| Frontloading: An Alternative Approach To NBA Contracts Authored by Elrod Enchilada - January 31, 2008 - 6:06 pm
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For example, if a team signs its own player, say the Bulls re-signing Luol Deng, to a 5-year deal starting at $10 million per year, it can give a $1,050,000 raise every year of the deal. After five years, with four years of maximum raises, instead of being a $50 million deal, it is a $60,500,000 deal. The last year of the contract has a salary of $14,200,000.
For a free agent signed away from another team, say the Hawks (who are under the cap) attempting to sign the restricted free agent Deng this summer, they could offer a first year salary of $10 million which would allow for raises of $800,000 every year in a long-term deal. After five years, instead of being a $50 million contract, it is a $58 million contract. The last year of the deal has a salary of $13,200,000.
I think the time has come for NBA teams to discontinue this practice of giving maximum annual raises as a matter or course. In this article I address this prevalent practice of giving annual raises in NBA contracts. In my view this practice is often counterproductive strategically. Instead, savvy teams should, and I believe will, begin to turn to the practice of frontloading.
Don’t get me wrong: there are times when issuing these maximum annual raises make sense, such as when a team only has so much cap space to utilize so it is limited in how much the first year salary can be, and it needs to make the most attractive offer possible. Or when a team has a superstar like LeBron James or Dwight Howard or Kevin Garnett, and you pay the maximum permitted by law no questions asked.
Likewise, there are times strategically when structuring salaries with maximum annual raises makes sense for teams: in particular, when a team is already well below the cap and wishes to remain there so it can sign a free agent or trade for an expensive veteran with a large contract, like Charlotte did with Jason Richardson this past off-season. In that case paying the least amount now and deferring salary creates more available cap space to play with. But most teams are not in this highly desirable situation, and by always giving maximum annual raises in contracts, they make it much more difficult to ever get there without shedding valuable players.
Likewise, pushing more salary off into the future can help teams avoid the dreaded luxury tax or at least push it off into the future.
But these instances only apply to a minority of teams in the NBA today.
Yet scroll through the team salary lists on the Internet, and almost every team in the league has player after player with annual increases built into their contracts when such increases were not necessary to get the deal done and when such contract structures served no strategic purpose. There were alternatives that could have satisfied the player and put the team in a much better position with regard to the salary cap.
These teams need to frontload.
The principle behind frontloading is simple. Unless teams are absolutely forced to give annual raises, in most strategic situations it would be more prudent for teams to pay more early in the contract and to stop giving raises that clobber a team’s salary cap position by the last two or three years of the deal. If you look at the example above, you can see how much larger the salary cap hit is in the 5th year of the deal if maximum raises are given.
In fact, when a team is signing its own player – if it is not a max contract superstar -- or if it has cap room, I think a compelling argument can be made that a smart team will actually reverse the process and give the largest salary in the first year and then have annual maximum decreases in the salary. According to the NBA collective bargaining agreement, a contract can be decreased by as much as it can be increased annually. So when a team re-signs its own player, it can lower the annual salary by as much as 10.5 percent based off the first year of the salary. When a team signs a player from another team, it can lower the annual salary by as much as 8 percent off the first year on the contract. That is what I mean by frontloading.
I know, you are probably asking, “Hey, why would any player accept an annual pay cut?” The reason is that they are not taking a pay cut because they are going to make the same amount of money, only they will get paid much more of it at the beginning of the contract. Any person in business or economics will tell you that is a winning proposition.
So, in the example I gave above, imagine if the Bulls said to Luol Deng, “We agree to give you a five-year $60,000,000 deal, only we want to restructure it so you get much more of the money at the front end.” So the new contract would pay Deng $15,000,000 the first year and have annual $1,575,000 decreases in the salary. In the fifth year of the deal, the Bulls would pay Deng $8,700,000. The difference in the cap hit in the fifth year between this approach and the classic maximum-raise approach is a whopping $5,500,000.
The player clearly wins. Deng can take that extra money he gets early in the contract, invest it, and the total amount he will make from the deal after five years will be much more than in the standard deal. In fact, teams will be able to negotiate down the first-year salary because getting the money at the front of the deal is such an advantage. This is standard practice in business.
There are also very distinct benefits for the teams. First, teams will be able keep their long-term position vis-a-vis the salary cap much healthier. In the near term the team pays more and may have to pay the luxury tax in some cases, but a few years down the road the team will have far more cap space to use for free agents. It is worth noting that Chicago is pioneering the movement to frontload long-term deals, doing so with the recent Ben Wallace, Kirk Hinrich, and Andres Nocioni contracts. The Bulls pay more now, but they are still not paying a luxury tax, and they are going to have greater flexibility and a lower cap figure in 2010 and beyond. I assume they will do the same thing with Deng and Ben Gordon if they are able to resign them. Come 2012, save five million here and three million there a bunch of times and pretty soon you are talking real cap space, enough to afford a significant free agent. And that might be enough to win a team a title, or at least make it much better.
With frontloading, the era of NBA teams having many mediocre or worse players with massive long-term contracts grown mountainous due to huge annual raises making them all but untradeable except as salary dumps: Ratliff, LaFrentz, Szczerbiak, Miles, Walker, seemingly half the Knicks, the list goes on and on – will slowly fade into the past. That is as it should be: the NBA will pay as much or more in salary only it will now go to players who deserve it.
