nba-lockout

Einstein and MacGyver Solve the NBA Lockout – Part 2

Here is part 2 of Art Rondeau‘s solution to the NBA lockout. Enjoy!

Here’s a quick summary of Part 1:

1. The proposed new solution uses a stock market model. Using 57% of Basketball Related Income (BRI) for our example (the percentage that players received in the last CBA) and $100M for the average team BRI (based on data from Hoopshype.com), we break the $57M into $50K “shares”. This comes out to 1,140 shares per team. The $50K share price is an estimate.

2. 20-25% of a team’s shares would immediately go into an “escrow” account (the focus of much of this article). For this example, we’ll put 20% in escrow (228 shares).

3. Instead of stating a fixed dollar amount for the player to receive (one of the biggest causes for the owners’ reported losses), the player will be assigned the equivalent of his salary in $50K shares of “stock”. Specifically, the player will be assigned 80% of his salary in shares (the other 20% is part of the escrow account). Any shares left over after each player gets his 80% will also get added to escrow (there’s a detailed example in Part 1).

4. Actual share price will be determined at the end of the season based on how much BRI the team earns. If the team earns $100M in BRI, the share price remains at $50K. If the team earns more BRI, the share price goes up. If the team earns less BRI, the share price goes down.

5. I’m suggesting a guarantee for the minimum share price. This gives the players a safety net and ensures that the owner has some skin in the payroll portion of the game as well (he’s obviously got some skin in all the other areas of the biz). In theory, it should never be necessary for the owner to add cash to increase the share price “up” to the minimum, but it’s nice to have it in place, just in case.

6. All 57% of a team’s BRI will be paid to its players. There are no incentives for not getting the best talent that’s available. Note that if the players’ are paid every penny of the 57% but the team’s salaries can never total more than 57%, you’ve effectively got a balanced budget (at least as far as player salaries go) each and every year.

If you saw any of the comments that came out of the negotiating session between the NBA and NBPA last week, a lot seems to be riding on the owners wanting a hard salary cap and the players saying that they won’t accept one. The benefits of a hard cap are that it limits the owners’ exposure for losses and, as one article reported, keeps them from agreeing to bad contracts. And while this latter reason looks a little fishy (after all, they should be able to keep from agreeing to bad contracts without any help, right?), it’s actually a legitimate issue that we’ll address this time around.

One of the big benefits of our stock market model is that it limits the owners’ exposure for losses but does it without imposing a hard cap on the players. The “cap” rises and falls with the team’s BRI.

Another big benefit is that this system puts some of the onus on the players. Play hard and keep the fans involved and coming to the games and it will pay off. Give up on the season or tick off the fan base and that will be reflected in the players’ paychecks, too.

As nice as it may seem to have guaranteed dollar figures in contracts, it eliminates some of the motivators that help human beings, not just basketball players, excel. Having at least some of the bottom line dependent on how well the player and the team perform will bring overall play up a notch.

Ric Bucher’s information about the portion of BRI that’s determined before the season begins helps here, too. Season tickets, luxury suites, and signage (ads inside the arena) have all been sold before the first game begins. That means that their pricing and demand are based in large part on what happened the season before. So even if a team is eliminated from playoff contention very early in the season, they still have an incentive to play hard. Not only will they want to keep bringing fans to the arena to maximize this season’s earnings, they’ll want to ensure that the portion of next year’s BRI that they can only directly impact right now is as profitable as possible.

As We Begin Part 2

As Part 2 is about to kick into gear, I’ve got to issue an apology. This is about a lot of special situations and, as such, it’s a longer piece than Part 1. My warning from Part 1 about not operating heavy machinery while reading it is in effect for Part 2 as well.

And since this article is Part 2 of “Einstein and MacGyver Solve the NBA Lockout”, I should mention Einstein and MacGyver here.

Okay, now that I’ve mentioned them, let’s get into how we’ll handle different circumstances using our stock market model and mention some additional relevant topics as well.

