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Contracts
Oy...all kinds of technical problems with TypePad yesterday. So how about these Class of 2003 contract extensions? Do we think these guys are really going to move around in three or four years? It seems to me that all the same CBA-mandated incentives to resign with the team you're already on will all be in place, but I'm also not sure I understand all the relevant cap/contract/CBA rules. Or, rather, I'm quite sure I don't understand them.
July 13, 2006 | Permalink
Comments
I'm wondering why this sort of contract hasn't been the norm. Since its a player option, if they have a Grant Hill issue, injury right after signing the contract, they can still exercise the option and collect for the extra years. If they play as expected they'll be worth boat loads and can opt out. Win-Win for the player.
Posted by: crack | Jul 13, 2006 11:29:33 AM
What's with this rumor that LBJ has some sweeteners in his endorsement contracts that if he moves to a bigger market the deals sweeten? The three-year extension makes sense in this light. He's only 21, right?
Posted by: Ron Mashate | Jul 13, 2006 11:45:36 AM
Here's my understanding. (Note that, while I am a lawyer, don't take that to mean I know anything about the salary cap! This is just speculation based on what I understand about the CBA.)
The total amount of an NBA contract depends on a few things: (i) how much the first year salary is, (ii) the length of the contract, and (iii) the amount of the annual increases. The NBA CBA limits all of them. To take an example, you could have a contract that (i) begins with a first year salary of $5 million, (ii) is for three years, and (iii) has 10% increases in the second and third years (note: increases are not compounded - they are a percentage of first year salary). The total amount of the contract is for $5,000,000 (first year) + $5,500,000 (second year) + $6,000,000 (third year) = $16,500,000.
The issue that LeBron (and now Wade, too) is exploiting is the CBA's limit to the salary in the first year of a contract. The CBA provides that the limit to the amount of the first year of a contract is (x) if the player has 0-6 years of service: 25% of Salary Cap, (y) if the player has 7-9 years of service: 30% of Salary Cap, and (z) 10 or more years of service: 35% of Salary Cap. In all cases, the amount of maximum annual increases is the same: 10.5%.
What LeBron's agent is trying to do is allow LeBron to sign a new contract when he has 7 years of service - which is the first year he can take advantage of the 30% of Salary Cap level. By signing a three year extension contract, LeBron will have had a total of 7 years of service when he signs his next contract (4 years under his rookie contract, and 3 years under the contract signed yesterday). That means, his next contract can begin with an initial year salary at 30% of Cap.
Of course, by taking a three year extension rather than a 5 year extension, he's foregoing some guaranteed money. To reduce the deficit in the amount of the guaranteed money, he has a player option for a 4th year. That way, if he DOESN'T sign a new contract after the three year extension (if he get paralyzed in a car accident or something), he can still get that 4th guaranteed year money. The CBA limits player options to one year, so he can't get an option for the 4th and 5th years - just the 4th year.
Again, that's just my speculation as to why they are signing the 3 year contracts rather than the 5 year contracts - it allows them more money for their next contract. Anybody have any actual information, rather than off the cuff speculation?
As a Nets fan, I'm happy. LeBron will be looking for a new contract when, conveniently enough, the new Brooklyn arena is scheduled to open. Wonder if LeBron wants to become a Brooklyn icon?
Posted by: Al | Jul 13, 2006 12:22:27 PM
if you have as much money and success at an early age as LBJ (and wade and carmelo), hitching your cart to a franchise forever seems unwise, even granted the possibility of an amare/penny/kenyon type injury. why marry yourself to the cavs if there's no guarantee they can provide the pieces you need to win it all, when in 3 years you might could go wherever works best? obviously it's complicated by the cap and its affect on other team's ability to sign you at some point down the road. unless you're one of those anomalous superstars (timmy, reggie, kevin(?)) who prefers small market you own, having the flexibility to more somewhere better seems wise.
Posted by: dj superflat | Jul 13, 2006 1:31:25 PM
please keep basketblogging. the middle east is going up in flames, and Ambassador Bolton's moustache is getting all the whiter as Armageddon draws nigh. I MUST KNOW MORE ABOUT LEBRON"S RUMOURED SWEETHEART DEAL WITH HIS BIG SPONSORS!
Posted by: Gregbollah | Jul 13, 2006 2:07:11 PM
Gregbollah, try, you know, Matt's dayjob(s) for that kind of stuff...
I think Al has a good summary of why the 3 and not the 5. Also, I suggest that the agents are betting on the Salary Cap itself rising by more than the max increase, so that in 3 years, LBJ, D-wade, etc. get a larger slice of a bigger pie.
