Deregulate Scholarship Limits to Rebalance Athletic Department Spending
October 19, 2020 – Richard Keroack, Assistant Director of Compliance – Financial Aid, UNC Chapel Hill
Dr. Kevin Blue, Director of Athletics at UC Davis recently wrote an article imploring leaders in college athletics to consider creating policy to limit athletic department spending. While I agree that limiting spending creates a more sustainable business model, a solution to achieve that result could be to deregulate athletic scholarship limits. I realize how counterintuitive that sounds so I’ll repeat. The solution to reduce athletic department spending may be to deregulate NCAA scholarship limits. Hear me out.
Achieving Market Efficiency in College Athletics
In an efficient labor market, all workers are paid the exact amount that they contribute to the company. In college athletics, the labor market consists of coaches, staff, and student-athletes*.
*Student-athletes are not technically employees but they contribute to the college sports product so should be considered in that context for this analysis.
Coaches and staff exist in an open labor market; they are free to seek employment anywhere and are not bound by limits to their compensation. Student-athletes, on the other hand, exist in a closed labor market. The sum of their aggregate compensation is tied to NCAA scholarship limits.
College athletics is not an efficient market. The amount of scholarship compensation provided to student-athletes is capped at the sum of the NCAA scholarship limits and has remained fixed as revenues have increased. Coaches and staff are not bound by any compensation restrictions and have been able to demand a larger share of the increasing revenue.
Dr. Blue asked us to open our minds to new ideas. This is can be one of them. What would happen if we opened up the market for student-athletes scholarship compensation by eliminating the NCAA scholarship limits?
The non-profit nature of athletics departments encourages departments to spend all the revenue that they generate. What if athletic departments had the option to funnel a greater percentage of that revenue back to student-athletes in the form of scholarship? This would allow athletics resources to be spread efficiently amongst coaches, staff, and student-athletes to create market equilibrium where the supply curve intersects with the demand curve and coaches, staff, and student-athletes are compensated at a level equal to the value that they provide to the athletic department.
Major Themes
This idea would require athletic departments to pivot from two long standing operational assumptions:
- Eliminate NCAA scholarship limits. Allow each school to award as much athletic aid as they can afford.
- Categorize all sports as equivalency sports. No more head count sports. Athletic scholarships can be broken up and awarded in fractional shares.
You got that? Athletic departments could award as much scholarship as they can afford and all sports would become equivalency sports.
Benefits of Eliminating NCAA Scholarship Limits
Maximize Scholarship Aid to Student-Athletes.
By eliminating scholarship limits, more aid could be provided to more student-athletes. Period. This is a good outcome for student-athletes.
Efficient Resource Allocation
The athletic scholarship market will reach equilibrium and athletic aid will be provided to students in an amount that is most efficient. For example, we know that football and basketball generate the most revenue so it may be that a football program will need to award 100+ scholarships to be competitive whereas maybe tennis or golf only needs to award 2-3 full scholarships to compete on a national level. That would be okay because each team and each student-athlete will be awarded athletic scholarship equal to the value that they provide to the athletic department. No more. No less.
Financial Flexibility.
Eliminating scholarship limits also provides financial flexibility to athletic departments. The scholarship budget would be a lever that Athletic Directors can manipulate. If times are good and they have a great young coach then institutions can choose to invest more athletic aid in that specific program. If revenues are threatened then ADs can also scale back athletic aid to adjust, similar to how they can with coaches and staff.
Reduce Personnel Expenses.
Eliminating scholarship limits could also reduce runaway personnel expenses. Athletic departments have finite resources. Opening up athletic scholarship compensation to an open market would force a business model where ADs are forced to choose to invest resources in personnel and facilities or invest in scholarships. Does the institution need another Director of Recruiting or locker room update or should those resources be invested in recruiting another student-athlete? Which option provides the greatest return on investment? Right now, the option to invest in another scholarship student-athletes doesn’t exist.
Critiques
Every single person I’ve shared this idea with is not nearly as enthusiastic as I am about its viability. Admittedly, there are some drawbacks.
Without scholarship limits, the Power Five conference schools will simply award more athletic aid than other schools can afford. That will hurt competitive equity.
Definitely. But the power five conference schools have been dominant over smaller schools for many years even when both sides could offer the same amount of scholarships. Competitive equity will not be any more stratified than it already is. The difference will be that the schools that can afford to offer a large amount of scholarship will be able to help finance that many more students’ education that they otherwise could not have when there was a scholarship limit.
Additionally, athletic departments can strategically concentrate resources in sports that they can be successful in. A Group of Five institution may determine that although a football or basketball national championship is probably out of reach, it can instead to invest in a niche sport such as softball or lacrosse that they can be dominant in.
Eliminating scholarship limits will end up costing athletic departments more money than if limits are in place.
Maybe. The market will determine this. Athletic departments have finite resources. Even the biggest schools have a budget. The brilliance about the efficient market hypothesis is that each stakeholder is allocated resources equal to the value that they provide. Market equilibrium will occur when coaches, staff, and aggregate student-athlete scholarship compensation are all exactly what each stakeholder is worth. This may be more or it may be less than what athletic departments are currently spending. Ultimately, the bottom line figure will be what the market is willing to bear.
Power five conference schools will hoard talent with inflated rosters.
Yes. A football powerhouse may decide that it is a good investment for them to provide 120 football scholarships. That obviously means that they will have more recruiting success than a school that is choosing to, or maybe can only afford to provide 70 football scholarships. However, I find it hard to believe that the 11th wide receiver on their depth chart will be happy not playing. I think they would transfer to a school that can offer more playing time. If they do not transfer then they probably aren’t playing much so there really isn’t a competitive advantage. Plus, that student is still receiving a scholarship and getting a degree.
Additionally, the marginal value of the 121st scholarship football player will be so low that most institutions would probably see a better ROI by investing those resources in a 10th soccer scholarship or 12th baseball scholarship where the student-athlete can provided some on-field production.
The Olympic sports will experience the biggest competitive equity discrepancy.
This is a negative aspect of eliminating scholarship limits. Institution A may choose to invest a lot into women’s soccer, for example, and institution B may choose to invest scholarship dollars in a different Olympic sport and not at all into women’s soccer. This is a competitive equity problem.
I would be in favor of establishing scholarship floors for each sport. So women’s soccer teams may need to be required to award at least 4 scholarships so that each institution is recruiting student-athletes that can at least stay somewhat competitive with the schools that might choose to invest 14 scholarships.
An efficient market favors the revenue producing men’s sports. How does that work with Title IX?
Yes. Title IX is another important aspect. We can expect that the market will show that it is important to invest resources into football and men’s basketball. Those two sports produce the largest return on investment. The Title IX implication is that, depending on the institution’s profile, schools will need to invest more in female sports as they increase spending in male sports.
So if ADs want to give football another two scholarships to go recruit with then it might mean that two additional scholarships in female sports need to be awarded to stay in compliance with Title IX. Each school will need to manage that on its own.
Conclusion
The industry is changing. We are on the verge of entering college athletics 2.0. COVID-19 has only accelerated the timeline. Resetting the economic model by deregulating NCAA scholarship limits could rebalance athletic department spending to a rational level.