Second, teams will find it easier to get players to accept a provision that gives the team an option to drop the final year of the contract. It is not going to always be possible to get players to agree to let teams have an option to end the contract with a season to go, but players will be more willing to accept this with frontloaded deals because they will have gotten the lion’s share of their money before then. If a team exercises its option, the player has gotten most of the money and is then free to sign with another team. The only catch for the team is that a team option cannot be put into the contract unless the salary in the final season is the same or greater than the salary in the preceding year.
If teams are able to get a contract to include the team’s option to a final year in a five or six year contract, it can then dump players who have become unproductive without having to work a contract buy-out and have the contract count against their salary cap for the final year of the contract. It also makes it less expensive to work out a buy-out in the year or two before the option if the player has really hit the skids. And the cherry on the sundae is that they get the player off their team. These guys sometimes become locker room cancers.
In certain scenarios, where the frontloading is especially attractive and the player has few alternatives, teams may even be able to get the player to agree to have the final two years non-guaranteed. It will probably require a team to overpay a player beyond merely frontloading in order to get the right to have the last two years of a five or six year deal non-guaranteed. In this case, unlike a team option, the salary can continue to be decreased. This is a dream scenario for a team because it makes it possible to dump players or trade them easily since other teams can dump them. Or, if they are playing well, keep them through the contract and get them cheap at the back-end.
Players have resisted non-guaranteed years in contracts, for self-evident reasons, but with frontloading and a slight bump in initial salary, it can get back on the table. The only player I can locate with such an arrangement presently is Antoine Walker, who was forced to accept it because of medical problems that emerged after he signed his six-year deal with Miami in 2005. Walker wisely preferred to let the last two seasons of the deal be non-guaranteed rather than jeopardize the first four years of a deal that made him among the most overpaid players in the NBA. With frontloading, Walker’s exception could be more prevalent.
Third, frontloading long-term contracts makes it much easier to move players later in their contracts. Their salaries are simply much lower which makes them easier to trade. If a player is a young and emerging all-star, like, say Luol Deng, toward the end of a front-loaded contract at age 25 or 26 he might be relatively cheap at $9 million or $10 million per year, and many more teams could compete for him if the Bulls decided for whatever reason to put him on the market. With a traditional maximum raise contract, Deng’s salary would be $14 million by the last year and the market would be thinner, and his trade value would be less.
There is one downside, a mighty one at that, for a team that frontloads its long-term contracts in the manner I suggest. The team has to pay more salary in the near-term, and for many teams to do this might put them over the luxury tax threshold. Then they will have to pay, in effect, double when they take on additional salary to frontload contracts. This is the main drawback to the plan as far as I can see. Frontloading is the strategic choice of teams with especially wealthy owners, or visionary owners with patience and a commitment to win over the long haul. That does not include all 30 teams.
There are really three schools of owners, and each of them would have a different stance toward frontloading. Owners like Robert Sarver in Phoenix, who traded away two number one picks to get Seattle to take a good player like Kurt Thomas with a measly one year left on his deal, would never go for something like this. At the other end of the spectrum, the billionaire owners like Paul Allen and Mark Cuban should almost always frontload contracts when it is an option. Cuban may live to regret not frontloading his deals for Josh Howard and Jason Terry. Their contracts were made for frontloading. When Brandon Roy and LaMarcus Aldridge come up for extensions, Allen will be wise to frontload, except in the unlikely event they become max contract players. (Then he will probably be wondering if he has enough fingers for championship rings.) Guys like Allen and Cuban can afford to be patient. In the long run they will laugh last.
For most other owners who are in the middle, I think frontloading is a no-brainer if there are no luxury cap implications. The only reason not to frontload is if a team is already under the cap, as I noted at the outset, and frontloading would undermine its ability to sign free agents or trade for expensive players, like Charlotte did with Jason Richardson. But once a team is at or near the salary cap, frontload away!
I would argue that teams not owned by billionaires might consider the value of frontloading contracts even if there are luxury taxes to be paid. I know, that is easy for me to say; it is not my money. But it is true that, on balance, NBA teams make far more money if they go deep into the playoffs than if they go deep into the lottery. Ticket prices increase, merchandise sales go up, and local TV and radio contracts are bid much higher. Done right, frontloading is a strategy that can get a team to the top and keep it there quite a bit longer once it has gotten there. And it is worth repeating that frontloading can help teams avoid, or at least lessen, the terrible position of having several costly overpaid players on their roster who are all but untradeable.
I know this is all very abstract at present. In the second part of this article, I will discuss how frontloading contracts could benefit one specific team, the Boston Celtics, the team I follow and write about for RealGM. In part two, this theoretical discussion will be made concrete. I want to be clear about one point: frontloading contracts is a strategic device. It is not to be applied willy-nilly to all contracts. There are going to be times a team will offer contracts with maximum annual raises. Each particular team will have a different strategic situation, and the usefulness of frontloading will vary. My discussion of the Celtics will demonstrate that. But the general usefulness of frontloading applies for every team in the league. It is an idea whose time has come.
*I want to thank Larry Coon and his superb FAQ and FGump of RealGM for helping me understand how the CBA affects frontloading. |
