Boxing and karate are quite staid pursuits when compared with mixed martial arts. In its early, unregulated days, the sport was little more than street fights in a cage and was banned in states across the country. Outlaw status only fueled MMA’s popularity and it now rivals boxing in generating warrior idols and capturing the attention of a commercially important demographic: 18- to 24-year-old males. The Ultimate Fighting Championship (UFC), the sport’s most successful promoter, has parlayed MMA’s format (and a stable of some 300 male and female fighters) into a television, pay-per-view, and arena empire worth an estimated $1 billion.
In matches that last for three to five rounds of five minutes each, fighters go at each other with techniques developed by other martial arts, including classic pugilistic punches, the lightning kicks of Thailand’s Muay Thai, and the throws and full-body grappling of Brazilian jiujitsu. Just don’t knee anyone in the groin or gouge their eyes out.
Whether or not you like a good fight, the UFC offers surprisingly good data on a question that is terrifically relevant to corporate America. Years of research suggests that companies’ stock market value doesn’t rise with the addition of a high-priced CEO, but what about individuals? When people earn more, does their performance improve?
It’s hard to compare performance between different jobs. A salesperson could get promoted to manager (and make more money), but then she would have different tasks and responsibilities than she had before. There is one company, however, where employees do the same thing year after year even as their role increases in importance, and where superior performance is consistently rewarded. That company is the UFC.
Rookie UFC fighters are paid what amounts to minimum wage after expenses. At the other end, megastars such as Georges St. Pierre and Anderson Silva may make millions of dollars per fight. If a fighter compiles a respectable record, he can negotiate a higher salary; he’ll also face better opposition, until he gets a shot at a title. As in business, we would expect fighters who get paid more to perform better, not only winning but surpassing fans’ and fight promoters’ expectations.
As it turns out, that’s basically what happens—up to a certain point. After a fighter triples his initial salary, pay is negatively correlated with performance. As a fighter gets paid more, his performance suffers. I compiled data on the records of the 15 most active UFC fighters between 2004 and 2012; Jeff Fox from MMA Manifesto provided the salary for each fight. In 156 fights, the winning fighters earned less per fight, as a multiple of their initial UFC pay, than the losers did. The results suggest that as fighters are paid more they tend to lose more often. (Stats sticklers: In the actual analysis I control for non-normality).
To judge whether these fighters are meeting expectations or missing them by a mile, I looked at the pre-fight odds as reported by the UFC and sports betting site 5dimes. If we placed a $100 bet against a fighter every time his salary grew beyond roughly three times his initial UFC paycheck, for these 15 fighters over the course of 10 years we’d bet $6,200 and come away $820.03 richer: a 13.2 percent profit margin, 58 percent better than if we bet randomly.
Some people might jump to the conclusion that we should just pay people less. It’s not that easy. UFC fighters face much tougher competition as they climb the competitive ranks. However, the data do clearly show that when we pay people more, they don’t perform as well as we expect them to.
It should go without saying that UFC fighters are not corporate executives. Yet they do follow similar trajectories in pay and organizational ranking. In both cases, there is a highly nonlinear pay scale, where it is possible to go from making a small amount of money to a large amount of money with a small increase in rank. Highly ranked UFC fighters, like top executives, make hundreds of times the salary of entry-level fighter-employees. These highly ranked fighters are also central to the success of the UFC, since they drive the lucrative pay-per-view model that nets the UFC tens of millions of dollars per event, mirroring the benefits that upper management is supposed to bring to their organizations.
What we’ve learned from these fighters is that when it comes to executive pay, companies are likely overestimating the performance of their top management. This applies not just to when executives are hired, but also to compensation packages that are heaped on top of base pay. This doesn’t argue that people shouldn’t make obscenely large amounts of money: It suggests that instead of massive salary jumps, increases should be linear, frequent, and difficult but not impossible to attain.
Let’s take a real-world example. Jamie Dimon, JPMorgan Chase’s chief executive, got a 74 percent pay increase in February, bringing his total compensation to about $20 million. Does JPMorgan Chase expect Dimon to perform 74 percent better? If it does, it might want to adjust its expectations. Since announcing his salary increase, JPMorgan Chase’s stock is up only 6.6 percent. This does not qualify as poor performance by any means, and over five years or so Dimon might be able to bring about 74 percent improvement. But does his current performance justify that kind of pay increase today? Probably not.
The company might be better served if it raised Dimon’s salary to the same level over time and with some concrete performance goals. Instead of the one-time leap, Dimon could get a 5 percent bump per quarter. In about three years he would be making the same salary, but the expectations around his performance would also be more accurate and reflective of his work.
I should add that this is to some degree a fantasy. As long as a company is willing to deliver a massive jump in pay, the most talented candidates will take it. It appears Burberry did precisely this with its new CEO, taking him from the top of the pay scale in the U.K. and raising the ceiling.
In the UFC, fighters at the upper echelons can very quickly make huge multiples of their initial salaries. Given that entry-level fighters are paid what amounts to less than minimum wage, you can argue that the massive jumps are necessary. But you can also make the convincing case that the UFC, and fighters themselves, should not take these paydays as an indicator of future success.
Perhaps the best advice comes from that paragon of management thinking, Slash: “You have to earn it, even if you think you’ve paid your dues.”