Top-Heavy Tournament Payouts
Multi-table tournaments are the most dramatic way for a player to increase his bankroll. The player that is fortunate to win the tournament receives a dramatic return on investment. This year's WSOP Main Event winner turned $10,000 into $8.25 million in a week of player, an ROI of 82,400%!
Since most of a tournament's prize pool is awarded to the top handful of finishers, the final hands of a poker tournament can be pretty intense. In a large field tournament, first place will often win as much as twenty times as much as ninth place. A pot where the loser wins $25k but the winner may easily go on to win $500k will elicit a lot of emotion and therefore, many viewers.
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The winner's share of the prize pool in most major tournaments is often absurdly large. For example, Jonathan Little, the winner of a recent World Poker Tour event, grossed $1,091,295 for his victory. Little's payday represented 37.5% of the $2,907,381 prize pool. Second-place finisher Cory Carroll won $561,369. Just the two of them were awarded 57% of the prize pool in a tournament that drew over 300 players. Aside from upping the variance in tournaments to bingo-esque proportions, these top-heavy payouts have some more far-reaching macro consequences on the poker ecosystem.
Why tournaments have top-heavy payouts
There are several reasons why poker tournaments tend to have very top-heavy payouts. First, casinos and tournament directors are motivated to post large first-place prizes for marketing purposes. On the WPT/WSOP circuit, payout structures are often stretched to ensure the winner becomes a "millionaire." From their perspective, what's sexier: a tournament where the winner receives $850,000 or $1,000,000? There is something magical when the winner will become a "millionaire." Clearly, the bigger the winner's take, the more casino operators can rest their hat on offering such large prizes to customers.
Players are also drawn to tournaments that offer huge prizes. A large first-place prize will attract many players who hope to turn their modest buy-in into a huge sum, especially if this sum will result in them becoming a millionaire (before taxes that is).
A painfully obvious instance of "millionaire marketing" was the 2004 WSOP Tournament of Champions. Second-place finisher, Phil Hellmuth, won absolutely nothing for outlasting eight of the world's best players. The tournament's winner, Annie Duke, won an astounding $2,000,000. No participants in that tournament can complain too much about the payout structure since it was a freeroll. But the point is clear: the more the winner's share resembles a life-changing lottery payout, the easier it is to market and televise a poker tournament.
How top-heavy tournament payouts hurt the poker world
Consider an online poker room that offers one huge tournament each week. The prize pool for that tournament might be $500,000. Let's say the final nine players get $350,000 of that money. Each week, those nine winners will likely withdraw their huge payday from the online site. So because of that tournament, at least $250,000 is withdrawn from the online poker room each week. That is $250,000 that is no longer up for play in the poker room, so the "poker economy" of that site was shrunk by about $250,000 due to the tournament.
The poker ecosystem, as a whole, works just like the online poker room in the above example. There is only so much money people are willing to spend on poker. Thus, windfall tournament winnings are likely to be removed from the poker world, and invested by players in safer areas like securities or real estate. More of the money from a $1,000,000 prize pool will stay in the poker world if 500 people receive an average of $2,000 than if 4 people receive an average of $250,000.
How top-heavy tournaments hurt players
Some countries do not tax gambling winnings, and poker players in those countries are certainly grateful for that. Nevertheless, some countries do, such as the United States. When gambling winnings are taxed (particularly how they are in the US), top-heavy tournament payouts have disastrous tax consequences.
Let's look at two different players, both of whom grossed $180,000 from tournaments. Both of these players are in the 33% tax bracket due to their day jobs, so any net winnings from poker are taxed at 33%. Player A won $45,000 each year for four years in a row. After taxes, he keeps $30,000 of his poker winnings each year, for a net total of $120,000 over the course of the four years.
Player B loses $20,000 each year for three straight years. Under US tax law, gambling losses are only deductible against gambling winnings, so a net-loss is not deductible against your general income. Therefore, Player B is not allowed to deduct these gambling losses against his income during those years. In year four, Player B wins a tournament for $240,000. However, after taxes, he only gets to keep $160,000. When you factor in the $60,000 in losses from the past three years, Player B only nets $100,000, which is $20,000 less than what Player A netted even though they both had the same amount of poker winnings.
This example shows the pros of gambling winnings that come in consistent, small chunks (like those of cash game players) versus through a huge windfall every few years.
Top-heavy payouts also have a psychological impact on tournament players. Since so few players truly "win" in tournaments, most of the participants are left with a feeling of failure. Over the course of a handful of washouts in a row, this feeling may be emphasized to the point that players quit playing because they are sick of losing. Of course, there is another side to this coin. When a player wins a tournament, the feeling of jubilation and confidence may be so extreme that they quit their day job and wind up giving back all their winnings (and then some) on the notion that they think they are a "tournament pro".
The variance created by top-heavy payouts makes it extremely difficult for players to accurately assess their ROI in multi-table tournaments. With the exception of low buy-in online tournaments (which can be played multiple times daily), few players are able to reasonably assess their ROI in multi-table tournaments in less than a year, particularly of large buy-in land-based ones. The difference in placing fourth versus first in just one $10k tournament can turn a player from a net loser into a huge winner for the year.
Players, in general, do not like top-heavy payouts
For evidence that top-heavy payouts aren't popular, one needn't look further than any final table rich in casual, amateur players. It is entirely common, in fact, the norm, for players to make a deal at final tables in order to flatten the payouts. In a personal experience, I found myself with the shortest chip stack out of six remaining players in a live tournament. First was scheduled to pay $21,000. Sixth was scheduled to pay $4,000. I was able to negotiate my way to a $9,000 payday (equal to that of three other players at the table, even though they had more chips than me), simply because the chipleaders feared their palpable visions of a $21,000 score could result in a less-than-satisfying $4,000 win.
When it comes down to it, people are risk-averse. Few people truly have the gamble in them to play for thousands, or tens of thousands, or even hundreds of thousands of dollars near the end of poker tournaments. At that point, many people realize that luck will be a huge factor in determining the outcome, and that the payouts should be modified to reflect that.
Top-heavy payouts are neither good for players nor good for the poker world in general. However, the lure of the huge first-place prize results in people buying into tournaments and watching poker on TV, which is why top-heavy payouts will continue to be the norm for a long time.