Monday, February 02, 2009

You Pays Your Money...

Kimi Raikkonen, the highest paid driver on the F1 grid, is reputed to earn upwards of £25 million a year. While it's not quite on a par with the world's highest paid sportsman, Tiger Woods, it's still a staggering sum of money for a few hundred hours of work. It would take someone earning the median annual salary for a full time employee in the UK (such as your correspondent) a millennium to match the taciturn Finn's earnings. Someone on the minimum wage had better pencil in another 1000 years.....

There are plenty people who find the earnings of Raikkonen and, no doubt, other celebrities, obscene. Personally, I don't much care one way or the other. Whether merely driving racing cars, no matter how good you are at it, merits £25m or more a year I rather doubt. But if someone is prepared to pay you an eight figure sum to do something you actually rather enjoy doing anyway, chances are you wouldn't turn down the offer. And, at least unlike the captains of banking and investment, they haven't earned their money by inflicting untold damage on the global economy.

The recent economic turmoil engulfing the wider world has not escaped F1, however. No surprise really, given that the car industry has been seriously affected, and given that banks, such as Santander, Royal Bank of Scotland and ING are amongst the sport's major sponsors. With the sport's major backers facing serious financial difficulties, it is more than likely that not a few people within the sport are looking at the sums being paid out to such as Raikkonen, Alonso and Hamilton and wondering how it can continue to be justified.

There have been suggestions that F1 should take the bull by the horns and impose a salary cap on what drivers can earn. I have my doubts about whether a scheme could actually work. Even someone with as little business acumen as myself can see ways around it. Are personal sponsorship deals to be covered by any such arrangement? and if not, what's to stop a team determined to snare a particular driver from 'coming to an arrangement' with regard to team sponsors becoming personal sponsors? Or payments in kind, for example, of winning race cars?

The only way this can work is if it is a deal made between the top teams not to pay more than a certain amount for a driver. Anything imposed by the FIA without the full support of the teams themselves will almost certainly be side-stepped one way or another. All that aside, though, I can't help thinking that the scheme is the wrong solution to the wrong problem. The teams who are paying top-dollar for the likes of Raikkonen, Hamilton and so on are not the ones facing the most serious financial difficulties. If the incomes of Ferrari and Mclaren are falling, then doubtless this will be a factor when it comes to renegotiating their drivers' contracts, but the its highly unlikely that either team will fall over simply because of the sums it is paying out to its drivers.

The teams in real financial difficulty - if the rumours are anything to go by - Williams and Force India, would be unaffected by any salary cap on drivers because their drivers aren't earning anything like enough money to be affected by any plausible limit on what drivers can earn. Adrian Sutil, for example, is still at Force India despite a rather lacklustre second season in the sport because he actually brings a lot of money to the team. Williams' Kazuki Nakajima has his seat chiefly because Williams' engine suppliers Toyota were prepared to cut the Didcot team a more favourable deal if they took Satoru's son on.

Formula 1 teams aren't charities, so why are the sport's biggest stars so well rewarded? The answer to this one is rather interesting. With a sport like football, the answer is straightforward. The best players are, by definition, better than their rivals. Having better players than anyone else should, all else being equal, ensure that a team wins more often than not. If you want them to play for your team and not your opponents' squad, then all else being equal, you're probably going to have to pay them more. And there are not really many other options open to a football team manager when it comes to spending the team's cash. Work to improve the stadium might help the club's commercial prospects, and so generate still more money, but it isn't going to make a difference to the performance of the players on the pitch.

Motor racing isn't like that. Spending money on drivers isn't the only way, or even usually the best way, that a team can improve its' performance. Hiring more engineers, investing in improved computer modeling techniques, a new wind-tunnel or any number of other programmes are every bit as likely to make a car faster, and they have the added advantage that, while the advantage that a driver brings leaves the moment your expensive superstar heads out of the door, gains found by your technical team are a long-term investment - they also improve the performance of both cars, and not only the one that your expensive lead driver is in. Ron Dennis once said that one of the reasons Mclaren fell into a slump in the mid-1990s was that it had been spending so much money keeping Ayrton Senna on board that they had allowed investment in other areas to slip. So when Senna left the team at the end of 1993, they began a three year period without a win.

So why, when a team could be making long term investments in its engineering strength, do Mclaren, Ferrari and Renault, to name but 3 teams, spend so much on their number 1 drivers? The answer, in short, is the law of diminishing returns at work. When you have a budget of £40m to run your racing team, an additional £10m will buy far more time if spent on the car than on the driver. When you've got a budget of £250m, that additional £10m isn't going to buy nearly as much improvement in performance as it would for a smaller team. Ferrari or Mclaren would find no shortage of competent professional racing drivers, and probably not a few current F1 drivers, who would be delighted to be offered a drive for them, and who wouldn't care whether they were paid at all. After all, even Ayrton Senna once offered to drive for Williams for free when they were dominating the sport in the early 1990s (he wasn't prepared to extend the same generous offer to Mclaren, it must be said.) The top teams, though, must reckon that the money they would save would, if instead spent on the car, not buy back the time they would lose by replacing an Alonso or a Hamilton with a Sutil or a Piquet Jr.

Fernando Alonso has said he reckons he's worth 6 tenths of a second a lap. One might quibble with the exact figure. Autosport's stats boffins reckoned he was, on average, about 4 tenths of a second a lap quicker than his team mate Nelson Piquet Jr. at Renault last year, and even leaving that aside, there is a more awkward question to be asked. 6 tenths of a second faster than whom? He certainly wasn't 6 tenths faster than Lewis Hamilton at Mclaren the previous year. Nonetheless, there is little doubt that a driver the calibre of Alonso (or Hamilton) is worth a few tenths of a second.

Teams spend vast sums of money chasing a few tenths, and hiring a man with the ability of an Alonso, Hamilton, Kubica or Raikkonen is a more reliable way to find this kind of time than most. Research and development might produce improvements, or it might not. And unlike money spent on the car, it has the added advantage that, if you're in a position to hire the best driver in the field, you not only have that man on your books, you make sure that none of your rivals do. If, for example, Lewis Hamilton is a tenth of a second a lap quicker than anyone else on the grid (I'm not suggesting he is, I'm just illustrating a point), hiring him really buys you 2 tenths - the extra tenth you find, and the tenth your rivals would have had if he were driving their car. One reason Ron Dennis might have felt inclined to take the chance of pairing up Alain Prost and Ayrton Senna in the late 1980s must have been the thought that neither man would be racing against him.

That's not to say that every mega-bucks deal a team has ever done has made sense. One can question whether Kimi Raikkonen was really worth all the money Ferrari have shovelled his way, especially since the much less well-remunerated Felipe Massa outpaced him as often as not last year, or whether the team might have got someone quicker for rather less money. That is debatable, whereas the silly money Toyota paid for Ralf Schumacher back in 2005 was utterly inexplicable, and quite who thought Eddie Irvine was worth his multi-million pound retainer at Jaguar I don't know. In both cases, one suspects this was the result of corporate suits from the automotive world with deep pockets and little real understanding of the sport getting their fingers burnt.

None of this is to say that driver salaries won't fall in the coming years. In the current economic climate, teams are not going to have the kind of money to spend that they once had. In that context, it simply won't make sense to offer eight figure sums to the guys who drive the cars. Like Clive over at F1Insight, I'm not convinced of the need for salary caps, though. The limitations of free markets might have been shown up rather painfully in the real world over the last year or so, but this strikes me as one area where there is no need for intervene. Let the teams decide for themselves what the worth of having a really first-rate driver on the payroll is.

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