salary and no. of years

[r-creat]

Hi there, I have a newbie question and hope someone can give me some insights. I know that the CBA has stipulated what % of salary raise a player can get. But what we usually see from news is a big lump sum of x amount of money signed for y years. My question is that when GM and player negotiate the contact terms, do they decide on x first, y first, x/y annual salary? I just wanted to get an idea what the major parameter is when a contact is negotiated.

Any help is appreciated. Thanks!

[DBoys]

Guaranteed money is the biggie. My sense of things is that the payout sequence is more important to teams than to players because of the cap limitations. But the person here that you really want to hear from on this is Dunkenstein.

[Klomp]

It depends on the player and the specific situation.

If someone is seeking a max-level contract, the money isn't a sticking point because the CBA has already outlined the rules in regards to max contracts. It's the years that are discussed (Kevin Love's last extension with Minnesota a prime example).

Some people are willing to take a bigger deal for fewer years, while some are willing to take less money for a longer period to help the team financially (Dirk Nowitzki).

[Knosh]

Guaranteed money is the biggie. My sense of things is that the payout sequence is more important to teams than to players because of the cap limitations. But the person here that you really want to hear from on this is Dunkenstein.

I'd say present value is the biggie for players. Payout sequence does change that, since a dollar today is worth more than a dollar tomorrow.
Also a shorter contract might have a higher present value than a longer one with appropriate annual payments if the risk adjusted expected value of a future contract is higher. See LeBron.
You could even put a $-figure on stuff like "improving your team/increasing chances to win", "playing in a bigger market/nicer city" and so on and explain stuff like taking paycuts with present value.

How total salary, years, annual salary factor in present value might differ from player to player, so I don't think you can really say how negotiations work in general.

[DBoys]

Guaranteed money is the biggie. My sense of things is that the payout sequence is more important to teams than to players because of the cap limitations. But the person here that you really want to hear from on this is Dunkenstein.

I'd say present value is the biggie for players.

LOL no. Definitely NOT that. 99% of player contracts are structured with the least possible present value for the dollars contracted, rather than the most. Frankly, observation says contract "structure" tends to be done to maximize team considerations, more than anything.

As fans, we focus on this year's salary. But I really don't think players look foremost at this year's pay, or even at "average annual salary" in a deal, as much as they look at "what's the total I'll definitely get."

[Knosh]

Guaranteed money is the biggie. My sense of things is that the payout sequence is more important to teams than to players because of the cap limitations. But the person here that you really want to hear from on this is Dunkenstein.

I'd say present value is the biggie for players.

LOL no. Definitely NOT that. 99% of player contracts are structured with the least possible present value for the dollars contracted, rather than the most. Frankly, observation says contract "structure" tends to be done to maximize team considerations, more than anything.

Yeah I'm aware that the majority of contracts are backloaded. That might very well be due to teams prefering that structue. But that doesn't contradict players maximing present value at all.

[r-creat]

thanks all, and it does help.

let me just elaborate why I am asking the question about money and years.

i'm actually doing a nerdy thing to look at what the impact of signing players into long contracts is on team finance. i know there's a new restriction on the max years signed, but it was not uncommon to have players signed into 5+ yr contracts.

so I just looked at the data, and found that players signing higher salary also have longer years signed. it's true for most players. but i also looked at the star players (top 5% performance), their contract years signed are relatively long and insensitive to their pay.
(could you share with me your thoughts on these too?)

it is counter-intuitive in the sense that players signing longer years should have lower salary for risk premium. it just got me wonder:
(a) whether it is the player or the team that prefers such long-term contract, and
(b) what the team can get out of signing players into both high-paid, long-tenure contracts.
(could you share with me your thoughts on these too?)

then, i looked at the data, and found a number of things:
1) over time, player performance gets worse, for both star players or non-stars.
2) in a given year, players signing longer-term contract perform better than players signing shorter-term contract, and i have already controlled their initial performance upon signing the contract. (e.g. for two players that played equally well at the time they signed their contracts, in the first year of contract, the player signing 5 years perform better than the player signing 3 years).
3) but, interestingly, teams actually lost money over time when they signed players into long-term contracts. money i referred to the financial gains of #wins that the player is responsible for, minus the player salary.

at first, i thought, signing long-term contracts would give players less incentive to play well, but that apparently isn't the case here. i cannot explain why teams get less out of long-term contracts. so i suspected that the increases in payout sequence outweighs the increase in player performance, so teams lost money. so i'm thinking maybe players signing long-term contracts did not just want guarantee pay for long years, but they wanted the payout sequence. but that doesn't seem to make sense.

just wanted to check with you guys what you think over it.

thanks a lot!