A Few Words about Revenue Sharing and “Minimums”

Ultimately, it’s imperative to the health of the league that all twenty-eight-ish markets field NBA-quality teams (30 teams but 2 in LA and 2 in the NY/NJ area). That means that although salaries may not be exactly identical between a big market team and a small market team, they have to be close enough so that players at all levels will consider playing for all 30 teams, at least from a $$$ perspective.

It also means that NBA-level coaching staffs and NBA-quality Basketball Operations staffs (President/General Manager/etc.) must be employed as well. This most likely means a mandated “minimum” dollar amount to spend on the coaching staff and another mandated “minimum” to spend on Basketball Ops. Without these minimums, some owners may be tempted to hire coaches based more on how little they’ll sign for than on how good they are at coaching. While this type of thing would seldom happen, keeping the “product” (quality of play) at its best is too important to the league to just leave it to chance.

All this probably means at least a 2-part revenue sharing agreement. Part 1 brings in enough to keep players’ salaries mostly (or exactly) equal throughout the league. Part 2 brings in enough to ensure that a certain number of dollars are spent on coaching and Basketball Ops. This article isn’t a referendum on revenue sharing; I’m just taking the opportunity to introduce its need into our “solution”.

Furthering Our Stock Market Model for Special Circumstances

The majority of the stock sold on the stock market is called “Common” stock but there’s another type that gets preferential treatment. It’s called, coincidentally, “Preferred” stock. It gets paid off before Common stock does, sometimes lowering the value of the Common stock. In our example, the shares that make up the 80% of the players’ salaries are “Preferred”.

In the escrow account, most of the stock is “Common” but some of it is “Preferred”. And, as circumstances change, it can jump from Preferred to Common and back as fast as Marty Feldman’s hump switched shoulders in Young Frankenstein (now if we can just get someone to draft “Abby Normal”…).

Some stocks on the stock exchange pay something called “Dividends”. This is kind of a bonus per share that’s paid when things go especially well. We’ll be paying Dividends at some point here, too.

Our escrow account will be used for the following special circumstances:

1. Paying player “minimums”

2. Paying performance, good citizen, good teammate, and community service bonuses.

3. Making up any trade differentials.

4. Paying for players who must be brought in because a player on the original roster is out for the season with injuries.

Here’s what all that means, at least in my little world:

1. “Minimums”: Players on their first contracts and some players on their last should, in my opinion, have some kind of minimum salary figure that they can count on. Rookies are already limited as to how much money/how many shares they’ll receive based on where they are drafted. But they have start up expenses and maybe even need to provide for some extended family. Since they’ve already had a limit placed on how many shares they can negotiate, providing some sort of minimum salary makes sense.

And players who are playing for the “veteran’s minimum” have also already been limited based on number of years of service. So a minimum share price makes sense here as well.

Both groups that get minimums have less downside risk than their “higher number of shares” teammates. But at the same time, because they’ve got a smaller number of shares, their upside potential is not as great as their teammates’.

If, after the share price is calculated at the end of the season, any player in either of the two groups has earned less than his guaranteed minimum, shares (or portions of shares) will be taken out of the escrow account to bring the total value of the player’s shares to that guaranteed minimum.

2. Bonuses: The four (4) bonus groups – performance, good citizen, good teammate, and community service – are all optional and could be eliminated if including them causes too much uproar. But we’ve got a chance to make a bit more of an impact on team performance if we include them, so I’m going to go for it.

In general, bonuses can be paid based on one of four models:

a) All players get an equal number of bonus shares;

b) Each player gets a percentage of the bonus shares based on his percentage of overall team salary (if a “max” player owns 20% of the total number of shares, he’d get 20% of the bonus shares available as well);

c) One or more players get an extra taste because of extra results/effort and then the other players split the rest as in a) or b)

d) One or more players lose money and the rest of the team splits the rest as in a) or b)

For most players, this bonus money should be pretty much “in the bank”, except for exceptional circumstances.

