Analyzing and Improving the NBA’s Collective Bargaining Agreement

Click here to view the salary proposals discussed in this article.

Introduction

Kevin Durant’s departure from Oklahoma City to Golden State may not represent the NBA’s most significant paradigm shift in 2016. Amidst reports of ongoing labor discussions between the NBA and the NBPA, Commissioner Adam Silver and NBPA Executive Director Michele Roberts remain optimistic of coming to terms on a new Collective Bargaining Agreement (“CBA”) before either party may opt-out of the current deal December 15.

With massive media deals exponentially elevating league-wide revenues, players and owners remain incentivized to avoid a work stoppage and continue their prosperous relationship. Unanticipated revenue growth, however, has enabled relatively synonymous players at the end of their contracts the opportunity to seize upon a surging salary cap, while superior players locked into long term deals cannot earn raises. Stars like Steph Curry and John Wall, for example, have witnessed lesser teammates obtain more lucrative contracts without the opportunity to capitalize on the sizable salary cap increase themselves.

While these players earning millions of dollars hardly deserve the sympathy of the average fan, the influx of funds has created imbalanced classes while enabling players that reach free agency the ability to control the league’s competitive climate. Without the salary cap’s expansion this offseason, Kevin Durant would not have been able to join the Western Conference’s two-year reigning champion. Parity in the NBA is threateningly low with few realistic championship contenders.

Herein lies the conflict: players seek to retain their true “free agency” – not simply their ability to ultimately decide their cities of employment, but rather the maximization of lucrative options. Given suppressed salary caps in the past, most franchises operated above the soft cap line and were unable to offer free agents market value deals while limited to various exceptions to offer veterans opportunities. Now, cap spa­ce provides more teams with the ability to make competitive offers to free agents.

Owners, on the other hand, wish to limit outside opportunities ­for their free agents through devices like restricted free agency and higher maximum contracts. By restricting free agency options, owners hope to retain more of their players, decrease volatility in their franchise’s year-to-year competitive outlook, and reduce the risk of the creation of “super teams” and a subsequent reduction in parity.

Ultimately, the exponential increase in league revenues provides a unique opportunity to develop a creative solution that benefits all parties. By avoiding a work stoppage and finding an adequate resolution, the NBA may be able to seize upon the NFL’s ratings decline and emerge as the preeminent professional sports league in the world.

Defining and Distributing Basketball Related Income (“BRI”)

The greatest challenge to sports labor negotiations remains defining sharable revenue and dividing such revenue between franchises who orchestrate a league’s business affairs and players who represent the source of entertainment. In 2011, the NBA and players suffered losses estimated over $800 million when they were forced to sacrifice a fifth of the 2011-12 season while negotiating a division of Basketball Related Income (“BRI”). The owners ultimately won the stalemate, increasing their share from 43% of BRI in the 2005 agreement to approximately 50%.

Fortunately, new executive leadership and booming revenues, namely the league’s nine-year, $24 billion media rights deal with ESPN and Turner, appear to have healed the scars from the previous contentious negotiation. The league and players have reportedly agreed to maintain a 50-50 distribution of revenue, providing optimism that a new agreement is imminent. Given the league’s current health and international upside, an even split represents a smart compromise for both parties; owners are turning profits while players continue to earn the most lucrative contracts in professional sports.

New revenue streams, however, present challenges to defining BRI in the next CBA. While BRI has been rather all-encompassing, players should seek as expansive a definition as possible to account for new opportunities like jersey advertisements and the advent of future digital mediums that may market NBA content. Commissioner Adam Silver estimates that jersey advertisements may provide an additional $100 million per year into the NBA’s revenue portfolio, which should effectively provide $50 million more a year to the players per the BRI percentage split (i.e., an increase in each team’s salary cap by about $1.67 million).

