performance.
A system that socializes risk while privatizing guaranteed reward will eventually produce higher costs, weaker performance, and a diminished sense of fairness. It shifts the economic playing field away from measurable results and toward protected income. The customer, taxpayer, patient, student, or fan pays more, while the recipient of the money bears less responsibility for delivering value.
This is not an argument against paying people well. It is an argument for paying well when performance justifies it.
Baseball’s Lesson: Major League Baseball offers a visible example of the problem with guaranteed, non-performance-based salaries. A player may receive a long-term contract worth tens or hundreds of millions of dollars, but the team remains obligated to pay even if injuries, declining skills, or indifference reduce that player’s value. The financial risk rests heavily with the club, its owners, its fans, and ultimately the customers who buy tickets, subscriptions, merchandise, and stadium concessions.
Meanwhile, some of baseball’s most successful organizations have achieved strong results without the largest payrolls. Milwaukee has long competed in one of baseball’s smallest markets, yet it has often outperformed much wealthier franchises in regular-season success. Tampa Bay has repeatedly fielded competitive teams on a fraction of the payroll of clubs such as the New York Yankees, demonstrating that intelligent scouting, player development, discipline, and efficient management can sometimes overcome sheer financial advantage.
That does not mean money is irrelevant. Great players deserve great compensation. But the lesson is that payroll size does not automatically produce victories, and guaranteed contracts do not automatically produce better effort or better baseball.
A team that pays a player before knowing whether he will perform is, in effect, buying an insurance policy for the player. The player receives security; the club assumes the risk. The same basic arrangement appears in many public-sector programs, where taxpayers guarantee compensation or benefits but have limited ability to measure whether the promised service has improved.
College Football’s New Marketplace: College football has become another testing ground for this principle. Name, image, and likeness payments, together with the transfer portal, have created a new player market. Athletes now possess greater bargaining power, and they should be free to benefit from their talent, effort, and public appeal. But freedom to earn is not the same thing as wisdom in structuring compensation.
When universities, collectives, or boosters guarantee large payments to recruits or quarterbacks before performance has been demonstrated on the field, they assume a substantial risk. A highly paid player may be injured, fail to fit the system, struggle under pressure, or simply prove less valuable than expected. The school still bears the financial cost, while the team, supporters, and donors may receive little return.
The better model is not to deny athletes compensation. It is to connect a meaningful portion of compensation to transparent, enforceable, and measurable results: playing time, academic progress, team leadership, postseason success, statistical performance where appropriate, and compliance with team obligations.
A program that can identify talent accurately and pay for demonstrated value will often gain more than a program that wins bidding wars for unproven players. The purpose of compensation should be to reward performance, not merely to purchase hope.
Public Education and Public Employment: The same question applies to public education. Teachers perform one of the most important jobs in any society, and excellent teachers should be paid substantially more than they commonly are. But in many public-school systems, pay is determined principally by seniority and credentials rather than by classroom effectiveness.
A master’s degree or tenure may justify some additional compensation. Experience matters, and advanced study can be valuable. Yet neither credential alone guarantees that students are learning more, reading better, mastering mathematics, thinking clearly, or becoming responsible citizens.
The current system often produces an uncomfortable result: exceptional teachers may be paid only modestly more than average teachers, while weak teachers may remain protected by salary schedules, tenure rules, and bureaucratic procedures that make accountability difficult. That is unfair to families, unfair to students, unfair to taxpayers, and especially unfair to gifted teachers whose labor produces extraordinary results.
Performance standards should not be simplistic. A teacher cannot fairly be judged by a single standardized test score, since students enter classrooms with different abilities, home environments, and challenges. But it is possible to use multiple measures:
Student academic growth over time, not merely raw test scores.
- Classroom observation by qualified evaluators.
- Parent and student feedback, carefully weighted.
- Attendance, preparation, and professional reliability.
- Success in improving outcomes for struggling students.
- Contributions to school culture, mentoring, and curriculum development.
- The central principle is simple: exceptional performance should bring exceptional reward.
The Buyer Should Not Bear All Risk: Consider an ordinary business transaction. When a developer hires a civil engineering firm for a major project, the developer does not normally regard the transaction as complete when the contract is signed. The engineering company must produce plans, meet deadlines, satisfy technical requirements, and deliver work that can survive professional review and legal scrutiny.
Payment may be made in stages. Some amount may be withheld until milestones are met. The contract may include penalties for delays, defects, or failure to comply with agreed standards. In short, the provider of the service bears some responsibility for performance.
Why should taxpayers and consumers be denied the same protection? When a government program guarantees income, benefits, or payments without meaningful performance standards, the public assumes the risk. When a school system guarantees nearly identical pay regardless of effectiveness, students and taxpayers assume the risk. When sports teams guarantee enormous contracts without adequate performance incentives, fans and franchise owners assume the risk.
In each case, the seller of the service—or the recipient of public support—receives a form of insurance paid for by someone else. This is where the concept of moral hazard becomes important. Moral hazard exists when someone is insulated from the consequences of poor decisions or weak performance. If a person receives the reward regardless of the result, the incentive to improve, economize, compete, or take responsibility becomes weaker.
The problem is not that every recipient becomes lazy or dishonest. Most people want to do worthwhile work. The problem is that institutions should be designed for real human behavior, not idealized human behavior. A sound system rewards diligence, improvement, responsibility, and results. A weak system makes it possible to be paid almost the same whether one excels or merely occupies a position.
The Case for a “Reverse Dividend” The alternative is a compensation model that might be called a “reverse dividend.” In a normal dividend, an investor receives a share of the profits after a company has produced value. In a reverse-dividend system, an employee, athlete, contractor, or service provider would receive a reasonable base payment, followed by substantial additional compensation when agreed-upon results are achieved.
This approach would preserve basic security while restoring accountability. It would also make compensation more honest. The buyer would not pay the full premium before the work is performed. The seller would earn the highest reward by producing the highest value.
Such a structure might include:
A base salary sufficient to attract qualified employees or athletes.
- Clearly defined performance benchmarks.
- Bonuses for measurable improvement and exceptional results.
- Deferred compensation tied to long-term success rather than short-term appearances.
- Penalties or reduced future guarantees for failure to meet basic obligations.
- Independent evaluation to prevent favoritism or political manipulation.
For teachers, that could mean higher pay for sustained student growth and proven instructional excellence. For college athletes, it could mean compensation linked to participation, achievement, academic responsibility, and team contribution. For professional athletes, it could mean more incentive-based contracts and fewer fully guaranteed deals detached from later performance. For public programs, it could mean benefits and subsidies designed to encourage work, training, recovery, family stability, and eventual independence wherever those goals are realistically possible.
Restoring Fairness: Economics is not merely about charts, curves, and abstract formulas. It is also about justice. A society must decide who bears risk, who receives reward, and whether those two things remain connected.
When compensation is guaranteed without regard to performance, prices tend to rise while value declines. The supply-and-demand relationship becomes distorted. Average performance is subsidized, excellence is under-rewarded, and the buyer—whether a taxpayer, parent, patient, fan, donor, or consumer—pays more for less. The result is not true compassion, nor is it true capitalism. It is a system in which risk is transferred downward to the public while security is transferred upward to those who are already being paid.
The better course is neither cruelty nor exploitation. It is a return to a basic moral and economic standard: reward value, recognize excellence, protect legitimate need, and require accountability wherever performance can reasonably be measured.
Guaranteed income should never become guaranteed indifference. The strongest institutions are those that ask people to perform, reward them generously when they do, and refuse to make the public permanently responsible for the cost of failure.
