Posted by John Vrooman on Friday, January 23, 2015 in National Basketball Association.

Interview with CNBC.

KD Salary structure (updated)

1. What would a major player like Kevin Durant be worth in a league without salary caps? Is his salary fair now?

The NBA has essentially 3 salary caps.

Since 1984 Each team has faced a soft salary cap (it can be exceeded for a variety of reasons)at 49-51% of BRI (Basketball Related Income). In the last CBA (collective bargaining agreement) the NBA owners have imposed a strictly progressive luxury tax at 53.5% of BRI.

The luxury tax (since 1999)  has now effectively become a hard cap. During this season 2014-15, the soft cap is $63.1 million and the hard cap (luxury tax) has been set at $76.8 million. About 80 percent of the clubs are over the soft cap and only 20 percent are at or over the luxury tax threshold.

On top of all of this, individual player salaries are also capped base on years’ service in the NBA. This is called a players max salary.

Kevin Durant  is probably being paid about half of what he is worth to the OKC Thunder because of the arbitrary individual salary cap (max salary) that is determined by his years in the league rather than his production.

The value of a NBA players production is called his marginal revenue product and it is determined directly from his marginal product or how many wins he produces. KD’s marginal product is measured by an advanced metric called win shares and the money value of total team wins is determined by taking two-thirds of OKC’s revenue (total players share should probably be about two-thirds of a clubs revenue).

Last season KD produced about 19.2 of OKC’s 59 wins or 32.5 percent. If the players create about 66.7% of team revenues then KD creates 21.7 percent of the $152 million total OKC revenue.

This gives KD a marginal revenue product of $33 million compared to his salary of $17.8 million for 2014. This implies that he is paid about 53.9 percent of what he is worth or conversely that his rate of exploitation under the individual max salary is 46.1 percent.

2. If top players are worth more than they are paid, how do you think they bring in so much money? Wins, ticket sales, merchandise, etc.

In MLB the veteran free agents (6 years or more of service) are on average paid a third more than they are worth and the younger players (years 1-3) are paid only a third of what they are worth to their teams. By contrast the NBA veteran stars like Lebron James and KD are the ones who are usually underpaid and exploited. This is a combination of the salary cap but more a function of the individual maximum salary limitations.

3. Do you think that salary caps increase league competitiveness by distributing talent more evenly?

Yes there is strong evidence that hard salary caps in the NFL and NHL randomize talent distribution and create competitive balance that may come at the expense of team quality and continuity.

There is also strong evidence that the soft salary cap in NBA allows good teams to stay together but it also makes it difficult to rebuild bad teams. For example the Larry Bird exception allows teams to exceed the soft cap to resign their own free agents.

There is clearly an optimum level of competitive balance that is less than the randomization of the NFL and NHL and greater than the predetermined dynasties and doormats of the NBA. 

Ironically MLB may have achieved that optimum balance between team excellence and league fairness largely because they are the only major sports league where player salaries are market determined without a significant salary cap.

4. Do you think salary caps should exist?

No on the contrary, the hard salary (payroll caps) generate an inferior random league production at the expense of major player exploitation, while the NBA soft cap leads to the other extreme of dynasties and doormats.

The hard caps in the NFL and NHL destroy team chemistry and lead to an inferior product of equally bad teams defeating each other. The soft cap in the NBA leads to  an imbalanced league where only a handful of clubs can win. In combination with the soft cap and luxury tax , the individual maximum salary leads to the major exploitation of the NBA’s star players. The original purpose of the NBA salary cap in 1984 was to protect conservative owners against other high rolling owners, not to protect owners against players.

All three salary caps artificially limit the players share of league revenues at less than 50 percent, when a free market would probably let the players share to 60 percent to two-thirds of league revenues.  

A players share above two-third would begin to squeeze profits, which occurred in the NHL when player costs soared to 75 percent before the 2004-05 lock-out and imposition of the hard cap The league that seems to have achieved the optimum competitive balance without gross player exploitation is MLB where there is no salary cap with moderate revenue sharing.

 

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