Although the NBA’s aggressive revenue grab provides players a tangible economic benefit, certain advertisements may be problematic for players with potentially conflicting endorsement deals. Unlike the NFL, which controls in-game player apparel, NBA players can market and capitalize off of shoe deals that remain immune from revenue sharing. In the 1980s, Michael Jordan and agent David Falk pioneered basketball shoes as an overwhelmingly lucrative industry through the launch of Air Jordan. Since, star players have partnered with an array of brands for personal shoe deals approaching or eclipsing the value of their playing contracts. The league’s partnership with Nike, which provides for the company’s trademark “swoosh” on jerseys, creates conflict for athletes not sponsored by the brand. Further, athletes that pursue outside endorsement opportunities may have deals with companies that operate in the same industry as others partnering with teams to advertise on jerseys. While new endorsement deals will likely contain carve outs for jersey advertisements, players may nevertheless lose certain opportunities. Jersey advertisements may also cause players to unintentionally breach current relationships. Players must seek protection from the league against any claims and should insist on a greater share of income from jersey advertisements due to sponsorship cannibalization.

Balancing Player Pay: Renegotiations, Extensions, and Increasing Minimums & Exceptions

While most big picture issues relating to the pool of money available to players appears settled, skyrocketing salary cap figures have caused an imbalance of wealth among the players. The CBA’s restrictions against renegotiating long term contracts has presented several awkward situations where a team’s franchise player earns far less than his teammates, simply due to the timing of each player’s free agency (e.g., Washington Wizards star John Wall will earn an average of $16.78 million over the next three seasons while his backcourt teammate Bradley Beal signed a five-year deal averaging $25.43 million per year this offseason).

The next CBA must allow teams greater freedom to renegotiate raises for players under contract. Currently, teams may only renegotiate with players if the franchise maintains ample cap space and the player originally signed a deal for four or more years. Further, the parties cannot start negotiations until after the third anniversary of the contract’s signing. Providing added flexibility creates benefits for both players and teams: (1) players who deserve a greater share in the expanding cap space can receive wages closer to their market worth; (2) more players may receive opportunities for longer term contracts, providing security against injury risk; (3) teams may be able to retain their talented players, especially if the “hometown” team can offer a greater portion of the salary cap than their competitors (Kevin Durant may never have left Oklahoma City if the franchise was allowed to offer him a lucrative extension several seasons ago); and (4) teams may avoid awkward internal dynamics if players receive salaries more closely aligned with their value to the team and the market for their services. Since teams may eclipse the salary cap to sign certain free agents (e.g., a team’s own player with Bird Rights or unrestricted free agents through “mid-level,” veteran, and other exceptions) teams should be able to exceed the cap to offer extensions to players they would otherwise possess Bird Rights to if the player was a free agent. In such a scenario, the Wizards could offer Wall a max deal that would allow Wall to earn more money closer to his market value while the team would be protected by keeping him under contract for a longer term. Further, team chemistry issues may be mitigated.

The league’s expanding salary cap has also created disparaging imbalances among player classes. While the previous CBA provided certain players with fixed salaries (e.g., rookie salary scale, veteran minimums, other free agent exceptions), other player contracts only remain restricted by certain max percentages of the salary cap. As a result, teams have utilized newfound cap space to sign players to disproportionately exorbitant deals while other players, namely veterans who may not command long term pacts given their limited upside and inevitable downside, miss out on the cap openings and can only be signed with fixed over-the-cap free agency exceptions. Rookies also experience pre-determined fixed contracts. While free agent contracts have escalated, certain veterans and rookies cannot negotiate a compatible increase. Tying exceptions and the rookie scale to a percentage of the salary cap in the next CBA would enable all classes of players to prosper off of any future unanticipated revenue growth.

While it is easy to sympathize with players unable to access greater wealth because of fixed salaries, a fixed system limits downside risk in the event league revenue plateaus or declines. Just within the past five years, the league experienced stagnant revenue growth in the wake of the lockout – the 2011-12 and 2012-13 salary caps were each $58.044 million, while negligibly increasing to $58.679 million in 2013-14. Although the league continues to experience high growth, the looming threat of the burst of the cable bubble may depress future media deals. Several factors, however, suggest that the NBA likely will not experience a decline in revenue any time soon, including: (1) the likelihood of the avoidance of a labor dispute; (2) sports remaining the only true “must watch” live content on television (funneling advertisers to sports); (3) international growth; and (4) a beckoning NFL decline (due to concussions, other injuries, and declining fan interest). Despite league-wide optimism for continued growth, players should nevertheless seek to carve-out minimum “worst case scenario” salary floors while tying the upside to percentages of the salary cap.