[DBoys]

If you want to understand the "why" of most of the contracting practices , they probably revolve around two truths:

1 the first is fairly simple: they are limited by what the rules allow.

Each free agent chasing a deal has a max amount of initial dollars he can get, a max raise, and a max number of years. And teams have cap rules that limit their offers.

2 the second is the basic rule of contracts everywhere: it's a matter of negotiation

When you observe "players signing higher salary also have longer years signed" it's nothing revelatory - if a player is a 'max' salary player, then teams competing for his services will want to tie him up for as long as they can, and will offer max money over max years. However, if the player is a scrub, they want to limit their downside and will only offer a year or two.

That dynamic is also mirrored by the nature of negotiation. The better players are able to negotiate better deals - ie, longer and more lucrative. The worse ones have to settle for what they can get.

[DBoys]

Yeah I'm aware that the majority of contracts are backloaded. That might very well be due to teams prefering that structue. But that doesn't contradict players maximing present value at all.

Actually, it does. A backloaded contract (which is the style of the VAST majority of contracts) would be MIMIMIZING present value, the very opposite. The fact that present value is minimized in virtually every deal would seem to indicate that "maximizing present value" is simply not an issue to players, generally speaking.

[Knosh]

so I just looked at the data, and found that players signing higher salary also have longer years signed. it's true for most players. but i also looked at the star players (top 5% performance), their contract years signed are relatively long and insensitive to their pay.
(could you share with me your thoughts on these too?)

It's not like every player in the NBA is equal. Superstars, All-Stars, good starters and so on get longer contracts and more annual salary than bench players/end of bench players.

it is counter-intuitive in the sense that players signing longer years should have lower salary for risk premium. it just got me wonder:
(a) whether it is the player or the team that prefers such long-term contract, and
(b) what the team can get out of signing players into both high-paid, long-tenure contracts.
(could you share with me your thoughts on these too?)

Longer years should have lower annual salary than shorter deals relative to player value. Your data is skewed, because there is obviously a correlation between salary and player skill. You can't compare a backup PG getting 3/15 to a superstar getting 5/100 and say anything about the risk premium.

Just some ideas why better players might get longer contracts:

In the case of superstars, they might be good value even on a max contract, so teams would be happy to get that good value for as long as possible and offer the maximum years possible. The player also would be happy to lock in as much years as possible, since he is already getting the maximum amount possible, so he doesn't really gain anything by going for a shorter deal. (Unless of course the salary cap is projected to go up significantly, as mentioned before)

High quality players tend to be a more scarce commodity than rotation guys. They have more barganing power and can demand longer contracts or teams might have to offer more years to outbid another team, since they are limited by the CBA in the annual salary they can offer. Teams might also be more willing to take on the risk of injuries to eliminate the risk of losing the player in free agency.
The player might prefer more years, since he has more to lose in case of an injury than he has to gain by a further improvement of his skill. This group might also include players just coming of a good year and being overrated at the moment, so they are happy to get as much years as possible.

Role players and bench guys just don't have that much bargaining power. Teams prefer shorter deals so that they can get out of the deal sooner in case something goes wrong. Those guys are easier to replace.
Low salary guys might also include players coming back form injury or off of a bad year. They might feel like the annual salary they can get in the market right now is lower than their actual value and they might actually prefer a shorter deal, so that they can play up their value and get a better deal afterwards.

3) but, interestingly, teams actually lost money over time when they signed players into long-term contracts. money i referred to the financial gains of #wins that the player is responsible for, minus the player salary.

