Best economic structure in sports?

Guaranteed salaries ruin the NBA. The lack of a salary cap ruins baseball. The average NFL career lasts three years and earns less then $1,000,000 in a career. What is the optimal solution?


  1. The most important aspect of an economic structure in a professional sports league is to maintain a competitive balance. The second most important feature is to protect and properly compensate the players. These two features are key to continually improving the product on the field, and in any micro-economic structure, the biggest factor to long term success is continually providing a high quality product.

    The NFL is closest with the salary cap and non-guaranteed salaries. Along with the draft and free agency, this structure ensures that any team is capable of making the playoffs, so come August, every NFL fan across the country knows their team has a chance and ratings and revenue reflect this greater interest over other professional sports.

    For this discussion we need to ignore the first round draft picks. In every sport they make enough money in their first contract to set themselves up for life (as long as they don't stupidly blow it away). But for all the guys taken on the second day of the NFL draft or the second round of the NBA draft, they are risking their bodies and long term health to benefit their respective league, and they need to be compensated as such. No league has it right, but I think combining them and we could get something that works.

    1) Contracts can't be guaranteed for longer than three years, with club and/or player options for longer contracts. (A player option could be the 5th year, but not the 4th. This way the team has an opportunity to release a player who significantly underperforms their contract, but if the player outperforms, they have leverage and negotiatiing power.)

    2) Every league must have a hard salary-cap. This will be the single biggest deterrent to overpaying useless players. Teams will have to be smart about who they sign and for how much. Anything less than a hard cap significantly favors large market teams with greater revenue.

    3) Stop overpaying the top 15 picks in the NFL draft. Use the NBA's slotting system, this already works. The first pick makes more than the second, significantly reduces (if not eliminates) hold-outs, and allows more of the player salary total to go to veterans who have outperformed their contract. Same thing with MLB. Stop forcing small market teams to skip the best players because of Scott Boras and "signability"

    4) Provide some kind of lifetime benefit for a player who suffers a career ending injury. Either a league funded insurance policy such as those high profile college athletes buy, or make them automatically eligible to receive retirement benefits at age 65. (They still have to work and provide for themselves for 40 years, but this is just like the rest of the population, they just don't have to worry about retirement. $500k right now EASILY provides $100k/yr for life [adjusted for inflation], 40 years later)

    5) There are other smaller changes that will come out of seeking an ideal economic structure. Allowing MLB teams to trade draft picks. Creating the impetus for players to try harder to earn their money, not try hard for one year, get a big guaranteed contract, and play like shit for the next 5 years.

  2. In that antitrust article, it said that the NFL players don't even have "basic benefits" like a 3rd-party arbitrator for disputes... that seems very backwards to me. So features like that are at the top of the list for protecting players too.

    Rather than go through all of your suggestions, let me summarize what seems to be the ideal salary solution:

    A league with short-term, guaranteed contracts. Hard salary caps for leaguewide competitiveness. A salary scale for all picks. Benefits for league retirees in the event of injury/disability. Third party arbitration for disputes.

    Would those five major changes lead to good competitiveness for all the leagues, while still protecting players and rewarding owners for their investment?

  3. And now let me add a wrinkle to #3... basketball is uniquely global, more so than football and baseball. Foreign draft picks after a certain point actually lose money based on rookie salary structures, which is why good foreign players sometimes demand they be drafted in the 2nd round, where the is no scale, so they can get paid more.

    If these sports stay global, will they be hurting their talent if they do not reform their payment scales? Same goes for salary caps... if the caps are keeping down payment of talent, will mid-level players end up leaving the leagues? Should we be concerned?

  4. Good wrinkle. Initially, I don't think any change needs to be made. If Ricky Rubio thinks he can make more throughout his career staying in Spain, then he has that option. But if he wants to play in the NBA, which probably means he has more opportunity to make more money over his lifetime, then he will have to submit to the slotting system the NBA has in place. A second round pick should not be paid more than a first round pick. There are many times in life that people are faced with a short-term loss vs. a long term gain. Foreign players will have to make that decision. The Timberwolves are not hurt, because they only lose the rights to Rubio if he doesn't play basketball at all. If he can earn more over an entire career in Spain than in the NBA, then the NBA is not ready to be as global. It's just another option.

    A salary cap is not designed to keep down the payment of talent. The overall player compensation is a set percentage of overall league revenue. It is designed to prevent teams that may have a significantly greater revenue stream from using that to buy more and better players than a small market team is capable. A salary cap forces teams to be smart about how they spend the money allotted to them for payroll purposes. much like a fantasy auction. You can decide to overpay for Adrian Peterson or Tom Brady, if you think that having that specific player is that much more important to helping you win. It just means you have less money to spend in other areas.

