Each team owner is given a rating. This rating is based on who you've played, whether you've won or lost and by how much. It is similiar in concept to the RPI ratings used for college basketball or Jeff Sagarin's ratings.
Each team owner is given a initial rating of 1400. This rating is adjusted after each league game, based on the final score and the rating of the opposing team owner. For example, if the 'Orange Crush' beat the 'High Flyers' 100-90 and the Orange Crush came into the game with a rating of 1480 and the High Flyers came in with a rating of 1420, the new ratings would be:
Handicaps are adjusted based on the differences in ratings between the two teams before the game is played. So if the Fence Crushers had come into the game with an 1800 rating and the Flame Throwers had a 1200 rating, their new ratings would be:
As you may have deduced from the rating formula, you are rewarded for beating good competition and likewise, you gain very little by beating weaker teams.
In addition to regular season wins/losses, you will receive additional bonuses to your owner rating by performing well in the playoffs.
NOTE: ratings are only adjusted for regular-season and post-season wins/losses. Also, your rating is carried with you from team to team, league to league.