Performance Bonus: The players would get paid this bonus for basically doing their jobs. If they’re playing hard, they’ve got no worries. However, in the rare case that a player just isn’t putting in the effort, it would be possible for him to lose some or all of his shares. Even an injured player who’s doing his rehab would qualify for bonus bucks. The only loss of bonus would be for dogging it above and beyond…

Another possible twist on this bonus is that a player who’s played way beyond expectations could get some extra shares (a la option “c”). For example, a 2nd round draft pick who ends up starting half the team’s games would seem to deserve some extra dollars because he’s performing way beyond what is expected of the average 2nd round pick. It’s a possible way to reward extraordinary effort and/or results.

Good Citizen: Again, this should be automatic. But if a player decides to shoot up the strip club parking lot at 3 a.m., this is a way for his teammates to show their disapproval. After all, that kind of behavior alienates the fans, ultimately costing all the players money because of lost BRI. Although the offending player might already have been fined by the league and/or the team, this bonus allows his teammates to weigh in. And for many athletes, peer pressure is the best way to get them to change for the better.

Good Teammate: This is another “sure thing” except in two general cases. First, if a player is going out of his way to undermine the coach, he might lose some of this bonus. Second, if a player is causing big problems to the rest of his teammates (continually picking fights, being a major distraction, etc.), the team could “vote” him a lesser share.

Obviously, things have got to be pretty extreme for a player to lose some of these dollars. But it’ll happen eventually.

Community Service: This is based on players going to events arranged by the team. For example, visiting a school or a hospital or signing autographs at a “season ticket holder only” event.

All things don’t have to be equal here, as long as everyone’s pulling his community “weight”. However, this category might be a way for a lower paid player to make some extra money. For example, if a player who gets little to no burn during games goes to an event so that one of the starters can miss it and get extra treatment on an off day, that should be worth an additional something.

3. Trade differentials come into play when, for example, your GM trades two players who have a total of 40 shares of stock and receives one player whose contract calls for him to get 50 shares of stock. The 10 share “differential” will come out of escrow.

4. Extra Players: If a player gets injured and is out long enough that the team has to go sign another player to replace him, I originally envisioned that money coming from the escrow account. And it may still come from there. I’m just having some second thoughts about whether the players should take a big financial hit because a teammate got injured. It could be that it’s better to have this type of salary be covered under revenue sharing. Your thoughts on all this will be appreciated.

Escrow Calculations

When divvying up the escrow money, all of which will be paid to players, the payout sequence looks like this (assume we’re going to pay additional players from escrow):

a) Shares to extra players (Preferred stock)
b) Shares to cover trade differentials (Preferred)
c) Share to cover player “minimums” (Preferred)
d) Bonus pool shares (Common)

The bonus pool shares are Common stock because their value decreases whenever anything is paid in categories a, b, or c. If nothing is paid in those categories, the price per share of Common stock is excellent. If a lot of escrow money goes out in the first three categories, there may not be much left for bonuses (hence, a large part of my hesitancy for paying extra players from escrow).

The bonus money can be divided evenly over the four different types of bonuses or it can be weighted so that half the bonus money goes for the performance bonus (for example) and the rest spread evenly across the other three bonuses.

(Note: I don’t know if shares deducted from a player should go to the rest of the players or to charity – there are pros and cons for both – I just know that they’re not going back to the owner).

Max and Max+ Players

One of the big differences in using the stock market model and the 57% cap is that when a player gets more shares in his contract, it’s more obvious that there are fewer shares to be split among his teammates. It’s likely that some number of shares will need to be decided on as what a “Max” player will get. That’s not really a big problem; there are lots of numbers gurus who can come up with the number of shares needed. A bigger problem is determining who’s a Max player and who’s a Max+ player. And who’s not.