Again, your data is skewed. Longer contracts means more annual salary means better players. Some role player might have a better win/$ value than some borderline all star, but that isn't a good metric to evaluate contracts.

[Knosh]

Yeah I'm aware that the majority of contracts are backloaded. That might very well be due to teams prefering that structue. But that doesn't contradict players maximing present value at all.

Actually, it does. A backloaded contract (which is the style of the VAST majority of contracts) would be MIMIMIZING present value, the very opposite. The fact that present value is minimized in virtually every deal would seem to indicate that "maximizing present value" is simply not an issue to players, generally speaking.

Why is a backloaded contract minimizing present value? Are you comparing let's say 4/40 backloaded to 4/40 frontloaded? If so, why?

Maybe the player has the choice between 4/40 backloaded and 4/20 frontloaded, because that is how the team views the trade-off between the two. If that are the choices to a player, he MAXIMIZES present value by taking the backloaded deal.

4/40 vs 4/20 is extreme, but my point is: The team might have drawbacks from frontloading a contract that goes beyond just the difference in present value based on how the CBA works. So they might be willing to offer more present value if the contract is backloaded and we would see players maximizing their present value by signing backloaded contracts.

[DBoys]

Yeah I'm aware that the majority of contracts are backloaded. That might very well be due to teams prefering that structue. But that doesn't contradict players maximing present value at all.

Actually, it does. A backloaded contract (which is the style of the VAST majority of contracts) would be MIMIMIZING present value, the very opposite. The fact that present value is minimized in virtually every deal would seem to indicate that "maximizing present value" is simply not an issue to players, generally speaking.

Why is a backloaded contract minimizing present value?

Wait, what? If you ask that, you don't understand the concept of "net present value" or "backloaded."

[Knosh]

Actually, it does. A backloaded contract (which is the style of the VAST majority of contracts) would be MIMIMIZING present value, the very opposite. The fact that present value is minimized in virtually every deal would seem to indicate that "maximizing present value" is simply not an issue to players, generally speaking.

Why is a backloaded contract minimizing present value?

Wait, what? If you ask that, you don't understand the concept of "net present value" or "backloaded."

there is more to the present value than just the payout structure. the total salary also figures in. Maybe read the rest of my post.

[DBoys]

1 We're talking about a contract for a specified amount, as that was the basis of the thread and its query.
2 Terms like "net present value" and "backloaded" have a distinct meaning. If you are creating your own brand new definitions for them, or a scenario for their use that really doesn't have anything to do with those terms as understood, I'm not going to try to decipher what that means. Sorry.

[Knosh]

1 We're talking about a contract for a specified amount, as that was the basis of the thread and its query.
2 Terms like "net present value" and "backloaded" have a distinct meaning. If you are creating your own brand new definitions for them, or a scenario for their use that really doesn't have anything to do with those terms as understood, I'm not going to try to decipher what that means. Sorry.

1. This trade is about contract negotiations and the parameters of it. I don't see how that means the amount is specified.

2. I know that. I didn't create my own definition.

I realize we weren't on the same page here, but there is really no reason to keep insinuating I don't know what I'm talking about.

[r-creat]

thank you to you all for the replies.

actually, i am the only one who doesn't know what a backloaded contract is, and why teams/players prefer structuring the contract that way.

would someone just give me an idea?

thanks again.

[r-creat]

is backloaded contract the same as a poison pill contract mentioned here: http://basketball.about.com/od/nba-cba- ... ntract.htm?

[Smitty731]

is backloaded contract the same as a poison pill contract mentioned here: http://basketball.about.com/od/nba-cba- ... ntract.htm?

No. Backloading a contract means that more money comes in later years vs. early years. For example, and this is just a simple example, a guy signs a deal for 3 years and 31.37million. The media will likely report this as something like 3/32 or 3/31. The reality is, due to the CBA, here are structures in place that limit annual raises. There are different scenarios for this. The one I used in this is example is a limit of 4.5% raises each year. So, the year 1 value of this contract is a flat 10 million. The second year is 10.45 million. The third year is $10,920,250.00. So, this contract is slightly backloaded, by the second and third years being worth more than the first. The poison pill might be the most misreported, and incorrectly, used term. I find it gets confused with Base Year Compensation a lot. About 100 or so more readings of the CBA or the FAQ, and you'll have them down!

