NBA's Super-Elite Get Even Super-Eliter: Why the 1% Do Just Fine in New Contract

Posted by: Dan Beucke on November 30, 2011 at 3:00 PM

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For those following the wealth debate, the contract battle just ended between NBA players and owners raises all sorts of issues: labor vs. capital, pay disparity, the way we compensate entertainers. The players took a hit in the new contract, reducing their share of league revenues from 57 percent to 50 percent. And management gains more control over where players play and for how long. On the other hand, the average player salary — already an impressive $5.2 million — should grow to $8 million by the end of the 10-year deal, according to the players-union chief.

As any NBA fan knows, the stars get paid far more than $5 million. Kobe Bryant of the Los Angeles Lakers stands to make $25.2 million this year, Dirk Nowitzki of the Dallas Mavericks, $19.1 million, and LeBron James of Miami’s Heat, $16 million. Indeed, pro athletes (lumped into a category that includes media moguls and entertainers) comprise 3 percent of the highest 0.1 percent of incomes, according to a November, 2010, study of top earners. That’s hardly shocking; as Robert Frank, the Cornell economist, argued in “The Winner-Take-All Society,” culture and technology narrow the market for pro athletes and entertainers — and, more recently, business and the professions — in a way that offers outsized rewards to a few stars.

As pro leagues goes, the rank-and-file NBA player makes out better than those in baseball, football, and other sports. Pro basketball salaries are guaranteed, for instance, which means paychecks aren’t cut short by injury or loss of skill. (There’s even an argument to be made that while pay disparity causes turmoil in the wider world, basketball teams actually do better when a couple of stars get paid much more than their teammates.)

So how will the NBA’s elite — its 1 percent club, as it were — make out under the latest contract? On balance, quite well. At least that’s the opinion of Mr. NBA Pay, Larry Coon, a computer scientist at UC Irvine who contributes to ESPN. (Here’s his exhaustive comparison of the old and new contracts.) What follows is Larry’s response in full to my inquiry. It’s wonky, but less so than the player efficiency ratings, alternate win scores, and other stats you’d be calculating if the NBA season had already started:

By reducing the players’ guaranteed split of revenues from 57 percent to 50 percent without rolling-back existing contracts, there will be less cap room to go around and the middle class will be squeezed out somewhat (with the presumption being that teams will find a way to give max dollars to elite players).

The high salary players were pretty well protected in this agreement. My presumption was that since ratification is one-player, one-vote, they would cut more from the stars to make the overall deal more amenable to the larger voting bloc — the rank & file players. That didn’t happen. Instead the maximum salary rules are the same as in the 2005 agreement. (The preservation of the provision where a player could receive 105% of his previous salary, even if this is over the league-wide max, is particularly important. In many of the owners’ previous proposals, the 105% provision was removed.)

As you noted, the “Rose Rule,” which allows franchise-level players coming off their rookie contracts to reach the 30% maximum sooner, is one of the players’ few gains in this agreement (although this rule also protects teams).

Contract lengths and raises are both reduced in the new agreement. Shorter contracts actually ensure that players receive MORE money, because with fewer dead contracts on the books, the money that otherwise would have been tied up in those contracts instead gets distributed to all players via the escrow system. Smaller raises (7.5 and 4.5 percent, down from 10.5 and 8 percent in the previous agreement) hurt the star players disproportionately, since these players tend to sign longer contracts.

The luxury tax penalties are now much higher, but teams tend to disregard the tax when it comes to signing elite players. If anything, the tougher luxury tax will affect mid-level players, since a taxpaying team like the Lakers which might have willingly paid a dollar-for-dollar penalty on a player like Ron Artest (now Metta World Peace) might think twice about offering the same contract when the penalty increases to $4.75 for each dollar or even higher.

Interestingly, the new agreement sometimes will make elite players choose between a larger contract and playing for their preferred team. In the old agreement players could receive the same contract via the sign-and-trade and extend-and-trade mechanisms as they could receive without a trade — with the result being that players such as Carmelo Anthony were able to leverage their teams into a trade to a specific destination. In the new agreement players’ contract lengths and raises will be smaller when using the S&T and E&T mechanisms. This will more often restrict player movement rather than earning potential — again protecting teams from losing elite players.

So in relation to the overall hit the players took in the new agreement, the elite players fare well.

(Photographer: Andrew D. Bernstein/NBAE via Getty Images)

Reader Comments

The Prairie Prankster

November 30, 2011 6:00 PM

I stopped watching the NBA over 10 years ago. While I think basketball players are some of the best athletes on the planet, I dislike the NBA style of basketball. I hate the selfishness of players and owners. David Stern is one of the biggest jerks I have ever met. NBA = Losers

Edward Gleason, CPA

November 30, 2011 11:10 PM

Well if you wish to drink from the David Stern Kool-Aid, this was a great deal for the players. For those of us who actually bothered to go through the financial aspects of the deal and the "system issues" (unlike yourself) it is a terrible deal for the players.

Please do some research next time, or contact me. This article is an embarrassment to Bloomberg.

John Paxson

December 1, 2011 5:05 AM

Edward Gleason, explain to me how this is a terrible deal for the players.

andrewfan

December 1, 2011 10:02 AM

I think it is a shame that the prices charged today for tickets are being paid by the fans. I personally wouldn't pay a dime to watch an NBA game. It hasn't been that long ago that I paid $7.50 for a front row seat and my salary hasn't gone up anywhere near what the players and owners make. I will not participate in the greed that is out there today. I hope there are many franchises that fail and that fans quit patronizing the NBA!!!

Magicbowlbob

December 1, 2011 12:23 PM

I want to get the occupy movement to focus on fair taxes. I do not care what or how you pay or don't pay taxes but if you are not paying 1% of your net worth you are not paying your share. I say the movement should be focusing on 1% for the 1%.
those that do not pay income tax still have many other taxes they pay, that together add up to way more than 1% of their net worth. Bumping our heads against the wall saying things are wrong in America is not a solution. Getting our financial affairs in order has to be the start. We can afford to pay our bills, just look on any hill anywhere and you know that. It is the fact that we don't tax enough to pay our bills, that things got this way in the first place. Nobody gives a hoot about whats going on if they are not paying for it anyways. Taxing the citizens enough to pay for what the government spends is the only way you will get reform in spending. Right now you have both the Left and the Right hooting and hollering wan wan wan all the way to the bank. If you don't make them pay for it they will never get off the ride.
Magicbowlbob

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About

"The Wealth Debate" is a running discussion of wealth, poverty, the economy and income inequality in the U.S. and the world. It was started shortly after the Occupy Wall Street movement sparked a global protest about the fallout from the financial crisis and money in politics. You can reach the editors, Dan Beucke and Mark Gimein, by email, or follow BloombergNow on Twitter to keep up with posts.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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