Blog

The NBA’s Incentive Issue

Franchise values and player salaries in the NBA have skyrocketed in the last decade, and it feels like the NBA, when compared to the other major U.S. sports, is growing the fastest in popularity. I personally love the current state of the NBA, but through the lens of someone who wants more parity and competitive balance, the NBA has an incentive issue. Players have been ring-chasing since time immemorial but superstars have generally waited until they were past their prime before doing so (Karl Malone, Gary Payton, Shaq, etc.). Two factors changed the landscape and resulted in the arms race we have for talent today: the creation of the Boston Big Three, and LeBron James.

A Brief Journey Down Memory Lane

The Celtics finished the 2007 season at the bottom of the Eastern Conference with a measly 24 wins, but that summer, Danny Ainge traded for both Ray Allen and Kevin Garnett; combined with Paul Pierce, they formed the Big Three. They completed a massive turnaround, winning 66 games the next year and defeating my beloved Lakers in six in the Finals.

LeBron James was one of the most hyped prospects ever, and the crazy thing is, he actually lived up to the hype. He went straight from high school to the NBA, was picked #1 overall by his hometown Cleveland Cavaliers and won Rookie of the Year, averaging 20.9 points, 5.5 rebounds, and 5.9 assists in his first season. He would only improve further from there, averaging 27.2/7.4/7.2 splits in his second season and 31.4/7.0/6.6 splits in his third! But, his own greatness was a burden. By the time LeBron got into the league, sports media was becoming more and more of a 24/7 news cycle, with talk shows that needed material to fill in airtime. This was only exacerbated by Twitter as he hit his prime. As possibly the most hyped prospect ever and someone who became one of the league’s best players from basically the minute he stepped onto the court in a Cavs jersey, LeBron was being lambasted more and more by the media with every passing year that he didn’t win a championship. It didn’t matter that he carried a bunch of nobodies to the Finals in 2007 or that he won MVPs for lifting the Cavs to the top of the Eastern Conference; expectations had grown so high that anything less than the title would be viewed as abject failure. LeBron was labeled a choke artist that couldn’t carry his team to the promised land.

Boston’s Big Three presented an almost insurmountable challenge for LeBron. They had three bona fide superstars; who were the Cavs’ Big Three? LeBron, Mo Willians, and Zydrunas Ilgauskas? The ever-increasing media abuse about whether he was “clutch” enough to carry his team to the title, combined with the three-headed dragon in Boston, all but forced LeBron to leave the Cavs to find a team that had another superstar. Enter the Miami Heat Big Three. LeBron, Chris Bosh, and Dwayne Wade all took paycuts in their prime in order to play together. The media frenzy that LeBron naturally brings, combined with some silly choices (live broadcasting The Decision, “not one, not two, not three”) created unprecedented scrutiny on the Heat. At the time, many critics and pundits labeled Lebron’s decision to team up with fellow superstars as a complete tarnishing of his legacy (while forgetting that Magic had Kareem and Worthy, Bird had McHale and Parish, MJ had Pippen, Kobe had Shaq, and on and on, while LeBron was stuck with a bunch of bums). Yet ultimately, forming the Big Three ended up being a boon to his legacy. After winning two chips in Miami and heading back to Cleveland to win one more, LeBron is universally recognized as one of the five greatest players of all time. Many view him as second only to His Airness himself and within striking distance to pass him, especially if LeBron keeps up his current production for a few more years.

LeBron’s decision, so contentious at the time, hasn’t left even the smallest blemish on his sterling legacy. His earlier “playoff struggles” are now packed into a narrative that only foreshadow his later greatness. The younger generation of players now in their prime have meticulously observed LeBron’s career and decisions to better shape their own legacy.

The NBA’s Current Incentive Structure

The factors currently incentivizing players and teams to form superteams are:

  1. RINGZZZZZ culture
  2. Massive salary and endorsement deals combined with players being praised for taking paycuts
  3. Superteam feedback loop

RINGZZZZZ Culture

Via Giphy

Get into a debate with anyone about whether player X is better than player Y, or watch any sports commentator, informed or not, rank their all-time players, and championships will invariably come up. Rings are justifiably the #1 factor in ranking how good a player was, but a lot of the infatuation with the number of titles won is unwarranted. There’s a saying in sports along the lines of “winning solves everything.” Some problems can’t be fixed by winning, but they definitely won’t be fixed by losing. Remember what happened with LeBron; he was being pilloried for his supposed poor performance in the playoffs and for teaming up with contemporary stars in Miami. However, years after the fact, after LeBron won a couple of championships, his earlier playoff troubles become a distant memory. Some people will still hold him teaming up with Wade and Bosh in Miami against him, but had LeBron not gone to Miami, he might still be stuck without a championship, putting up monstrous numbers on deadbeat teams; in that scenario, those same critics would be even more harsh. Winning doesn’t solve everything, but it sure solves a whole lot.

