Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

NBA Salary Cap

by Noah Constantine

 

 (Photo via The Undefeated)

(Photo via The Undefeated)

Imagine somebody gave you $1,000 and told you to go spend the night at the Ritz-Carlton. You could spend all the money on the penthouse suite, eat PB&J sandwiches you brought from home, and drink cheap beer from the gas station across the street. You could stay in a junior suite, go out to a nice dinner, and maybe buy a bottle of wine. Or, you could stay in the cheapest room at the Ritz (still very nice), have an amazing steak dinner, then have several drinks at the posh, rooftop bar. This is exciting — you have $1,000 to spend on a truly amazing night. Even if somebody beats you to the penthouse, your night remains intact. You can simply reevaluate the situation and make new choices to maximize utility. In fact, somebody overpaying for the penthouse might be a blessing in disguise. Is it really worth spending all your money on the hotel room? For those who love bud light and PB&J’s, the answer may be yes. Nobody, however, loses the penthouse suite and feels like the night is a foregone disaster. By sacrificing on the big ticket item, different indulgences are suddenly available. If you order well at the restaurant, you may still come out ahead of the guy in the penthouse.

Now imagine that you're an NBA franchise, given a similar opportunity. You get to build a roster however you think is best. A room at the Ritz-Carlton instead represents an all star caliber player. There are penthouse suites — LeBron James, James Harden, Kawhi Leonard, etc… You have junior suites, players like Paul George and Chris Paul. Finally, there are standard rooms, which represent players like Kemba Walker and Kevin Love. There are no bad options from this list — every player is really good. But, in the same way the penthouse is nicer and more expensive than a standard room, LeBron is better and costlier than Kemba Walker. In this scenario, you have to make strategic choices on whether its optimal to spend a huge portion of funds on a penthouse player, or if it's smarter to instead compile several really good, cheaper players. Regardless of your opinion, there are multiple ways to build a title-contending team. Losing out on the penthouse didn't ruin your night, in the same way that not having LeBron or KD shouldn't ruin your team’s hopes of a championship. By spending less money on a star, the team is able to accrue more good players, just like staying in a standard room allowed for trips to the steakhouse and the rooftop bar.

In reality, NBA franchises face a very different set of challenges than those outlined above. The current salary cap guidelines have established a “max salary” designation, where top players have a limit placed on their earning potential. Where the price of a room at the Ritz varies in accordance with the quality of the room, the price of an NBA all-star is essentially fixed. A series of factors, including years of service and career accolades, determine the maximum amount of money a player is eligible to earn over the duration of his contract. The formula, however, prevents players from earning their true market value, and young stars are drastically underpaid in comparison to inferior, older players. This season, Paul Milsap, Mike Conley, Kyle Lowry, and Blake Griffin are all making more money than James Harden. While they are all elite players, Harden is on a completely different level. This flawed system is part of the reason that the Houston Rockets are far superior to any of those other teams.

Additionally, the current salary cap system employs a “soft cap.” This means that teams are allowed to exceed the salary cap, while being penalized with fees and taxes. Teams that exceed the cap by a large amount are faced with the “luxury tax,” which carries huge penalties designed to deter the creation of extremely expensive rosters. Currently, the salary cap is just over $99 million and the luxury tax line sits just above $119 million. This season, only two of the 16 teams in playoff spots fall under the $99 million limit– the 76ers and the Pacers, both of whom are heavily reliant on rookie contracts, and neither is considered serious contenders. Twenty-two of the 30 teams in the NBA are over the salary cap for this season, of which, ten also exceed the luxury tax limit. The Golden State Warriors and Cleveland Cavaliers have the two highest payrolls in the NBA, both spending over $137 million on their rosters this season. While both of these teams will face huge luxury tax bills, they are able to finance this through additional revenue earned during the playoffs, ticket sales, and having ownership groups willing to spend in the name of success. It’s not a coincidence that the  best teams also happen to be the most expensive.

