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Think Percentages, Not Free Agent Dollars

Think Percentages, Not Free Agent Dollars
Jimmy Butler, who signed a five-year maximum contract extension worth $90 million, is congratulated by general manager Gar Forman during a press conference on July 9, 2015. (Anthony Souffle / Chicago Tribune)

By now, we've all heard about the pending boom that will see the NBA's salary cap soar.

Currently, all team's league-wide are operating within a salary cap of $70 million. Thanks to an exorbitant TV deal that is set to benefit all involved with game, the cap is going to change in a big way. Set to reach unprecedented levels, current projections have the 2016-17 season salary cap rising to $92 million, which represents an increase of $22 million against the status quo.

If that wasn't enough, the cap will continue to climb in 2017-18, reaching a projected $107 million.

As the cap spikes to never before seen heights, we can expect player salaries to increase at a similar rate. Though not officially set in stone until early July, we have an idea what the cap will look like. Conversely, estimating the future contracts of free agents is nothing more than a guessing game, and until the bidding war for free agents commences, we won't truly know the full impact of new cap environment until it's occurred.

This unknown is frightening in many ways. Previous expectations of market value deals are no longer relevant, with the new contract terms to tower over current deals as if they were an inferior foreign currency. If that wasn't enough, the overuse of the term 'max contract' with a caliber of player that typically would never be associated with such huge amounts of money, is already causing anxiety among many fan bases.

We're about to enter a free agency period where player's who've never been All-Stars are going to be paid like transcending superstars. Things are going to get weird, and we need to prepare for it.

Harrison Barnes, Nicolas Batum and Hassan Whiteside, to name a few, will benefit greatly from the rising cap, with expectations currently suggesting all three are set to bank max deals. That, on the surface, does sound absurd given Barnes and Whiteside can earn $21.6 million next season, while Batum -- who has additional year's of experience, therefore allowing him a higher percentage of the total cap -- can take home $25 million. These deals for nice-but-not-so-great players seem crazy, but are they really as crippling as they seem?

Perhaps they are if we continue to allow ourselves to operate under the current cap constraints, but when applying these contracts against the rising cap conditions, these deals become a lot more palatable.As we move closer towards the offseason period, these enormous deals will become a reality. There's no avoiding this. When they do, we shouldn't freak out. At least, not before doing the math.

As the cap rises, the value of the NBA dollar is changing. Comparing contracts year-on-year will be a pointless exercise until the cap stagnates at its new level, therefore judging the merits of the newly signed deal should be done by calculating a contracts value as a percentage of the cap instead of focusing on sum value of the giant deals that await our fortunate hoopers.

Think of it this way; we don't measure the average wage of 2016 in a direct comparison to that of 1986. The economic variables have changed, namely inflation. We know this, so it isn't bizarre when noting the differences. The same logic should be applied with future NBA contracts. Until we apply inflation to these contracts -- otherwise known as the rising salary cap -- we shouldn't be up in arms when a player signs a mammoth deal.

Using Harrison Barnes as an example, let's assume the 23-year-old forward receives a maximum contact offer in the offseason. Already declining a four-year, $64 million contract extension from the Golden State Warriors, Barnes will be seeking more than an annual income of $16 million. And he's likely to get it.

Coming off his rookie deal with 0-6 years experience in the NBA, Barnes will be subject to a maximum contract that equates to approximately 25% of the salary cap, as per section 16 of Larry Coon's NBA Salary Cap FAQ. In a landscape where the cap will rise to $92 million, Barnes can earn as much as $21.6 million in the first year of his new deal. That numbers seems monumental, and it is if you compare it to the current contracts being paid to player's this season. But comparisons to current contracts is futile. Instead, if we think about Barnes' max deal as a percentage of cap space, his inflated deal looks more reasonable.

Doing the math and using the percentage principle, a first year salary of $21.6 million will equate to 23.5% of next seasons $92 million salary cap. This percentage can now be used to judge how Barnes' deal shapes up against contracts in the current cap by applying 23.5% against a cap of $70 million. Completing this calculation, you'll find that a $21.6 million contract in 2016-17 is the equivalent of a $16.4 million contract in 2015-16.

So, in essence, Barnes accepting a maximum contract in the new cap will ensure he pockets an additional $5.2 million, but as a percentage of the cap, his future max deal will not be greater than a current max deal. Now, we can argue for days if contract with a starting salary of $21.6 million is a just contract for a young, two-way forward who has yet to make the leap to stardom, but by accurately measuring it against present day deals using percentages of cap space, we can at least have an objective discussion with comparative percentage rates instead of being bogged down by the enormity of contract amount.

Additionally, we can also determine a player's future contract in the new cap environment by using the year-on-year percentage increase of the cap and applying that to current contracts to find a comparative rate. As mentioned, the salary cap will be increasing from $70 million to $92 million, or 31.4%. Using this percentage, we can apply this to present day deals to determine fair value against a rising cap.