    It is possible that a mid-level player could make more money in Europe, but that is the same in any other industry. Maybe a computer engineer can make more money in another country. You can't force fans to spend more money to increase league revenue. If Europeans are spending more money on basketball, then they deserve to hire better basketball players. If the NBA can put together a better product, then fans will spend more money and the NBA will the a bigger advantage in keeping the better players. We may lose mid-level players to Europe, but we are gaining better players from Europe. That's a pretty sound financial structure.

  5. Wow - great post/ideas Aaron.

    I think Royce summed up your ideas nicely as well, and I don't have too much to offer in terms of additional comments, so I'll leave it with this:

    I like all that has been proposed, and I don't see an inherent economic/social flaw to your latest comment Royce - I think a major part of the proposals Aaron listed is that they're dynamic. If the league adopts these, league-wide quality should go up; this, in turn, would increase demand, thus increasing revenue; this, in turn would increase salary caps and the rookie contract scale.

    At least, this is how I see it.

  6. Back to your summary ideal solution. I would say that is pretty close, except that teams do no have to guarantee all contracts. If a player drafted in the 7th round is simply not good enough to play in the league, the NFL should not be forced to pay him for another two years. But a player can negotiate a two or three year guaranteed contract. A top pick still maintains a lot of leverage, maybe only signing for one or two years before going to free agency, as long as they perform at the level they are being paid. A lower pick or undrafted player can negotiate a lower salary for more years guaranteed.

    You could also have a top player, who the team wants to lock up for a long time, where the first three years are guaranteed, then each year alternates between a club and player option. The 4th year is the club option, the 5th year is the player option. (This could be done on shorter contracts as well). If a player feels he outperforms his contract, he will have multiple opportunities throughout the contract to leave the team, unless the team wants to renegotiate a new contract and give him a pay raise. On the other hand, if a player underperforms his contract, the team will have opportunities to cut him, without and financial repercussion.

  7. So in other words we want to keep the flexibility of short-term deals, but any deal that does get inked, you have to guarantee all the money for that period. Options are the way for either team or player to cut it short.

    The NBA actually has this solution with draftees. The rookie contracts run two years, then extensions become a possibility for the main team which have set limits (i.e. a "max contract") of amount and length- typically 5 years beyond the initial 2. That is why the great draft class of 2003 is the big target for clubs in 2010... the 7 years of their teams' initial deals/extensions are wearing out for LeBron, Wade, Melo, Bosh, Darko (ha), etc...

  8. "main team" = drafting team... really wish we could edit comments

  9. 1) You can copy/paste a comment and delete the previous one.

    2) You are right in concept, but wrong in numbers. LeBron, Wade and Bosh specifically turned down a max contract to be eligible in 2010 instead of 2011, when Melo's max contract is up.

  10. My bad. By the way, I have Stockholme Syndrome when it comes to the NBA salary structure. When Quentin Richardson's contract gets traded for Craig Smith, Sebastian Telfair and Madsen's contract, I find that perversely interesting. I understand that this a flaw within myself.

    Are the terms for the NBA's initial run of contracts too long, and too skewed towards the drafting team? You can re-sign existing players even if it puts you over the salary cap, but you still pay the luxury tax. Is this a hard enough cap, by your standards?

  11. My first reaction would be to say no, but I like the idea of being able to keep all the players you drafted as a reward for drafting well. I would be ok with a luxury tax that would allow you to go over the hard cap in order to keep your draftees. However, I would want this to not apply if you also have players drafted from other teams, which basically makes the entire idea impractical. Royce, can you further explain how the NBA works in allowing a team to re-sign existing players to go over the salary cap and pay a luxury tax? Is it anyone who had the previous season?

  12. Yes, any existing player on your team can sign contracts putting you over the cap. If Shehab were here, I would have him give the example of the Portland Trail Blazers. Since he's not, I'll take a crack at it.

    The Blazers drafted well in the last few years, so their best players are on the rookie-scale contract extensions. That means they are inexpensive right now. They also have a few good players they've acquired from elsewhere, also inexpensive. This year they are significantly under the cap because of that - let's say they're $10 million under. They can therefore sign a free agent this summer, or acquire a player in a trade, who will put them over the cap and use up this free space. But once they go over the cap, there is no signing new players.