Other Roster Structuring Changes: Higher Max Salaries, Qualifying Offer Draft Pick Compensation, Elimination of Restricted Free Agency

While all players deserve greater access to the league’s financial boon, teams and players alike may benefit through a modification of the league’s max salary system and the fostering of a free agent compensation model. In the current climate, teams receive only modest advantages to retain their free agents. For players who have not changed teams via free agency for either two or three years (known as “Early Bird” and “Larry Bird” free agents, respectively), the player’s original team may offer incremental 7.5% salary raises while opposing teams may only provide 4.5% increases. Teams with “Larry Bird” rights on their players can also offer a fifth guaranteed year while all other players can only sign four year pacts in unrestricted free agency.

With the cap rising at a rate in excess of max raises, however, many elite players have elected two-year deals with a first-year player opt-out to maximize their returns and maintain flexibility. As a result, a player’s original franchise no longer retains an advantage over their opponents to re-sign their free agents. Greater cap space also provides players with additional outside opportunities.

For added protection, teams should be able to offer their free agents higher max salaries than other franchises while also receiving draft pick compensation for losing high level free agents. Depending on whether a player qualifies for a max salary of 25%, 30%, or 35% of the cap, the original franchise should be able to offer a “super-max” deal up to an additional 5% of the cap to their own players. Unlike current protections, teams would maintain an advantage immune from year-to-year cap fluctuations. For added flexibility, the NBA should also install a draft pick compensation system similar to those present in the NFL and MLB. In such a model, the downside to losing free agents would be partially mitigated by adding an asset. Unlike the NFL system, however, teams should not automatically collect draft picks for losing free agents; draft pick compensation should be relegated to teams intent on retaining their players. Baseball’s compensation model, on the other hand, requires teams to propose “qualifying offers” to their free agents to receive draft picks, but forces teams signing free agents to relinquish high selections. MLB’s system thus may depress the market for certain free agents. The NBPA would likely avoid such a scenario in any agreed upon draft pick compensation model.

While the NBA Draft remains a top-heavy avenue for acquiring talent, allocating teams supplemental draft picks between the first and second rounds nevertheless provides value and flexibility to franchises. In practice, an NBA compensation system should follow the NFL’s “net” pick system where a team can only earn selections if they lose more free agents than they sign from competitors. For veterans, qualifying offer values should be set at a high enough level (e.g., $20MM+) to deter teams from offering contracts to relatively innocuous free agents; compensation should only be provided to teams losing stars.

Likewise, the NBA should terminate restricted free agency and include players completing their rookie deals not signed to long term extensions into the draft pick compensation system. Players currently subject to restricted free agency witness their markets plummet as teams avoid tying up their cap space into players whose deals may be matched by their original franchises. Instead, players should have unfettered access to free agency while teams can acquire a valuable asset for losing a talented young player. Ultimately, a free agent draft pick compensation model may be mutually beneficial for teams and players.

Protecting the Bottom Tier: Retirement Compensation, Supporting the D-League & Two-Way Contracts

When LeBron James and Chris Paul joined the NBPA as the preeminent active player representatives, some worried that the interests of the league’s elite may override those of the common player. Without substantial check from lower tiered veterans, James and Paul could leverage their influence into higher maximum salary cap percentages, leaving less money available to other players. With escalating salaries providing less of an impetus to effect change to the max salary compensation model, James and Paul instead appear poised to use their platform to advocate for those less represented in the players’ labor negotiations with the owners. As a compromise for refraining from battling for an increased share in BRI, the NBPA and NBA have reportedly agreed to new league-funded educational and health programs for retired players.

In addition to advocating for their predecessors, James and Paul should aid the next wave of players by supporting a quality minor league system through two-way contracts, team-specific affiliates for all 30 franchises, and a D-League salary cap. While sacrificing a limited sum of money, injecting more money into the D-League will (1) allow more quality players opportunities state-side (presenting the D-League as a viable alternative to opportunities abroad currently able to offer far superior compensation); (2) allow players to effectively help their parent franchises; (3) provide added team flexibility and injury protection; and (4) proactively avoid wage-related litigation experienced by the MLB. By developing a robust minor league system, the NBA may also seek to expand its draft to three rounds. As the NCAA continues to combat challenges to its payment scheme (or lack thereof), a substantive D-League may offer basketball players an enticing alternative to earn money while in their athletic primes and unable to earn a return in college.