Now take Kevin Durant. When he joined the already-stacked Warriors, his decision was portrayed as cowardly and critics insisted that his legacy would be forever tainted. Fast forward a couple of years, and most of that criticism is already gone. If he were to retire today, he would rank higher on people’s all-time lists for winning a championship with the Warriors than staying on the Thunder and not winning. Sure, people will bring up the fact that he joined a championship team and dock him for that, but, as with LeBron, those same people would’ve docked him even more if he had no championships.

Whenever the greatest NBA players ever are debated, no player can sniff the top 10 all-time discussion without at least one ring; the two closest are probably Charles Barkley and Karl Malone but they would probably not even make most people’s top 15. Of course, other factors are considered; nobody rates Robert Horry as a better player than Barkley, nor would most people rank Bill Russell ahead of Michael Jordan despite Russell having more rings than fingers. But, rings are the most important factor because so many other factors correlate with winning: being a good teammate, putting up eye popping stats, performing well in the playoffs. Players that don’t win are sometimes unfairly depicted as lacking those characteristics. The narrative crafted is dependent on whether a player subsequently wins: Kobe’s airballs as a rookie against the Jazz in the playoffs were lessons learned that paved the way for his later clutchness and greatness, whereas Chris Paul’s late game mistakes against the Thunder in 2014 and the Clippers blowing a 3-1 lead against the Rockets the following year are viewed as indicative of how badly CP3 always chokes. The consistent statistical output, the load carried when he was on the Hornets, and the clutch shots such as the game winner in Game 7 against the defending champs on a hobbled hamstring become forgotten footnotes in the wider narrative crafted about him.

The lesson to be learned is trite but worth repeating: do whatever it takes to win a championship. There might get intense criticism in the moment, but the criticism will fade; when all is said and done, and a player’s legacy is being evaluated by fans, the media, and other players, winning a ring (or many) will be considered far more heavily than how they were won.

Increase in Salary

NBA.png

The above graph shows the salary cap over time (data from Basketball Reference). The salary cap has increased an average of 10.6% per year from 1985 to 2018; stated another way, the salary cap today ($99M) is almost 28x the salary cap of 1985 ($3.6M). After some period of slow growth in the 2000s and early 2010s, the salary cap increased tremendously the past 2 years, and is projected to increase even more in the coming years (2020-2021 projection).

The salary cap is indicative of how players’ salaries have increased over time but is imperfect since in earlier years, team would routinely go over the cap whereas in recent years, it has become less common. The below graph is the average salary of the ten highest salaries that year from 1991 to 2018 (1991 to 2016 from here and 2017-8 from Wikipedia).

Top 10.PNG

The average of the ten highest salaries  increased by 8.9% from 1991 to 2018. Most of the increase came in the earlier years and the two most recent years, the latter mirroring the cap increase. Top ten salaries, like the cap, remained relatively stagnant in the 2000s and early 2010s (side note: the top ten salaries were high relative to the cap in the late 90s were what lead to the lockout in the 1998-9 season).

As you can see from the graph, salaries have shot up in recent years and will only further increase. Players like Steph Curry, Russell Westbrook, John Wall, and James Harden, have qualified for and signed the Designated Veteran Player Extension that pays them more than $40 million per year. On top of that, top players are supplementing their on-court income with similarly gargantuan salaries off the court. According to Forbes, in the 2018 season, Lebron made $52M in endorsements, Curry $42M, and Durant $33M.