    There is one major exception to this, called the Larry Bird exception (named cause he was the first player to get it). I will quote from Wikipedia:

    "In essence, the Larry Bird exception allows teams to exceed the salary cap to re-sign their own free agents, at an amount up to the maximum salary. To qualify as a Bird free agent, a player must have played three seasons without being waived or changing teams as a free agent. This means a player can obtain "Bird rights" by playing under three one-year contracts, a single contract of at least three years, or any combination thereof. It also means that when a player is traded, his Bird rights are traded with him, and his new team can use the Bird exception to re-sign him. Bird-exception contracts can be up to six years in length."

    On top of this, any player who doesn't qualify for the 3-years can STILL sign with their existing team for up to 120% of their current salary.

    So the Blazers have an incentive to use that "available" cap space now, before they have to re-sign their existing players next year, because they can re-sign those guys regardless of the cap.

  13. The NBA has built this understanding of the cap and its limitations into its tax structure. The salary cap is set at $60 million, while the luxury tax threshold is set at $70 million. My assumption is that the extra $10 million in padding is there because the league wants most teams to add their existing players past the cap line, and that buffer is an incentive to be more competitive by keeping your players with good deals (e.g. you can have an extra $10 mil in talent if you sign existing players the right way).

    Does my explanation make sense? And if so, does this system seem like a reasonable way of encouraging teams to keep existing players?

    Or do you prefer this only to apply to players you've drafted, but not acquired via trade or free agency? And if so, doesn't that really hurt free agency, and by extension the size of contracts, thus hurting players?

  14. 1) So is there any penalty for having a payroll of $65 million? It doesn't look like there is. Based on that explanation, I don't think that really counts as a salary cap, it's just a luxury tax. What is a good deal that allows you to go over the cap and under the luxury tax?

    2) A salary cap does not hurt the players at all. It simply ensures that teams make a better effort at signing the players for their appropriate value. Ron Artest, Adam Morrison, Derek Fisher, Sasha Vujacic, and Luke Walton are all between $4.8-$5.8 Million. Do you think all those guys are worth the same? A hard salary cap will deter teams from paying $7,000,000 to a guy who is worth $5,000,000. That is how you make the league more competitive. A salary cap restricts players to earn what their talent is worth.

    3) By protecting the players, I am usually referring to a player who suffers a skills reducing knee injury, which can reduce their quality of life. In the NBA, that player may have a long contract that a handicaps the team, while in the NFL that player can simply be cut and forgotten. The ideal structure would find the middle ground.

  15. 1 - I am not sure. There may be a penalty but it is nominal. The tax line is the true "cap" on spending... in fact like I said before, the $10 million gap is basically a $10 million incentive to sign your current players, cause you can add that much more talent.

    2 - Anything that reduces the amount a team can spend "hurts" players insofar as it reduces the total amount of money going to players. Unions will fight reductions in spending as a matter of this principle. You say Artest, Morrison, etc. are "worth" a certain amount, but that very dollar amount is defined by what percentage of a team's cap space they take up. If the cap is raised 20%, the relative "value" of players goes up a certain amount (maybe not 20%, but some percentage). But for the league's well-being it needs to be done.

    3 - in the NBA, most players are insured, so if they suffer an injury like that the insurance company pays the team back for almost all of that player's salary. This is happening right now with Yao Ming on the Rockets.

    One other thing we haven't discussed - what about salary floors? I know the NFL has one in the current collective bargaining agreement... in an economic situation where an owner might legitimately be losing money, it's in his economic interests to gut his payroll to save cash. This hurts the league overall. Will salary floors fix this, or do we not need to worry about it?

  16. 2) A salary cap absolutely does not reduce the total amount of money going to players. If the total pool is $2.1 Billion, then it means every team is limited to $70 Million, instead of one team being able to spend $140 Million and two other teams spending $35 Million. That's a competitive disadvantage, but doesn't change the total amount of money going to players.

    I do not know where the majority of NBA revenue comes from, but in the NFL, the TV rights basically pay the players salaries. The TV money is equally distributed among all the teams and that money is used to pay the players. I don't know if there is a large collective revenue source like that for the NBA.

    3) In my most recent example, I was trying to think of an injury that would not be career ending, specifically because of the insurance aspect, rather skills reducing. Thinking of a knee injury to a football lineman. These guys will have so many knee surgeries throughout their life, from previous injuries and weight, that their quality of life is reduced. I am trying to think of an NBA player whose career did not end, but skills were significantly reduced by an injury. Preferably a lesser known player.