The System, Not Stupid Contracts, Creates Wasted Payroll

I just came across this blog by Tim Donahue over at the Indiana Pacers site and found it to be a very interesting read, so I thought that I would share:

Link: http://www.eightpointsnineseconds.c...-not-stupid-contracts-creates-wasted-payroll/


The System, Not Stupid Contracts, Creates Wasted Payroll
by Tim Donahue on July 26, 2011 at 12:00 pm · 14 comments

In a system that mandates the players to receive a fixed percentage of revenue while limiting how much can go to stars and young players, you get bad contracts. In fact, I would go so far to say that all you get is bad contracts.

That’s right: virtually every NBA contract is a bad one. Some are bad for the players (e.g, LeBron and Durant are underpaid), but most are bad for the teams (we will give you a taste of those in a little bit).

This probably sounds crazy.

So to help show you what I mean, let’s first look at the audited results of the all-important 2010-11 basketball related income (BRI) that the NBA released last Friday. There are many interesting numbers included (like the 4.8% growth in BRI last season), but the takeaway for our purposes here is that, in order to ensure they receive the 57% share of BRI that the previous CBA mandates, the players will receive the $162 million sum held in escrow until the financials were finalized. (For the uninitiated, this “escrow” practice is something that was instituted in 1998 to ensure that the players’ percentage of BRI does not exceed the pre-arranged percentage. This year, 8% of the players’ salaries were held in escrow.)

This is the first time since the practice began that the players received all of the escrow. In every other year, the owners got most of the cash back. One way to read this is that the owners showed more spending restraint last year than during the rest of the past decade. Another is to recognize two major external factors: attempts to clear cap room for the coveted free agent class last summer, and the uncertainty surrounding the end of the CBA.

Regardless whether or not it was according to Hoyle restraint or a one-year oddity, they did pay out less on negotiated players salaries last year than they normally do (as a percentage of BRI). And perhaps most important in all of this is that the players not only got the escrow (which is a part of the cumulative negotiated player salaries) — the owners also have to write a $26 million check to the players to boot.

This is unprecedented.

(UPDATE/CORRECTION: There was originally an excerpt here taken from this piece by CBS’ Ken Berger, which is where I first saw the $26 million figure reported. But Berger’s account of the financials was not entirely correct so it has been redacted and the previous paragraph was slightly amended for clarification. My apologies for not catching this earlier, and thanks to Tim Frank of NBA Basketball Communications for notifying me of this oversight. This correction doesn’t have any material effect on this article. Carry on.)

So, all in all, the players walked away with $188 million, which on the face of it, is a tidy little sum to add to their lockout war chest. And for those who believe that the only possible end to this lockout is the players waving the white flag when their bank accounts start to dry up, this theoretically may give them more time.

Then again, this isn’t really a windfall for the players. It’s basically the same as a tax refund. It is the players’ money that was being held by someone else — at least the escrow portion is. It may help a little with their cash management, but I’m not at all convinced that it will have much, if any, impact on the length of the lockout. (In effect, it’s the rough equivalent of seven game checks.)

But the $26 million is interesting.

And it says something foundational about the current labor situation.

“Nobody Put a Gun to Your Head”
One of the recurring characterizations of the owners’ efforts during this lockout is that they’re “trying to protect themselves from themselves.” Under this theme, the problems (chiefly, bad player contracts) are either entirely or almost entirely the fault of the owners. The system is fine, but the owners are wastrels, proponents say. The line most parroted by those espousing this view can be traced back to an interview Wojnarowski conducted with NBPA rep Billy Hunter back in March.

Said Hunter:

“Ironically, a lot of the same things that David [Stern] and the owners are demanding now are identical to what they were demanding in ’98. He said, ‘I think every one of my owners should have a guaranteed $10 million profit per year. I said, ‘Bull… . ‘What they have is predicated on how they manage their teams. Nobody forces them to sign anyone.

“It’s the same argument: ‘We’ve got these guys who got six-year deals and I’ve got to pay this guy …’ Well, [expletive] it. Why did you give it to him? Nobody put a gun to your head.”

This view dovetails somewhat with the belief that these franchises either are or should be viewed as “hobbies for rich guys.” The other day, Danny Martinez of the Miami Heat blog Hot Hot Hoops wrote an excellent piece on the lockout, identifying the need for the owners to decide whether they wish to treat these properties as toys or as businesses.

His summation is an articulate statement of both of these points of view.

NBA owners are all very smart men. Most have made their fortunes elsewhere, clearly exhibiting keen business sense and the ability to make good decisions. I have a hard time believing that organizations attempting to turn a profit would allocate their funds as so many have over the course of the last decade. They have operated their vehicles of fun and exuberance without regard for impending financial repercussions. But now, as the dips into red grow larger and the blinding light coming from the upcoming TV deal blinds the owners, business sense reigns supreme.

The choice between toy and business is the one the owners have decided to make in my mind. I can support them picking business, just as long as they don’t continue to operate under the premise that it’s what they’ve doing all along. Because they weren’t, and we all know it.