The current salary cap system has had a series of unintended consequences, namely that it has become nearly impossible to compete at the highest level without a transcendent super star. Recently, Daryl Morey has spoken about how true star players have become undervalued commodities – their value far exceeds what they are paid. As a result of the max salary, transcendent stars are paid essentially the same amount as clearly inferior players. This equality of salaries allows for teams to pursue multiple all star players, which has become a prerequisite for contention. The top level talent is clustered amongst the best teams, while the rest of the NBA is forced to pay equivalent amounts for lesser caliber players. Over the past six seasons, the NBA finals have clearly illustrated this trend. LeBron James has represented the eastern conference every year, teaming up with other all stars like Dwyane Wade, Chris Bosh, Kyrie Irving, and Kevin Love. In the western conference, every finals representative has been led by one of Kevin Durant (teamed with Westbrook and Harden), Kawhi Leonard (with Duncan, Ginoboli, and Parker), or Steph Curry (with Thompson, Green, and now Durant). Essentially, if your team hasn’t had [at least] one of the transcendent super stars, there’s been no hope of playing into June.

There will never be true parity in the NBA. Big market teams will always be able to attract talent more easily, while ring-hungry veterans will sign below-market deals with serious contenders. A change to the salary cap system could, however, have extremely positive ramifications, resulting in increased competition across the NBA. Right now, the four or five teams with true super stars are the only relevant teams. The Golden State Warriors have four of the top 20 players in the NBA, including two transcendent stars. This collection of talent is nearly impossible to overcome or replicate. But, what if true super stars received market-value compensation? What if teams had to choose between having a transcendent talent, like Kevin Durant, or two or three really good players? Imagine if creative roster construction became an equalizing factor across the NBA.

NBA junkies toss around different ideas all the time, but there is one plan that I think could drastically improve the competitive landscape of the league. The revised system is comprised of a three prong plan: eliminating the max contract completely, instituting a hard salary cap (meaning that teams are not allowed to exceed the cap at all), and treating rookies as free agents (with some limit on their earning potential). This idea carries a lot of merit, and could have an extremely positive effect on the NBA. With this in mind, I created a system assigning value to players, with the intention of accurately representing the value of true superstars, and distinguishing them from other all star caliber players across the league. My system is exclusively reliant on publicly available data (courtesy of Basketball Reference), and I will be the first to admit it is not perfect. I heavily valued 3-point shooting and defensive numbers, while prioritizing wings due to the scarcity and value of switchable perimeter players. Additionally, due to the glut of good point guards, their value is slightly reduced. In reality, salaries would obviously differ from my projections, but I think that these rankings and cap figures serve as a good representation of the tangible changes that this proposed cap system could have on the NBA.

Below is a table of 34 players in the NBA. On the left is a list of the 34 highest paid players for the 2017-2018 season, according to their actual salaries. On the right is the list resulting from my system. In my system, I have assumed a hard salary cap of $115 million, and I have assigned a salary to every player who played enough games. Additionally, my system is not a projection of future development – it is solely based off how people performed in the 2016-2017 season.

 

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As you can see, the lists are very different. As a result of the unprecedented salary cap spike two years ago, a lot of mid-tier stars (and even elite role players) received contracts significantly richer than those of superior players who signed their contracts pre-2015. Players like Kawhi Leonard, Klay Thompson, Draymond Green, Kyrie Irving, Jimmy Butler and DeMarcus Cousins are all outside of the 40 highest paid players in the NBA. The biggest difference in these two lists, though, is how the top ten players in the league are paid. Using my projections, players like Kawhi, LeBron, Harden, and KD are worth roughly twice what the highest paid players are currently making. The difference in salary, however, starts shrinking after the top tier. Once you reach the mid teens (players like Paul George and Klay Thompson), the difference between real salary and projected becomes minimal.

