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  • Ryan Bernardoni

NBA Ideas: Flexible Max Contracts

The NBA Ideas post series is where I'll propose changes to the rules of the league that I believe would be net positives. These are not all 100% thought out ideas with formal proposals. They are not things that are 100% positive, or I like to think they would already be in place.

Idea #1: Flexible Max Contracts


Maximum contracts for most veteran players in the NBA are defined as a deal that starts at a percentage of the salary cap and increases by a set amount, defined as a percent of the first season's salary, for the length of the deal. The percentage of the cap is 25%, 30%, or 35%, depending on a player's experience and performance levels.


With this structure, true maximum contracts can only be written to increase in value year-over-year. For a player re-signing with a team that holds their full Bird Rights or Early Bird Rights, the raise is 8% of the first season's salary each year. For players changing teams or re-signing with a team that does not hold their Bird Rights, it's 5%.

The "problem" with these contracts is that they can become onerous, especially if a team is re-signing their own player to a full five year deal with 8% raises. Five years is a long time in the career of a professional athlete and the salary cap and luxury tax are usually not increasing at an 8% annual rate so in each subsequent season the contract takes up more space.


With the introduction in the last CBA of the "super max" extension for Designated Veterans who play at an All NBA level, you now have teams being put to very difficult decisions with their star players. Do we re-sign a player to a contract that will probably end up being a historically bad albatross, trade the player to a different team who will not have to worry about the added cost of the super-max, or play it out to free agency and risk losing the player for nothing?


The new rule that was meant to keep stars with their franchises has already been a factor in certain teams deciding to trade away their centerpieces instead of having to deal with the extreme contract risk.


One team that went the other direction, the Washington Wizards, may already be regretting that. John Wall, an unquestionably great player who will have his number retired by the Wizards and will likely make the Hall of Fame, has already signed an extension that won't kick in until 2019-20. That deal will pay him nearly $47M for his age-32 season. It's viewed as a terrible deal already, and it's a year away from starting.


Proposal: For teams with Bird Rights, instead of setting max contracts as a first season salary with defined raises, set them as a total value over a number of years and allow the team and player to structure the payments however they choose, within annual increase/decrease limits.


When signing a non-max contract using cap space or an exception, teams often choose to pay out a descending deal where the first season's salary is the highest for the contract and then each season decreases by a set amount, usually 5% or 8%, depending on rights status. This type of deal lets the team plan more concretely because they know more about their payroll status in the earlier seasons. It also makes the contract more tradable or easier to waive down the line if the player's performance does not live up to their pay.


The player gets all the same money, and get it sooner, so they have no reason to complain. Unless in a deflationary period, the descending contract has a higher present value to the player.


There are also numerous contracts that have been signed using a flat structure, where the player gets the same amount each year. This is a nice middle-ground if the team has cap or tax concerns in the early years of the deal but don't want to push excess risk into the future.


The league could give teams with Bird Rights this same flexibility in maximum contracts by defining a maximum contract with a formula for the maximum value of the entire deal and then allowing the player and team to negotiate an increase/flat/decrease structure within that.


The formula to match the current total contract values would be:


S = Salary Cap

P = Max Starting % of Cap

N = Number of Years

R = Raise Percent


Total Contract Value = (S * P * N) + ((N-1) * N / 2) * (S * P * R))


Example for a 5-Year maximum contract based on a $100M cap, 35% base, and 8% raise:

$100,000,000 * 35% + ((5 * (5 + 1) / 2) * ($100,000,000 * 35% * 8%)

$35,000,000 * 5 + (10 * $2,800,000)

$175,000,000 + $28,000,000

$203,000,000


You can note that this is the same total amount as the 35% 5-year max contract with 8% raises in the table above.


The difference is that, instead of only allowing the team and player to structure this contract with an ascending structure, they could allow them to build the contract however they want within an 8% increase or decrease.

With this proposed change, instead of looking out with fear of paying a player $46M in a season five years down the line where you expect their performance level to have dropped and you don't have a good idea what the state of your team will be, you could decide to front-load their deal and take the heaviest risk when you have the most information about the level of the player's performance and your team's finances.


Pros


This change would not force teams to use this structure. It's simply another option in the toolbox that could help them decide to retain their best players, which seems to be a goal of the league.


Some contracts would become more aligned to performance as they would be getting paid higher salaries in what are likely to be their prime years.


Fewer teams will be left in utterly hopeless situations where a player signed years previous to a huge contract becomes injured or sees their level of play deteriorate dramatically and they're stuck with a contract eating up ever more of their deal. These contracts would become somewhat easier to trade.


Cons


NBA contracts aren't actually as simple as they seem and front-loading max deals could impact escrow payments and the calculation of salary shortfalls that adjust the cap in subsequent years. I think this would basically wash out over time, and the small number of player that it would impact may limit the total impact further, but it would require more study and possible further adjusting.


Determining exactly who these structures can be used on would have to be negotiated. In this example I've proposed only making it available to a team retaining a player with Bird Rights, but the NBPA would likely ask for it to be available to all max contracts. Uses and limits could become a sticking point between league and union, though I think it ultimately serves the interest of everyone to allow this structure for at least some situations.


Teams who choose to use a descending structure will have to carefully manage the luxury tax in the early years of the deal. In the above example, you can see that the highest single season amount in any year is the first of the descending structure, and that is also the year when the cap and tax lines would likely be lowest. Further limits on descending structures could be put in place, but if the cap is increasing year-over-year the percent of cap in early years can be massive.


Conclusion


In a recent Reddit AMA, Rocket's General Manager Daryl Morey touched on this issue.


Question: Why aren't front loaded contracts more common?

Answer: Front loaded contracts are a win/win when possible. Players get more money up front and teams get more flexibility on the back end. Contracts where you are giving the player the most allowed under the CBA have to be escalating so they can get the max possible.


It seems like making them possible in more situations would also be a win/win.

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