NBA Salaries: "It Would Get to $50 Million," and Other Tall Tales That Tell the Truth

This past weekend, Miami Heat superstar Dwyane Wade caused a ripple for two items:

1. Talking back to David Stern;
2. Telling a reporter that Wade should make a salary that approaches $50 million.

To the first point, I have to commend Dwyane Wade for finally voicing his concerns about how he perceives the players as being treated. However, I find it hard to shake the notion that by and large, players are acting at the behest of their attorneys, who are likely whispering in their ears, "you should be angry now." It is a fair thing to do when those attorneys are not writing dramatic "hold the line!" letters that are all but certain to be deal-busters. This brinkmanship thing, you see, is a two-way street. 

The second point though, which I find far more interesting, warrants some examination. If you look at the ESPN link connected to that second point, you find this reasoned analysis:

Consider this: LeBron James produced 25.4 WARP [Wins Above Replacement Player] in his final season in Cleveland and if James were paid like his peers ($2 million/WARP), James would have warranted a contract that paid him something like this:

$50.8 million.

The reasoning goes: Wade was not attempting to be a millionaire martyr, but an observer of free market principles. And what is more American than free market principles? If the NBA existed without an upward boundary (i.e. soft salary cap) then we would see the bidding war for the elite talent skyrocket. 

I tend to agree with this analysis, actually. In fact, I even wrote about it on my old site:

Best Bargains in the NBA | OKC Thunderdome

In that post, I examined Forbes.com's similar conclusion - that some key players are so valuable that if you look at their performance metrics compared to their salary, you can only conclude that the franchises that employ them are making out like bandits. In the case of Forbes, they applied Dave Berri's "wins produced" metric  instead of WARP, but you come to a similar conclusion using either one. If you're considering a player like LeBron James or Dwight Howard, their contribution is so dramatic to the team's bottom line that if you truly paid them in terms of the wins they produced, they would consume almost the entire salary cap space by themselves. Ergo, per Wade's assertion, if one were to remove the salary cap, we would see those elite players' salaries jump dramatically.

I took the liberty of re-creating that Forbes list with updated numbers to see how this year's crop of players stacks up. To do that, I needed two pieces of information - the average dollar amount spent per each win, and each player's wins produced metric. (In the Wade ESPN piece, they use WARP and Forbes uses wins produced; I went with wins produced, but one is as good as the other for my purposes here). 

(click to zoom in)

We can see that in this past season, teams spent on average about $1.8 million per win. If we then apply Dave Berri's wins produced metric in the same way that Forbes did, we multiply the 1.8 number by each player's wins produced number. There are 453 players in the NBA, so I have excerpted the top 20 here:

So the NBA's richest man should be...Kevin Love??? I'm as big a fan of Love in the Shower as anybody, but if his wins produced number (25.8) is actually higher than the team's actual win total (17) then clearly both Forbes' and D-Wade's statistician supporters need to rethink the model a bit. Fortunately for our purposes here, he seems to be the only outlier in this top 20 list, so at least we can still consider guys like Wade, Howard, and LeBron and their true financial consideration.

1. Moneyball

Perhaps you went and saw the movie "Moneyball" this past weekend, or you had read the book sometime in the past decade. If you did, you were offered an insight into the author Michael Lewis' obsessive thinking that hovers around one central idea - what is a thing worth? (In fact, he actually edited a book which was essentially called just that) How do we value a thing, be it a car, a computer, an idea, or a dime? For any given thing, there ranges from one to one hundred reasons why the thing is priced the way it is, and pro athletes are no different. There are also a number of ways to calculate the present value of an athlete, based on both his value right now and his value in the future (combine them both and you get something called a net present value). Whether a team realizes it or not, when they offer a contract to a player, they are assigning a value to his expected future cash flow returns. Is Dwyane Wade worth $50 million this season? Did he account for at least $50 million in cash inflows? Is that return expected to remain for the duration of his entire contract?

As Tim Donahue at the Pacers blog 8 Points, 9 Seconds dug into a while back, when a team has to deal with a salary cap structure, be it hard, soft, or Mr. Softee, there is going to be an upward bounded limit as to how much you can squeeze in. Putting aside individual contract limitations for a moment, consider last season's cap of $58 million. For each team, the challenge was to as best as possible acquire as much talent as possible under that limit, lest a penalty be invoked (luxury tax). If we take for example the Thunder, their 2011-12 roster is about as tight as you can make it. Just look at it; it's a practical Picasso of salary balancing. However, in two years, things get messy. Key players (James Harden, Serge Ibaka) come off of their rookie contracts. Guys will want to get paid. Their central figure in Kevin Durant is locked up, but what about the rest of them? Every other piece is likely movable to make sure that the team stays financially viable. And that is under the old setup. What happens in a new setup, when contracts must be shortened, guaranteed contract money shrinks, and teams must make even harder decisions on who to keep and who to let walk? Truly, the salary cap structure in whatever form it may be in creates an upward bound that restricts teams' ability to spend what they want for whomever they want.

However, without that pesky nuisance of a salary cap, not only would OKC be free and unencumbered to continue their financial mastery, but they could also pay Durant even more, sign Russell Westbrook to his true honey badger value, and maybe even go out and trade for Dwight Howard. Chocolate truffles for everyone!

I am exaggerating, of course. The first obstacle we would run into is the fact that marginal revenue streams would eventually diminish to the point where it was no longer beneficial to add costly components to a team's arsenal. Income doesn't go up forever. Furthermore, an aggregation of elite talent on a few teams would erode competition. It isn't even so much that a team like the Lakers would be guaranteed to be a force of nature if they owned Kobe Bryant, LeBron, and Howard all on one team; it's the fact that nobody else could; that is what destroys the competition. 