One of the things that hurt almost everybody (eventually) during the past decade was the number of players who got “max” contracts but weren’t really “max” talents. This is where the “keep owners from making bad contract decisions” rationale comes from. And here’s why it’s really an issue:

First, no matter what kind of money you make, it’s probably less, much less, than NBA basketball players make. And it’s probably more than other people that you know make and less than what still other people you know make. You most likely know people who make about what you do and are jealous because someone else is making a few cents more per hour, a few hundred more per week, or a few thousand more per month than they are. Those kinds of issues over what we make compared to what others make exist at all economic levels. That means that they exist for players, too.

If you know someone who’s unhappy because of the “injustice” of a money issue, you’ve probably seen that their attitudes are bad and sometimes contagious. Most likely, they don’t work as hard as they could. You don’t have to look far to find a few examples of this.

Now take the potential attitude problems and lack of effort problems and imagine that the player you’re about to pay $10M per season is the one with those problems. Maybe his agent has hyped him that he’s worth $12M per season when he’s really not. Maybe player A was overpaid by his team and your guy, player B, knows he’s better than player A. And wants that reflected in his salary.

The owner’s got a couple of options: he can pay the $10M and maybe have a player sulking and not giving his all (not intentionally but because the player feels upset) or he can “ensure” that he gets $10M of effort and attitude by paying the extra $2M to “insure” his investment. This, believe it or not, is a real world situation.

A few seasons ago, an NBA GM decided he wanted me to use my peak performance coaching program with one of his players to shore up a weak part of his game. The GM knew it was weak; the player knew it was weak; his teammates knew it was weak. But the GM said that he’d have the player’s agent contact me to set things up because if the GM told the player that he needed to work on that aspect of his game, the player might feel that the team wasn’t happy with him.

If a GM can’t tell a player he’s found someone to help the player fix a part of his game that the player has publicly said is weak, how is he going to tell one of his best players that he’s not as great as he thinks he is and that he’ll have to “settle” for less than max money? Answer: he can’t. And because of that, too many max contracts were written. And will continue to be unless a solution that allows the team to limit max contracts without the aforementioned issues is found.

Can a team have more than one max contract player? Certainly. But does every team have one? Probably not. Being the best player on a team doesn’t necessarily mean that he’s a max player. After all, he might have been #4 on the team and #1, 2, and 3 left during free agency. Now he’s #1 by default.

Something needs to be done to remedy this but I don’t think that it has to be a hard cap. Instead, what I’m going to recommend is that Max and Max+ players must not only be designated as such by the team, that designation must be approved by the League Office.

True Max players should, and would, get that designation. But if the league turned someone down after the owner said that the player was “Max” then any anger should be directed at the league and not at the team. That’d be a big help to the owners. And I’m sure the league can find someone diabolical enough to make those kinds of calls (cue Conan’s clip of Dracula as Dick Cheney).

Last but not least, we have what I’m calling Max+ (max plus). And there are only a handful of these. It’s a dividend for a player who is really the cornerstone, and maybe the face, of the franchise. Although they’ve got to be a top player, the designation is more about mystique. People come to the games specifically to see them play.

My take is that these players should probably get a bonus that’s outside the 57%. As such, they’d get it when things went well but wouldn’t get it if the season was a disaster. This bonus could be a percentage or two of profit and would need to be approved by the league. Since it’s above and beyond, it’s the only money that wouldn’t have to be paid in the same season that it was earned. It certainly could be but if the player and owner agreed to it being deferred, that could happen.

Wrapping Up

I told you early on that this would be long. For those of you still reading, thanks for hanging in.

Just a couple of things before we wrap up: you’ll notice that I’m using much of what’s in the just-expired CBA (percentages; rookie scale; veteran’s minimums, etc.). This is because these are things that the owners and players agreed when they crafted the last CBA. Basic accounting certifications needs to be addressed. Although they may want to haggle about the % of BRI, the only really big differences from the last CBA are shares instead of dollars; income somewhat pegged to profitability and effort; and a flexible cap. The rest should be concepts that both sides have long been comfortable with, lessening the chance that a minor point would keep them from adopting the overall system.

Part 3 will be out in just a few days (where have you heard that before?) and will focus on why both sides should agree to this and how they can get the season started while hammering out the particulars.

 

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