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Tuesday, July 5, 2016

How the NBA Destroyed League Parity by Increasing Compensation Parity

The Economist has an interesting article If You Can't Beat 'Em, Join 'Em on the NBA's disaster of a collective bargaining agreement "CBA" that has effectively ruined the chance of parity in the NBA, something it was meant to foster (hat tip Lawrence for the article) and set the stage for Kevin Durant joining the 73 win Golden State Warriors (note: I am a huge Warriors fan and still not happy that he left Oklahoma City from a basketball standpoint... though I am excited to watch Durant play more often).

Two of the main issues outlined:

1) Players are entitled to 51% of all basketball related revenue

Under the current CBA, the players are entitled to 51% of all basketball-related income. So when new money comes in, the team salary cap goes up—and when a lot of new money comes in, the cap goes up a lot.
2) The max any player can receive is capped (at roughly $24 million, depending on service time which I'll ignore)
That gave every team an extra $24m of cap space to sign whoever they pleased—an amount that just happens to be nearly as large as the individual maximum. 

What Does this Mean to the Compensation Structure of the NBA?

In simple terms... each team NEEDS to spend a certain amount of money (I say "needs" as the maximum amount each team can pay is likely below the clearing value if it were a free market) and the amount of money that can be paid to any individual player is capped. My guess is the result is players in aggregate make less, but that non-stars make much more (with the decrease being more than 100% compensated by the stars).

The below is a framework for my guess as to how players would be compensated with no collective bargaining agreement (i.e. a completely free market), with a cap of the current $94 million per team with no player cap, and the current cap of $94 million per team with each player being capped at ~$25 million / year (in the real world there are a lot of nuances in these numbers and they aren't meant to be exact).
  • No CBA: in a free market, teams will simply pay more for talent as a whole (which is what we saw before there were huge penalties invoked in the latest CBA to team's that paid more than their allotment), which would also allow rookies to make more than the limits the league has imposed. 
  • Team's (not players) capped: there has been a lot of research already pointing to stars being underpaid in the current structure due to the max contract each player can receive. Given only 5 players can play at any time and the fact that one player can turn a team from mediocre to the world champs (unlike in a sport such as football), true stars should make multiples more than anyone else and would likely receive the marginal dollar if an owner had to choose.
  • Team's capped + max player contract: if a player would have otherwise made more in % of a team's payroll in a capped structure, then by definition limiting these stars to a certain $$ amount would increase the amount all others could / need to receive. 
Throw in the additional detail that team salary levels spiked when current stars were already locked into below market rate contracts and you have all the ingredients you need for massive overpaying of below average players.

Back to the Economist with the impact...
The real lesson from Mr Durant’s decision is the same as the one provided by Mr James’s original move to Miami: that the NBA’s CBA is a train wreck. At the very least, the maximum contract needs to go—it reduces the entire art of team-building into a sycophantic exercise of courting superstars who cannot be paid what they are worth.
It should be no surprise that if you can't compensate a player much closer to what they are worth if they stay (or in other words... penalize a player more for leaving), they will be more likely to leave an existing team for other forms of compensation (including improved odds of a championship, a more ideal living location, friendship, other forms of compensation, etc...), all of which are more likely only at a handful of teams in the league... including Golden State.