Sliding under the radar as a free agent prospect, Bulls guard E'Twaun Moore has found himself requiring a new contract at the perfect time.  Developing into a credible backup guard capable of defending both guard positions whilst shooting 45.2 percent from the three-point line, Moore should receive significant interest. With an increasing cap and a demand of "3&D" point guards, Moore's will garner offers substantially greater than his current veteran's minimum scale contract, but what offers can we reasonably expect for Moore to receive?

If an assumption is made that E'Twaun Moore is worth the equivalent of 2015-16 mid-level exception, a starting salary of $5.46 million would be a worthy reward for his breakout season. But as the cap is rising, that amount will no longer carry the same meaning in 2016-17, being viewed as modest and beneath his worth.

Using the percentage principle once more, we can reverse engineer a $5.46 million contract by applying 68.6% (difference between 100% and 31.4%, the percentage increase of the cap, year-on-year). In doing so, we'd find that $5.46 million in 2016-17 would be the equivalent of a $3.8 million deal in 2015-16. Most would agree that E'Twaun Moore is worth more than this, especially after averaging 9.2 points, 2.7 rebounds and 2.2 assists in 24.8 minutes per game since Jan. 1 2016.

So what is fair value for E'Twaun Moore?

Revisiting the theory that Moore deserves an offer equivalent to the current mid-level exception of $5.46 million, adjusting this figure by the year-on-year percentage increase of the cap, don't be surprised if Moore receives offers of $7.2 million or more. That may sound like a massive amount for a backup guard, but again, as a percentage of the cap, there's no fundamental difference between $7.2 million and $5.46 million.

Importantly, it should be reiterated that the cap will continue to rise in 2017-18, so there's even more potential for a player to be offered more than what we perceive their current value to be worth. With the cap projected to rise to $107 million in 2017-18, this represents an increase of $37 million on the current salary cap. Knowing further increases are coming, in order to secure the services of prospective free agent, team's may find themselves 'overpaying' a player in the first year of their deal as an incentive to the player to move franchises, thus forcing contract values to be even higher than the relative terms of the current salary cap.

There is a very real chance that E'Twaun Moore could receive an offer of $7.2 million next season - a deal equivalent to the current mid-level exception. A scenario also exists that Moore could receive even more than this, with a starting salary as much as $8.3 million being a realistic possibility. How so?

Applying the percentage principle.

If we were to calculate a $5.46 million deal against a $70 million salary cap, we'd find that E'Twaun Moore at this amount would equate to 7.8% of the cap. Using the same logic and applying the 2016-17 salary equivalents, a $7.2 million deal against a $92 million salary cap would also equate to 7.8% of the cap. But what about $8.3 million against a salary cap of $107 million? You guessed it, 7.8% of the cap.

Front office executives league-wide already have sufficient information that suggests a further cap boom is coming a year from now. With this knowledge, if thinking about player contracts in terms of percentages -- and not dollars! -- if it is deemed a player like E'Twaun Moore is worthy of 7.8% of a team's cap space, a team may offer $8.3 million in the upcoming offseason in order to lure him away from the Bulls.

You'll note that a starting salary of $8.3 million is greater than 7.8% of the 2016-17 salary cap, but as the cap rises in 2017-18, the contract value as a percentage of the cap would stabilize, meaning only the initial season can be considered an overpay. Until the cap normalizes, this is likely tactic that will be used by many team's this offseason, which further understates the importance of judging contracts based on percentage of the cap, both in the pending cap and those that are to follow.

***

So aside from multi-millionaire athletes increasing their net worth and an unnecessary amount of math being required to justify their insane contracts, what does this all mean?

Unfortunately, in order to objectively analyze the worth of a player's contract without throwing fits at the inordinate amount of eight figure deals being signed this offseason, a reshaping of our collective perspective about contract structures will be required if we're to judge a new deal on its merit.

The majority use sports as an escape from reality, so the thought of punching figures in spreadsheets instead of chugging beer and yelling at referees goes against every fandom norm we have. That may be the case, but if you also want to avoid heart palpations when the Chicago Bulls -- or one of many rivals -- offer E'Twaun Moore a four-year, $30 million deal, it's best to breakdown preconceived notions of fair value now, and to start planning for the new normal ahead of time.

 

Follow on Twitter: @mkarantzoulis

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  • Would the NBA players union be wise to adopt a standard percentage for the 15 players on each team allowing for at least 3 players on each team to receive a max contract and other players to have a fixed rate per cent of the available revenue?
    And since the cap has risen and will rise again a year later, does this mean FO's will try to sign its star players and free agents this year to this year's max to allow them to have more cap space next year? This means that the Bulls were smart signing Butler to a max contract last season. Does this also encourage the FO to sign a free agent to a max deal this summer?
    And does this mean that the luxury tax cap would start at $100M$

  • In reply to penwit1:

    Financially this also means that the Bulls would be smart not to trade Jimmy Butler. This would allow the FO cap space to sign an additional max player and still have cap room to resign E'tawm Moore to a,competitive contract?

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