 

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Under these modified conditions, it would become essentially impossible for teams to sign two of the true superstars in the league, and very improbable that a team could pair an all-NBA caliber player (top 15 guy) with an all-star running mate. Teams would likely be able to sign two mid-tier stars, or try to combine three fringe all-stars/ elite role players. Due to the increased allocation of cap space to the top 10 guys, role players and bench guys would become slightly cheaper, but the projected salary difference for players outside of the top 15 is relatively marginal (for a look at the complete list, click here). In essence, by changing the salary cap, the lack of a transcendent star would no longer be prohibitive in creating a legitimate contender. Teams with clear visions, a keen eye for talent, and the ability to assemble a cohesive roster would gain the opportunity to compete side by side with LeBron.

Beyond the obvious changes in roster construction, this proposed salary cap system would also serve to benefit small market teams in several different ways. Currently, it’s very hard for non-destination cities to attract talented free agents, because every team can offer the same amount of money. By eliminating the max contract, however, teams who have historically struggled to lure free agents would be able to offer slightly richer deals. If Indiana really valued a player highly, they could gain an edge by increasing their offer to be richer than that given by Miami/LA/New York. Additionally, by instituting a hard salary cap, teams that generate less revenue would not have to deal with the precarious nature of the luxury tax. Instead, all teams would have a truly equal check book. Owners like Joe Lacob, of Golden State, would no longer be able to gain a competitive advantage due to their willingness to exceed the salary cap.

Another benefit of this revised system is that through the removal of the draft, intentionally losing (tanking) would be completely dis-incentivized. Regardless of ideological beliefs, tanking is currently an effective strategy for enhancing the probability of future success. While there are many unsuccessful examples (Orlando), high draft picks have offered many teams the best avenue to rebuild. If rookies were to be treated as free agents, poor records would no longer serve as an advantage in the draft process. Rookies would be valued more accurately, and teams would be best served by trying to compete for wins. Additionally, smart rookies would be able to choose teams where their skills would be valued, their talents developed well, and situations where they feel comfortable. Too often talented young players fail because they are placed in poor situations — this would enable young players to gain a level of ownership over their careers, helping to minimize wasted potential.

Before you start knit-picking my rankings, recognize that this list is simply illustrative, and is meant to serve as an aid in this thought exercise. Right now, there seems to be only one real avenue for contending in the NBA: having one of the truly transcendent superstars. LeBron James, making only 24% of Cleveland’s cap figure, might be the best value in basketball. The Cavaliers are able to put all star caliber players around him, and as a result, they have dominated the east for the past three seasons. Imagine though, a system where LeBron got paid his actual value, whether that be 45% or 65% of the salary cap. In that world, teams would have to make tough decisions. Would you rather have LeBron, but then significantly limit the rest of the talent on your roster, or would you choose Nikola Jokic AND Klay Thompson? Instead of limiting the NBA to having four or five serious contenders, smart roster construction and personnel moves could expand the number of really good teams, increasing competition and parity across the league.

There will always be good and bad contracts in the NBA. Steph Curry ascending to an MVP level while on a 4 year, $44 million contract could still happen. Similarly, small market teams might still feel pressured into paying a premium to retain (or attract) talent. Some players will fail to live up to the contracts they sign, or desperate general managers will overpay to reach a level of relevancy. Changing the salary cap system will not make every team better, nor will it make every deal fair. It would, however, provide organizations with elite leadership and front offices, an avenue to create serious contenders without having multiple hall of famers. As intoxicating as Golden State is to watch, their dominance has made basketball less fun in many ways. Only a handful of teams can even stay on the court with them, and the Warriors are resounding favorites to repeat as NBA champions. This level of dominance has forced the majority of the league into irrelevance, and created a feeling of inevitability in the NBA season. For people like me, who love the competitive nature of basketball, the current juggernauts have really detracted from my enjoyment of the game, especially throughout the regular season. A series of changing to the salary cap system could, however, help to rectify some of the current problems in the NBA, leading to an improved competitive landscape and restoring the drama that makes basketball so much fun.

How would you build your team to win if players actually earned their value?

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