So, why do I bring up the massive amount that top players are earning? It’s not because they don’t deserve such massive salaries. They do. It’s to illustrate how much and how quickly salaries have increased. NBA players were already enormously wealthy in the late 90s. Now, they’re making so much money that they can afford to take discounts to allow their franchise to assemble a better team. For instance, Kevin Durant took a $9.5M paycut (SI) this season to allow the Warriors to keep Iguodala. Despite that huge discount, his salary this year was still large enough that he would’ve been either the highest paid or second-highest paid player in any year before the 2017 season. This is the point I wanted to make with those two graphs. Players’ salaries have increased so much in recent years that they can afford to take a big discount and still be paid an enormous amount. Combined with the pervasive ring-fetish, superstars are incentivized to take a discount to stack their team with talent. The Big Three in Miami would’ve never been formed if Wade, LeBron, and Bosh all wanted max contracts so they each took a discount to make their dream happen. The superstars of today who are being pilloried by the press for their inability to win a championship will look to take a discount to form their own superteams and will be able to do so with minimal financial impact.

The focus on titles isn’t the only factor incentivizing players to take discounts for their team. There’s also the perception of being “a team player.” Tim Duncan was praised for giving discounts to the Spurs over the years to allow them to keep their best players together while Kobe Bryant was criticized for making almost $80M in his last three years. Why millionaires should be giving discounts to billionaires is beyond me, but that’s a debate for another time. The fact is, players will be lauded for doing so. So, to summarize. Superstars are incentivized to focus solely on winning championships since that is the #1 factor in how their legacy will be judged; players who form superteams, like LeBron and Kevin Durant, will be heavily criticized in the moment but, as long as they perform well, the criticism will quickly fade, and the championships that they’re able to win after forming the superteam will be a big net-positive for their legacy; superstars nowadays are making so much money now that they make more than equivalent players from just a few years ago, even after taking a discount; and, they are incentivized to do take discounts because it lets their franchise build the best team possible and because they’ll be celebrated as “a team player.” This brings me to the last contributing factor to superteams.

Feedback Loops

Feedback loops are formed when the outputs become inputs and vice-versa, creating a loop that feeds upon itself. They govern many of the things around us and examples include the stock market (positive outlook results in higher stock prices which results in a more positive outlook and on and on, leading to a bubble; the opposite then happens in a crash), the climate (ice melts, resulting in less ice to reflect the sunlight, which causes more ice to melt), and the dominance of many successful companies (people sign-up for Facebook because that’s where their friends are which leads to more people being on Facebook, which leads to more people signing up).

The NBA is also governed by many feedback loops. Sports are quickly becoming the last TV event that must be viewed live. The drop in viewers in other programs lead advertisers to flock to sports, which leads to more sports coverage and an increase in its popularity and profits, which lead to more advertisers. The increase in popularity and profitability means that the NBA’s salary cap and its players’ salaries, on and off the court, will keep increasing in the near future, and the increased media scrutiny will create more pressure for superstars to win a championship. Combined with their increasing pay, players will be further incentivized to take a pay cut and to team up with fellow stars to win. As more superteams are formed, even stronger superteams will have to be formed to try and beat them, creating a feedback loop that increases the gap between the good and bad teams.

How I Could Be Wrong

Despite what I laid out, the simplest reason I could be wrong is that NBA superstars simply refuse to take a paycut. It takes a high amount of competitiveness to just make it into the NBA; the top players are all ultra-competitive and know that they’re worth the max, if not more. Giving a discount will be a concession that many won’t make. For example, LeBron, who took slightly less than the max to form the Big Three, hasn’t taken less than the max since he left Miami and there are reports that he refuses to do so (Yahoo Sports). Nor should he. His true value to any franchise is way more than the max. But it’s not just LeBron. It’s hard to get any superstar to take a discount. Very few rich people have ever believed they were rich enough. Wealth is its own feedback loop, with those that make a lot of money desiring to make even more. Moreover, being a max contract player signals that you are worth the most a team can pay you. There’s a certain status with being paid the max, a status that many highly competitive players won’t be willing to give up; conversely, accepting less than the max might hurt your status in the eyes of fellow players, the media, or the fans.

Conclusion

As long as LeBron is playing at a high level, more superteams will be formed. He needs more championships to topple MJ as the greatest player ever and will need to create superteams to compete with the Warriors and the Rockets. After he retires, there might be a slowdown in the formation of superteams for a few years, but soon the media frenzy will look for a new victim to criticize, and the pressure will be on the superstars in the next generation to win. When that pressure reaches a tipping point, those superstars will look to form their own superteams, kicking off the cycle once again.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s