It’s hard for most Americans to consider someone making $20 million a year underpaid, but there are circumstances where it’s true. We see it occasionally in business, where a CEO running a massive company in extremely profitable fashion can be worth much more than his or her paycheck, and we definitely see it in sports, where league salary caps work to suppress individual player compensation.
Nowhere is the topic hotter right now than during NBA free agency, especially with several of the world’s best players pondering their options. Beyond debates about whether certain players deserve max salaries, though, lies a wider discussion about the inherent unfairness of the concept to begin with.
ESPN Insider’s Tom Haberstroh was the latest to dig thoughtfully into the issue ($$) of artificial caps on NBA player salaries, noting that an accidental byproduct of the latest CBA was allowing highly undervalued assets like LeBron James the power to lord over the market as a free agent. Any team would want a player like LeBron, whose actual on-court and off-court value combines to be many multiples of what he actually is able to be paid. Therefore, multiple teams are doing everything they possibly can to lure him, and the result is one player freezing everything else meaningful until he decides where he wants to play next season.
With basketball related income and, relatedly, the salary cap growing at much higher than expected rates already — and massive new national TV deals expected over the next few of years — collective bargaining agreement expert Larry Coon expects a player lockout in 2017. He writes in this blog entry from April that owners should be expected to give back some of the gains from their 2011 negotiations now that the current model has made so many more teams profitable (and worth more in sales).
With new NBA commissioner Adam Silver continuing to push more competitive balance as a desired trait, the next CBA negotiations should include a rule change that could remedy all of these issues at once. Borrowing from MLS (of all places), the NBA should implement a designated player rule.
The premise behind the rule is different for MLS than it would be for the NBA in that MLS is competing in a global marketplace for soccer talent when it’s nowhere near the best or highest-paying league in the world. For the 2014 season, MLS teams have a salary cap of $3.1 million (as compared to the NBA’s expected cap of around $63 million for the 2014-15 season). There’s no way MLS teams can afford to import or keep top talent with that kind of pay structure, so they created the designated player rule that allows teams to pay a player world market-level compensation while taking only a small hit on their cap.
Currently, the maximum MLS cap hit for a designated player is 12.5 percent of the overall cap, or $387,500 (see section II B here for more details; there are provisions for young player discounts, too). This rule has been utilized by various franchises to lure legendary France striker Thierry Henry, keep American stalwart Landon Donovan, and bring back other top Americans like Clint Dempsey and Michael Bradley from Europe. All of them make at least $4.3 million per season, but they still only count for $387,500 against the cap.
The impact of a rule like this on the NBA is easy to see on a micro level. For someone like LeBron, whose actual on-court worth has been estimated at around $45 million per season, a bidding war for his services (which includes his off-court value, estimated at $55 million) could easily see him eclipse the $100 million mark per year. That extra salary would be coming out of the owner’s pocket above what they’re currently paying per the CBA, but the value of having a LeBron is such that it makes almost any investment worthwhile. Lesser-but-still-massive salaries would be available to other stars, who would be able to navigate a freer market for their services, letting owners decide just how much they’re worth.
Where the owners and Adam Silver can get more competitive balance out of this is by making the cap hit percentage prohibitive enough that it makes creating superteams difficult.
MLS teams are currently allowed two designated player spots, and they can acquire a third, because the still-emerging league wants better teams. The low cap percentage hit encourages teams to lure top talent with outsized pay. But let’s say the NBA made its designated player cap hit equal to 40 percent of the team’s cap. For next season, that would be $25.2 million. We are already discussing how problematic it is for teams like the Knicks and Lakers to pair another major piece with Carmelo (if he re-signs) and Kobe because of their salaries. Depending on how much harder or easier the owners wanted to make it to double up on established standouts, the cap hit percentage could be adjusted accordingly.
So, what would the league’s elite players do in that kind of system?
For starters, it would be extremely difficult to have two superstars in any one market, because one of them wouldn’t be constrained by the cap in terms of compensation while the other would be. Would Dwyane Wade be OK with the Heat paying LeBron $100 million while he could only make $20 million there, or would Miami have just made him its designated player instead? For that matter, would LeBron ever have left Cleveland if staying could have earned him five times as much as taking his talents to join forces with his friends? Remember, there are only so many prime markets in the league, so these slots would rarely be available, presumably.
The immediate concern from some on Twitter was that small-market teams wouldn’t be able to compete in this system (as if they currently do?). That said, this kind of setup should actually increase the likelihood of small-market teams keeping drafted talent or luring a star they never could get now.
LeBron’s not going to Utah, but there are plenty of others who might.
With designated player spots in the marquee cities almost always filled (sidebar: this rule is made for someone like Carmelo Anthony, who has significant, demonstrated off-court value to his franchise, but whose on-court value as compared to his expected salary is questionable), what happens after that? Wouldn’t someone like Chris Bosh be tempted to take $30 million a year in a lesser market instead of maybe half that to play with a team that already had a designated player? Wouldn’t Andrew Wiggins, if he’s five years into a future Hall of Fame career, strongly think about Dan Gilbert’s offer of $40 million a year if designated player spots are not available in markets he would prefer (and LeBron’s not in Cleveland)?
NBA free agents already are conditioned to take as much money as they can in a constricted market. It’s hard to believe they would operate differently if the market opened up and the salary differentials were magnitudes larger. It might cost owners a little more of their profits to do things this way, but the expectation is that they will concede a bit in the next CBA negotiations anyway. Why not do something like this, which appears to be a giveback, but significantly benefits ownership as a whole, as well?