To address this point, I am actually reminded of the Bob Costas revenue sharing plan. Put aside for a moment the fact that he's talking about baseball - the salient point is this one:

"You don't have a game without two major league teams. The New York Yankees make $58 million a year in local broadcasting revenues, but the money comes because they're playing games against other major league teams. Yankee intrasquad games are not broadcast, and wouldn't be watched in such numbers if they were."

Here we have our first obstacle to an unbounded salary system. If only a handful of teams (i.e. the Knicks, Lakers, and Bulls) could truly open up the floodgates and sign on any player they wanted for any amount of money they wanted, competition would erode because of the dearth of truly "elite" talent. They could also buy up the middle talent as well, preventing even the money-conscious teams of building a Billy Beane-like assault. With the level of competition dropping,  the product's quality would deteriorate and with it, the revenue streams as well. 

2. Are you really sure you want free markets?

In the U.S., pro sports occupy a strange hybrid space that crosses free market principles with collectivism. Leagues have to all move together in the same general positive direction or else they deteriorate. Whether we're talking about the NBA (30 teams), the NFL (32 teams), or MLB (30 teams), each league has determined a "critical mass" for how many teams it needs to capture the most attention through competitive entertainment. Collectively, the leagues make their money in the market the same way any other entertainment companies does - by selling stuff. Are you going to spend your $25 on a new Knicks hat or the new Maroon 5 album? The NBA has to put forth the best product possible to win that wager. So it would make sense, would it not, to pay the true "stars" of the league a premium to pursue this goal of making the league as attractive as possible? Wade would get his $50 million, LeBron would get his $60 million, Kobe would take his $75 million, and Durant would settle for $30 million (it just seems like the kind of thing KD would do). Each and every one of these contracts could be justified from an investment standpoint. 

If a player adds that much value, he gets paid. It is so simple.

There is a dark underbelly to this whole argument for free markets, and it too is quite simple. Do you want to see it?

Here it is:

If Wade, LeBron, and Howard represent some of the best money ever spent, these guys, the last 20 guys in our dollars per win calculation, would be the worst. When it comes to the argument for freedom in contracting, these guys are the problem that Dwyane Wade either doesn't realize or care about. If Wade personally is worth bringing to the Heat almost 19 wins per season all by himself, and by virtue of that can demand $34 million to do it, then what of his teammate Joel Anthony? Based on the exact same metric, not only is Anthony actively costing his team wins, but the team actually paid him $3.3 million to do it. Based on Wade's multiplier, Anthony would owe the team money (in part to help pay for Wade's contract). 

I'm not arguing that Joel Anthony is a bad player or bad for the Heat locker room or that he didn't help them get to the NBA Finals. If you listen to his teammates talk about him, they all believe that he did and they value him in Miami. However, if we're going to use a multiplier to examine the value of someone like LeBron or Wade, then the same metric must be applied to Anthony as well, and based on that, we would conclude that he owes the team money.

With this dark underbelly, we have to put the square peg in the round hole. As Michael Lewis wrote, there is a price for everything. Anthony's price (and the 145 other players who had a wins produced number of zero or less) is not commensurate with his salary, just like Wade's price is not commensurate with his. If the salary cap constrains Wade's true salary realization, then there must be another that constrains Anthony's. 

Minimum Wage for Millionaires

In the U.S. the minimum wage is $7.25. It has increased almost 53% over the past 15 years. Correlative if not causally, the unemployment for prime minimum wage contestants, teenagers, has increased 48% in that same time period. Did teenagers suddenly become less employable than in the past? No, they simply became more expensive. So companies, rather than pinch their profits by hiring increasingly expensive teenage labor, decided that they could simply do without them. Teenagers got pushed to the side and companies have struggled to maintain the same level of efficiencies without the resource of cheap labor.

If we look at Larry Coon's NBA Salary Cap FAQ, we can see that under the old CBA, the team was required to pay out at least 75% of the salary cap. Further more, players in the NBA were guaranteed a minimum wage of at least $473,000 in their first year alone, and after year 5, at least a million. If you consider a player like the Raptors' Andrea Bargnani, a former #1 pick, his guaranteed starting salary was even higher, and last season he was paid $9 million so that he could produce for his team seven losses. This is a big problem, because these players have to be paid, and they have to be paid far more than they are worth. Their market price is set far higher than their intrinsic value, and this artificial price floor is creating myriad waste.

Does Wade really want his free markets and the $50 million that comes with it? There is a cost involved, and that cost comes at the expense of players like his teammate. It comes at the cost of eliminating this artificial price floor. If a team wants to pay a player everything he is worth, then that means that they can and should stop paying the players who are worth nothing. 

We have a dilemma then in this "free market" model. As important people have argued, freedom isn't really free. In order to release the upward bound, a star must be willing to accede the removal of the lower bound as well. It is the only way that makes economic and financial sense. The size of the pie is fixed so the money has to come from somewhere, and it would have to come at the expense of Wade's teammates.

Furthermore, the primal beauty of capitalism is that it is indiscriminate. In the words of Gordon Gekko, "you do it right, or you get eliminated." Not only would the under-performing players experience "downsizing," but there is a good chance that entire franchises would as well. Proponents of team contraction would be dancing in the streets. 

The remaining question is this:

Mr. Wade...who gets cut first?