Commentary June 17, 2010, 5:00PM EST

A Problem Like LeBron

When you have a superstar employee, how do you not end up working for him?

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(Corrects spelling of Tobey Maguire's name in the 10th paragraph.)

The hardest problems in business are the ones that money alone can't solve. A gushing oil leak on the ocean floor is one example. LeBron James is another. When the 25-year-old aspiring "global icon" becomes a free agent on July 1, his price will be fixed. The rules worked out by the National Basketball Assn. owners and players union dictate that as a seven-year veteran, James can't receive more than 30 percent of a team's salary cap, which is projected to be $56.1 million next year. The Cleveland Cavaliers, his current employer and hometown team, can offer a six-year contract while the competition can offer only five, but regardless of where he signs, James will have to survive on an average of about $20 million a year.

James is quite a bit more valuable than that. The Cavaliers had the NBA's best regular-season record this year; should James sign elsewhere, they will immediately sink to the middle of the league pack, if not lower. The psychic blow—to the team, the city, the entire Rust Belt—would be even greater. The pressure to persuade James to stay is enormous. In a press conference the day after the Cavaliers were eliminated from the playoffs, team owner Dan Gilbert, a normally voluble entrepreneur who built the Quicken Loans mortgage empire from the ground up, labored under the load. His voice trailed off at the end of sentences, and he laughed feebly at his own jokes. "We have to ignore the noise," he said flatly. "We are focused on building the best franchise, the best environment, the best place for a long-term situation for LeBron or any free agent that we want to come here."

Gilbert bought the Cavaliers for $375 million in 2005, halfway through James's second year with the team. He has been adamant that he won't beg or grovel for James to stay—and that's a logical negotiating stance. Doing so would acknowledge that the value of his investment rides on the whims of a single employee who is half his age. Guess what? It does anyway. When James joined the team, home attendance at Cavaliers games went up 59 percent. This season, the team sold out all 41 home games for the first time in franchise history, and the Cavaliers were shown on national television as often as the Lakers and Celtics. Gilbert may own the Cavaliers, but James owns Gilbert.

In a 2009 study titled "Should Investors Bet on the Jockey or the Horse?" in The Journal of Finance, Steven Kaplan, an expert on executive compensation at the University of Chicago Booth School of Business, found that the answer, generally, is the horse. "In most businesses, what you find is that the core attribute is not the people, it's the business," he says. "Warren Buffett has a famous saying, which I think is supported by the data: 'When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact.'"

Kaplan's analysis presumes that value is sprinkled somewhat evenly across an organization. LeBron-style problems emerge when one entity is disporportionately responsible for value-creation. Sports franchises are obvious examples, though hardly the only ones.

The economics of the legal profession is also skewed by larger-than-life talent that demands larger-than-life compensation. Twenty years ago, at the law firm Kirkland & Ellis, Fred Bartlit Jr. was LeBron James in pinstripes. Bartlit, now best known for representing George W. Bush in Gore v. Bush in 2000, had distinguished himself as a powerful trial lawyer who attracted big clients. The compensation structure at Kirkland, as at most large firms, however, was based primarily on seniority and hours billed. Frustrated by the difference between his perceived value and his paycheck, Bartlit persuaded Kirkland to adopt a pay-by-results system for him and his group. "I originally thought that the model of getting paid for the value you bring could co-exist within an hourly firm," Bartlit says. But the two systems didn't work together.