The greatest part about his post is the homework he did.

Danny made a list of bad contracts to illustrate the wasteful decisions made by the owners. It’s a subjective list, but I didn’t see any highly objectionable inclusions. So I took his list, and added a little info to it. (All salary info sourced from Shamsports.)



The chart above takes Danny’s list and adds the 2010-2011 salary figure to each of them.

Some team totals include the salaries of more than one player (for example, Detroit’s blunder breakdown includes both Ben Gordon and Charlie Villanueva). Others show no amount, primarily because he’s referring to something that happened in the past (like with the Knicks) or something that may happen in the future (like with the Grizzlies).

As you can see, these contracts accounted for $263 million of the $2.176 billion in total player compensation paid to the players this year. (Note: “player compensation” includes benefits, which usually run 6%-8% of salaries — a figure included in the $2.176 billion total, but not in the $263 million.) Of course, the teams and owners got some value out of these players, but there is undoubtedly quite a bit of waste there.

One of the things that struck me in scanning the list was “Indiana: None.” Of course, Martinez was only seeking to provide examples of teams’ folly, and he succeeded in that. However, being a Pacer fan, I’m intimately familiar with dead money and wasted payroll. They had plenty last season.

So I decided to take Martinez’s list a step further to make a more complete list of owner errors.



Perhaps characterizing this as a list of “owner errors” is a bit strong.

This list includes players who were at least significantly overpaid given their production. But it also captures players who may have missed large chunks of time due to injury or other reasons. These things happen so maybe they are not “errors.” However, they do have a material negative impact on the value the team gets vs. the money put into the machine so they are “waste.”

As with Danny’s list, mine is subjective. It’s neither scientific nor exhaustive, but I believe it to be fairly representative. This list adds $488 million in payroll to the one compiled by Mr. Martinez — bringing the total to a cool $751 million in contracts not returning value in line with their size.

If you add about 6% for benefits, that’s $800 million total.

Again, there is some return on these players, but nowhere near enough. How much waste is here? It’s difficult to quantify, but a reasonable argument could be made for as much as $300 or $400 million of money-for-nothing. All of these contracts were approved and signed by the owners, so who do they have to blame but themselves?

For starters, let’s not forget about that critical $26 million figure.

We’ll come back to that.

The Only Payroll Bargains Are CBA-Mandated
Of course, the two lists above only account for about 80 contracts in a league of about 450 players. So I followed up by looking for the other end of the spectrum: guys who were obviously “underpaid.” Here is a list of those players.



This list comes with the same caveats as the last two — there are players I may have missed and some categorized as bargains will not be universally accepted as such. But I think we can agree that this is reasonable at least insofar as giving us a decent number to consider for the following argument.

The thing you can see here is that there aren’t nearly as many bargains as mistakes (about half). The other thing is that the list is overwhelmingly populated by players either on their rookie-scale contract or on max contracts. In other words, these weren’t the result of successful negotiations so much as they were the product of external salary limitations for players mandated by the CBA.

In short, while the owners need to look in the mirror on the “bad deals,” they don’t deserve a lot of credit for the “good” ones. The system — not savvy negotiators — created these bargains. (Of the players I identified as bargains, only the ones in red were even eligible to get a bigger contract under the last CBA. Moving all of those players to max deals would have added about $20 million in payroll.)

But … we have gone through enough tangents … it’s time to talk about the $26 million.

The 57% BRI Mandate for Players Will Always Be Paid Out
In 2010-2011, negotiated salaries totaled about $2.02 billion. If my lists above are reasonable, about 37% of that sum was tied up in bad or under-performing contracts. If you assume that only half of that 37% can be considere “wasted” money (because those players of course did offer some production), it means the owners threw away about $375 million in salaries.

Yet, they still had to write a check for $26 million to reach their 57% promise to the players. What this means is that if the owners had made none of their myriad mistakes, they would have realized a savings of … wait for it …

Zero dollars.

Yep.

Had the owners been as smart and efficient as they possibly could have been when signing players it would not have provided any savings whatsoever. It merely would have resulted in a larger check being written to the players — even after the escrow payout — to fulfill the 57% of BRI that players are guaranteed under the system currently in place.

Would that check have been for $100 million? $200 million? $400 million?

Who knows? But the more restraint shown by the owners while doling out contracts, the larger it would have been.

Because, again, players’ salaries must equal 57% of BRI — regardless of whether the owners are being frivolous with their spending arsenal (mid-level exceptions, trade exceptions, etc.) or they are paying a bench full of minimum-salaried bargains.

So, sure, Billy Hunter is correct: there is no one literally holding a gun to the owners’ heads, forcing them to overpay a guy like Ben Gordon rather than discover a guy Gary Neal. But even if errors like that — or like the salaries given to Gilbert Arenas, Rashard Lewis and Joe Johnson — aren’t made, the 57% mandate forces the owners to give $2.2 billion to the players.

Whether they’re worth it or not.