Sports agents are typically compensated by commission, although some will work for a flat-fee or a combination commission / flat-fee structure. The commission range for a sports agent is anywhere from 3% to 10% of a player’s gross negotiated salary. In most professional sports, the leagues and/or player associations require agents to obtain certification and regulate agent compensation. The NFL has set a maximum agent commission of 3%, the NBA 4%, the MLB does not allow an agent commission to bring the player’s total base compensation below the minimum salary guidance, and the NHL has no regulation around agent compensation. While the average agent earns close to $80,000 a year, a successful agent often makes over $1M a year.
Let’s take a closer look at these numbers. Every athlete should consider an agent’s commission is related to gross (pre-tax) income, so the relative value of an agent’s commission is in fact close to double the athlete’s actual take-home (after tax) pay. For example, the average MLB player’s salary in 2012 was $3,440,000 and the average MLB agent earns a 5% commission, which in this case would be $172,000. Given the marginal federal tax rate and an average state income tax rate, that player will actually take-home $1,828,380.58 a year, resulting in an agent total commission of 9.4% of what the player actually earned. Realize that most agents negotiate contracts for multiple years (average 3 to 7 years). Given the same example, if the agent negotiated a 3 year (MLB average) $15M contract, the agent would be due $750,000 for theoretically doing nothing else for the player other than the negotiation; particularly if the player is late in his career and not likely to play past those three years. The numbers can really add up. In 2008, Alexander Ovechkin signed a 13 year, $124M contract with the Washington Capitals (the largest contract in NHL history). He negotiated this deal without an agent, who given a NHL average 6% commission would have stood to earn nearly $7.5M or $572,308 a year, or an estimated $7k per game.
A pro athlete’s decision to work with an agent should not be a given. While working with an agent can result in a very lucrative deal that may not have otherwise not happened, the athlete should always consider the costs vs the benefits. Just like any other profession, agents as in the business of doing what they need to do to maximize their own earnings. News stories of high profile players firing their agents appear often. The truth is, the expectations most most pro athletes have for their agents abilities, beyond expertly negotiating their contracts, do not often equal the realities. The reality can be: lack of the expected personal attention, poor advice regarding financial or lifestyle decisions and the absence of a plan for (or interest in) handling legal, public relations or financial problems. Therefore when an athlete chooses to sign with a particular agent to negotiate a contract on his behalf, he should first ask: is the agent financially stressed in anyway that would cause him or her to be less than honest? What guarantees, if any, can the agent provide as far as the time that will be spent marketing the athlete versus another athlete the agent represents? How will the agent truly help protect the athlete’s future and deal with problems that may potentially occur?
Next week we will take a look at the psychology behind the player — agent relationship and offer insight into the future of the industry.