What the NFL could teach Europe: Column

Last month, upwards of a million Italians took to the streets to protest labor reforms recently proposed by Prime Minister Matteo Renzi. The union-led protests focused on proposed changes to the labor law, which bars Italian businesses from firing workers on permanent contracts except in cases of "serious misconduct."

Italy's economy struggles with youth unemployment at 44% and a GDP that shrank over the past decade. The popular outrage at the idea of reforming labor laws is emblematic of the broader challenges confronting the moribund eurozone.

To succeed, Renzi and his fellow leaders must help Europeans learn the power of pay for performance. The perfect lesson can be found in our NFL.

One of the NFL's defining characteristics is the absence of guaranteed long-term contracts like those found in basketball or baseball. If a team decides to cut ties, the player is entitled to receive only compensation explicitly guaranteed in his contract. This incentive structure avoids many of the complaints lodged by basketball and baseball fans of players prone to declining production after inking long-term deals.

Guarantee disaster

Even within the NFL, guaranteed money can be substantial. Nowhere is that more true than among quarterbacks, where 15 veterans have signed contracts of $50 million or more since 2009. The largest annual deal was the five-year $110 million extension signed by Green Bay Packers star Aaron Rodgers, which included $54 million in guarantees.

What is worth noting is how the performance of these big-money quarterbacks varies depending on how much of their contract is guaranteed.

Of the 15 quarterbacks, six have 40% or more of the contract guaranteed; the average passing rating for these "high guarantee" players was 5.8 points lower in the first year of their deal compared with the prior season.

Of the six quarterbacks with contracts guaranteeing 20%-39%, performance stayed about the same.

The best performing group was the quarterbacks whose contracts guaranteed less than 20%. On average, their quarterback ratings improved by 2.9 points in the season following the deal. Reigning league MVP Peyton Manning is among them.

Perhaps the most notorious NFL contract in recent history was signed by then-rookie Sam Bradford in 2010, when the Oklahoma Sooner star received $50 million in guarantees (64% of the total contract) from the St. Louis Rams. The deal caused such alarm that veteran players and management agreed on a new rookie pay scale for the following season. Bradford has had a middling NFL career.

Italian Peyton Manning

Rigid labor laws have left the eurozone without enough Peyton Mannings and too many Sam Bradfords. The result is dwindling productivity.

In Italy, the average worker is just 65% as productive as an American peer. That's one reason the business community is loath to hire full-time employees, opting for short-term contract workers instead.

One critical advantage young job seekers typically have is their willingness to accept lower wages in exchange for training and a foot in the door. But within Italy and several of its eurozone peers, work contracts are negotiated nationally, with union leaders and employers setting standard wages for entire professions. When combined with the permanent contracts cited above, this forces unseasoned workers into an unfortunate Catch-22: They need more experience to justify the higher standard wage, but they're unable to gain that experience because the higher wage makes them unattractive hires.

In this vein, the story of another quarterback is instructive. He was the 199th player chosen in the 2000 NFL draft and was fourth-string his rookie season. He was elevated to the backup roll in 2001 in large part because he was cheaper than alternatives. When the starting quarterback was injured in the season's second game, the backup took the reins and never looked back.

He would lead the team to its first Super Bowl title less than five months later. This quarterback was Tom Brady, and had he been forced to demand the $1 million league average instead of his meager $315,000, he never would have had the chance.

Italy and Europe have millions of young Tom Bradys, workers with vast potential but little experience. The question is whether leaders such as Italy's Matteo Renzi can get them into the game.

Matthew Schoenfeld works for Driehaus Capital Management,where he focuses on risk arbitrage.

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