With the NFL regular season in the books, let me turn my attention to the relationship between team payrolls and team performance. As we discuss in our book The Wages of Wins, while there tends to be a positive and statistically significant relationship between relative payroll and team performance, the relationship is not really very large enough to conclude that spending by teams is related to on-field performance. While the book was published in 2006 (and updated in 2007), I like to try to keep up to date on these topics and thus the reason for this blog post.
So, I downloaded the NFL regular season team standings data and NFL team payroll data to run this analysis for just the 2014 season. Before I present the results, I want to discuss the payroll data. Using the link above you can see that I am using "cash" and not there salary cap option. The reason is that I want to focus on actual spending by the team on the players as opposed to how money is attributed to payroll regulations. For those interested in doing this on there own, here is a step-by-step guide to payroll and performance analysis in Microsoft Excel.
So for the 2014 NFL regular season team payroll and performance is positive and statistically significant, but the amount that payroll explains team performance is about 25%. Meaning that there is 75% unexplained. If I wanted to know why teams wins, using only payroll seems to be a limited resource.