Although the league is strongly considering two-way contracts for the 16th and 17th players on the roster (similar to the NHL’s system where players earn an elevated salary when called up to the parent club and a lower salary in the minors), the league and players should extend two-way contracts up to the 20th player, which represents each team’s roster limit during the offseason. Over time, the NBA should extend the two-way contract system to comprise an entire NBDL roster, which would enable for maximum roster flexibility and opportunities for players.

Of course, the biggest downside to building out a competitive minor league system remains the cost to support D-League expansion and increased pay. For the 2016-17 season, each D-League franchise will be limited to a salary cap of $209,000, with player salaries set at either $19,500 or $26,000 (not including players sent down from their parent franchises). While staggeringly low, the D-League itself cannot support higher pay without a better brand of basketball to entice fans. Foreign teams can attract quality players with salaries often beginning in the six figures. Although it may not be tenable to support salaries at that level initially, the NBA should still raise minimum salaries to not only entice players but provide them a living. A salary cap of $1,000,000 and minimum minor league salaries of at least $50,000 may bring more quality players state-side with the appeal of the NBA dream. Determining who will subsidize the development of the D-League remains problematic, but owners and players may be able to agree to “split the baby” to fund player salaries without substantially impacting their bottom lines. If the league wants to develop a competitive minor league system that can train and produce quality players for the NBA, it needs to invest greater resources and subsidize its expansion.

Increasing Competitive Basketball: In-Season Tournaments & Cutting Pre-Season Games

Limited parity presents the league with potential problems in fostering consistent interest throughout the regular season. With rival executives unanimously expecting Warriors-Cavaliers Part III, the league needs to seek creative opportunities for added year-long intrigue.

One such proposal includes adopting an in-season, single-elimination knockout tournament akin to the English Premier League’s FA Cup. Creating another competition enables each team an additional opportunity to “win” each year; a mid-tier team that otherwise faces long odds to win the NBA Finals may be able to win such a tournament given the volatility of single contests.

The league should utilize the opportunity to foster regional rivalries by hosting preliminary rounds within divisions or other geographic dividers. A hypothetical “Red Auerbach Cup” could pit eight northeastern rivals in a single-knockout competition, advancing to face the winner of a supposed “Larry Bird Classic” in the Midwest. Regional tournaments breeding into a national competition could incense already bitter rivalries. Clubs gunning to win the NBA Finals may also strategically utilize the knockout tournament as a chance to develop young players in a competitive environment while resting stars. By playing tournament games at specified dates throughout the season, early elimination may provide teams with additional rest during the season-long grind.

By adding a potentially exciting play format at the expense of preseason contests, players would not necessarily be subjected to additional games or an earlier season start date. While the regular season would likely start earlier, the NBA may be able to eliminate back-to-backs to provide additional opportunities for rest. Any losses of preseason contests would likely be offset by more lucrative competitive games; sponsors may be attracted to the tournament’s unique format, which could also be used to fund prize money for the winner and incentivize all teams to compete for the tournament title.

Conclusion

Over the past few years, the NBA has experienced exponential growth and remains in position to continue its global ascension. Problems predominantly relating to competitive balance and inequitable player pay, however, present an opportunity to tweak the CBA to find a creative and balanced solution to maximize the interests of both the players and owners.

In the next CBA, the NBA and NBPA should (1) include an expansive definition for BRI; (2) protect players against endorsement losses resulting from conflicting jersey advertisements; (3) consider more expansive time for contract renegotiations and extensions; (4) align rookie scale and free agent exceptions with certain percentages of the salary cap; (5) allow teams to re-sign players at higher max salaries; (6) provide free agent draft pick compensation; (7) eliminate restricted free agency; (8) create two-way contracts; (9) invest in the D-League and raise minimum NBDL salaries; and (10) develop an in-season knockout competition similar to the English Premier League’s FA Cup.

With the distribution of BRI largely settled, the NBA and NBPA appear poised to continue its prosperous relationship indefinitely.

Click here to view the salary proposals discussed in this article.

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3 thoughts on “Analyzing and Improving the NBA’s Collective Bargaining Agreement

  1. Very well researched and thought out. In- season tournament is a very interesting idea. I know they do it in MLS and lower tier soccer teams here, similar to English Premier League tourneys.

    Like

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