Now, you could accomplish the same amount of money by spreading the money evenly over the three years at $10,456,750.00. The years and total payout remain the same, but the structure is different.

Why would a team or player want to do this? For the team, they save money in the first year and under the cap (assuming they are under). They can use that extra 450k or so towards another deal. For the player, assuming the money is all fully guaranteed, there isn't any reason not to do it this way. They still get their money either way.

It is becoming more common, to see players take deals that decrease in value annually. It is hardly the norm, but we see a few of these each year now. They are subject to the same % decline year over year that the raises are. This gives the player as much money up front as possible, but the team pays him less later in the contract when he might not be worth quite as much. If you have the cap flexibility to pull it off, I actually like this deal for older players a lot.

As to your original question, every negotiation is different. Players, agents, GMs, teams, etc all may want different things. And then you enter into the equation what they can and can't do legally under the CBA. For example, a lot of older players may prefer to lock in guaranteed years or the safety of years. Younger guys might want money. Some guys don't want to be tied down for years. Others want to stay in place. I think you'd find that every negotiation takes on a life of its own.

Hope this helps! If I said anything wrong, DBoys or Knosh will correct me!

[r-creat]

Yeah I'm aware that the majority of contracts are backloaded. That might very well be due to teams prefering that structue. But that doesn't contradict players maximing present value at all.

Actually, it does. A backloaded contract (which is the style of the VAST majority of contracts) would be MIMIMIZING present value, the very opposite. The fact that present value is minimized in virtually every deal would seem to indicate that "maximizing present value" is simply not an issue to players, generally speaking.

Why is a backloaded contract minimizing present value? Are you comparing let's say 4/40 backloaded to 4/40 frontloaded? If so, why?

Maybe the player has the choice between 4/40 backloaded and 4/20 frontloaded, because that is how the team views the trade-off between the two. If that are the choices to a player, he MAXIMIZES present value by taking the backloaded deal.

4/40 vs 4/20 is extreme, but my point is: The team might have drawbacks from frontloading a contract that goes beyond just the difference in present value based on how the CBA works. So they might be willing to offer more present value if the contract is backloaded and we would see players maximizing their present value by signing backloaded contracts.

now i have a better understanding of what backloading means and i re-read the whole post.

may i ask why we are not comparing 4/40 backloaded to 4/40 frontloaded? i thought (naively) it's only the total amount that matters.

[r-creat]

is backloaded contract the same as a poison pill contract mentioned here: http://basketball.about.com/od/nba-cba- ... ntract.htm?

Why would a team or player want to do this? For the team, they save money in the first year and under the cap (assuming they are under). They can use that extra 450k or so towards another deal. For the player, assuming the money is all fully guaranteed, there isn't any reason not to do it this way. They still get their money either way.

may i ask the following?

the cba stipulates that annual raise is 4.5%/7.5% depending on the type of contract. is there any possibility that a team can do extreme backloading? for e.g., assume a player can get 4/ 30. can a team offer payout sequence (5, 5, 5, 15) instead of (6, 7, 8, 9)?

for the team, you say that team wants to backload a contract because it can save cap room in the first year. but am i right that it can also be because:
(a) if the player is restricted free agent, then backloading makes it more difficult for the source team to keep the player?
(b) if the player is a big risk, then the team offering backloaded contracts can insure itself by selling the player in the final year as an expiring contract, and not have to pay the big part of the contract?

for the player, if the salary is guaranteed, he should be indifferent to whether it's backloaded or not. but does backloading affect the incentive of player to play well? does it self-select players of certain kind (e.g. those that are under/over-valued)? does the salary in the final year of a contract determine the salary of the first year of a new contract?

sorry for having too many questions. i've read the cba faq a number of times, and still do not think i understand it right. many thanks!!!