Posted by: Pooh | Jul 13, 2006 4:25:14 PM
Six Apart sucks.
Posted by: Petey | Jul 13, 2006 6:01:02 PM
Al's interpretation is the correct one here.
Although, I'd love to here Drezner, Delong, or Cowen delve into if this was a smart move for LeBron's agent. The more guaranteed money for LeBron, the more money for the agent. If Lebron has a horrible injury, the agent is going to lose a ton of cash. Of course, he may have gained quite a bit in terms of reputation, which may net him some future high picks that he otherwise might not have signed.
Posted by: a | Jul 13, 2006 7:14:17 PM
If Lebron has a horrible injury, the agent is going to lose a ton of cash.
Somewhere I read that agents get a much larger percentage of endorsement contracts. Moreover, you would think that someone like LeBron has sufficient power to get substantially lowered rates. I'm sure the agent did the smart thing for himself, to the extent that he could.
Posted by: SomeCallMeTim | Jul 13, 2006 10:19:14 PM
I don't understant the argument re agents. LeBron obviously made the determination that he's willing to trade the certainty of the 5th year for the extra money this contract structure would provide (assuming he actually makes it to sign the next contract). If LeBron made that determination, why wouldn't the agent make a similar determination? (That's ignoring the obvious point that agents are supposed to look out for their clients' interests first, not their own.)
Posted by: Al | Jul 13, 2006 10:47:49 PM
If LeBron made that determination, why wouldn't the agent make a similar determination?
I think this kind of miscontrues the agent-client relationship. You don't make a determination, and then your agent makes a separate determination. One of the things you're looking for your agent to do is to help you make determinations about where your best interests lie.
Posted by: Matthew Yglesias | Jul 14, 2006 12:21:07 AM
It's only partially about money. It's also about the flexibility to split town in 3yrs instead of 5yrs if you don't like the direction of the franchise.
That's something an agent who was more concerned with his commission than his client wouldn't care much about.
Posted by: Petey | Jul 14, 2006 6:46:05 AM
"If LeBron made that determination, why wouldn't the agent make a similar determination?"
Because LeBron could switch agents before his next contract. If the agent is only looking out for himself, he'd be advising his client to get the biggest contract right now.
Posted by: Petey | Jul 14, 2006 6:48:04 AM
If the agent is only looking out for himself, he'd be advising his client to get the biggest contract right now.
What's more, LeBron's agent probably hopes to continue repping people way into the future. A reputation as "the guy who worked out that great, innovative extension for LeBron James" will help you get future clients.
Posted by: Matthew Yglesias | Jul 14, 2006 8:31:44 AM
People are all over the board here on this agent thing.
As I see it, here are the arguments for an AGENT (not a player) to prefer a 5-year contract and to prefer a 3/4-year contract:
5-year contract:
1. Get more guaranteed money.
2. The player could injure himself/die/play badly and so not get another max contract.
3. The player could fire the agent between now and the next contract.
4. Reputation decreases if the player gambles on a 3/4 year contract and that gamble doesn't pay off (due to #2).
Note that of these things, the ones that affect the agent differently than the player (i.e., might make the agent calculate the cost/benefit differently than the player) are #3 and #4.
3/4 year contract:
1. Potentially get even more money 3 years down the road by representing the player when he signs an even bigger max contract.
2. Reputation increases if the player gambles on a 3/4 year contract and that gamble looks like it will, and DOES, pay off (due to #1).
Posted by: Al | Jul 14, 2006 3:26:45 PM
I'm not a big basketball fan but I'm curious if anyone knows what happened to the player who paid lawyers by the hour to negotiate his contract. I believe his name is/was Nasr Muhammed. Did he do well or did he decide it was a mistake and hire an agent?
Posted by: John | Jul 14, 2006 3:42:38 PM
Reputation increases if the player gambles on a 3/4 year contract and that gamble looks like it will, and DOES, pay off (due to #1).
This is what I was getting at in bringing up this topic. Is the gamble worth it for the agent (assuming that the agent was the one who suggested doing the 3 or 4 year contract)? Considering Wade has decided to follow suit, Lebron's agent looks like a pretty smart guy. And, I believe that an agent would be able to use his leadership on this decision to get future high picks to sign with him over competing agents.
Posted by: a | Jul 14, 2006 3:43:38 PM
John, I believe that was Ray Allen. And he's doing just fine...
Posted by: Pooh | Jul 14, 2006 5:59:14 PM
