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Layups: Kevin Pelton on the Perils of Long-Term Contracts

Posted by Neil Paine on July 16, 2010

Basketball Prospectus' Kevin Pelton has done some great research on the problems with handing out long-term contracts in the NBA:

"...It's not even the high cost of mediocrity that kills teams--it's the duration of it.

This jumped out at me over the course of compiling my position-by-position rankings of free agents. Sprinkled throughout these lists are players who have long since ceased to have any value to their team and have hung around solely because of their contract. [...] Often, like Antonio Daniels or the more extreme case of Cuttino Mobley, injury is a culprit. Sometimes, the player just aged. And occasionally, as in the case of Trenton Hassell, the contract was simply a mistake from day one.

...I see the takeaway as how teams can get themselves in trouble with the lengths of the contracts they offer as much as the yearly salary."

This is definitely true, and it's something the stats community has argued for a long time. True superstar free agent deals (Michael Jordan re-signing with Chicago in '96/97, Shaquille O'Neal signing with L.A. in '96, Kevin Garnett re-signing with Minnesota in '97, Tim Duncan re-signing with San Antonio in 2000, etc.) have largely been worth it. Likewise, low-cost players at the other end of the free agent spectrum invariably produce a good return on the investment: they come at no risk, and they’re usually just short-term deals, so if they flop, there are no long-term repercussions.

The middle class, however, is where ugly contracts are born. GMs have a long history of ignoring obvious warning signs when going after middle-class “established veterans”, which is why using the mid-level exception is usually a detriment to teams, not an advantage. The moral of the story is this: go all-in with your superstars, but when filling the rest of your roster, stick to the low-budget model of building through the draft and signing useful low-priced FA’s. And whatever you do, don't give long-term deals to middling players, because you will get burned.

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13 Responses to “Layups: Kevin Pelton on the Perils of Long-Term Contracts”

  1. David Fauber Says:

    I think by and large teams realize they're overpaying on a lot of these deals. The hope is that you get a few good years, and hopefully the final year is a trade asset (because of the expiring). Really the whole thing just illustrates how jacked up the CBA is though, in my opinion. (and by extension, how effective the player's association is in the NBA)

  2. Neil Paine Says:

    Very true. And I'm guessing that's something that's going to be different after the 2011-12 lockout.

  3. Anon x 2 Says:

    The problem is based on the economics of the system. It's a funny situation because most players are always underpaid from a revenue-cost model, but relative to other players a ton of players are overpaid because of the cap structure and max salary caps.

    Lebron is worth more than the max he could sign, both financially and in basketball value. However, he can't exceed that. This makes it very easy to overpay guys like and Gay and Joe Johnson, relative to Lebron, by giving them the same deals.

    And while those deals can hurt, it's the trickle down effect that gets teams. All of a sudden guys worth $4 million in basketball value get $8 million. Guys worth $6 million get $10 million. Guys worth $2.5 million get the MLE.

    And the length of these contracts are a big problem because of the high risk of injury and age diminishing returns (for guys nearing or at 30).

    I am not quite sure how to solve the basketball value issue relative to Lebron James outside of eliminating the cap which I believe is a far worse idea. The length issue could be dealt with by giving every contract a mandatory ETO in year 3, but if not exercised after year 3, it is guaranteed the rest of the way (minus player ETO and POs).

    Owners need to be protected from themselves because of the law of bidding in a 1st price auction (whoever wins the bid generally overpaid). How do you do that? I'm not quite sure, but I expect they will push hard for an across the board reduction in salaries.

  4. Kirk Says:

    Of course, from a player, aka labor point of view--and there are surely more of us that fall into that category than the owners category--they were not being paid market value in their rookie contracts. In the case of the few super duper stars, they *never* get paid their market value by their NBA teams. I agree with Neil's conclusion in this post, but what we call smart team building is based on the exploitation of players being paid artificially depressed salaries. On the flip side, Coghan just got something like a 300% return on his Warriors investment, not counting any losses/profits during his ownership. Fans are usually quick to condemn players, but we should at least all be aware of these dynamics if the CBA negotiations turn tough and the possibility of a lockout looms even larger.

  5. ScottR. Says:

    It's ridiculous that the GMs and owners need protection from themselves for giving out stupid contracts but, for the good of the game, they do. No one (but the individual player) wins when you have teams outbidding each other like drunken sailors for the services of a mid-level player. The team is ultimately hurt and the product suffers as a whole.

    Obviously you want to lock up your super duper stars but any league that lets a team sign Darko to a 4 year deal is flawed.

  6. Anon x 2 Says:

    I get the part relating to the players. But basketball is abnormal because the salaries are so high and it effects people not directly related in the business (fans).

    And I also believe the owners deserve blame, if not most of it, for all these issues. But the truth is that if we want to have a competitive league, they do need protecting.

  7. Nick Says:

    A deal the owners would hate but might solve the problem would be to allow teams to dump a contract for cap purposes, while still honoring the contract's monetary value with regards to the player, if the player is cut from the team.

  8. Jason J Says:

    Nick - You mean if the Knicks fire Marbury and pay out the length of his contract he immediately comes off the cap / tax figures? That's not too different than what they do with buyouts now I guess.

  9. Anon x 2 Says:

    he doesn't come off the cap. his buyout becomes part of the cap, instead.

    What he's referring to is the Allan Houston rule of a few years back.

  10. Grant Says:

    The ultimate goal of the salary cap is competitive balance in the league and the rewarding of shrewd management and coaching over high spending and long term commitments. The best thing to come out of the summer of 2010 was the clearing of the decks that so many teams went through to try and attract top talent. There have been fortunately fewer Darko deals than large contracts for legit superstars (even if Joe Johnson got seriously overpaid).

    If we're lucky, they split the Mid-Level exception in two on an annual basis, and make the larger exception every other year. There's a lot of players stuck making veteran minimum who deserve $2-3MM per year but due to cap rules are stuck at the "bottom" while a lot of guys earning $5-$8MM per year (Marc Blount) were just the beneficiaries of dumb money following exceptional contract year performances...

  11. Charrua Says:

    I wonder if part of the problem isn't the availability of replacements. I mean, it's easy to see that some of these contracts are bad, but are we sure that better options were available? There is a finite number of draft picks and useful cheap FAs, after all. And of course, at that salary range you are competing with Europe, not just other teams.
    More than anything, Kevin's numbers tell me that most guys become unrestricted FAs precisely just about their peak years (now, that's a good idea) and that teams tend to value known production a lot (enough that if you push them, they will pay too much for it).

  12. Daniel Song Says:

    Moral of the story: build through the draft, trades, and cheap free agents. Give the big expensive long-term contracts to superstars on your own team (i.e. Durant).

    Otherwise, you just have to let them walk and let other people give them stupid contracts.

  13. simeon Says:

    How about getting rid of guaranteed contracts altogether? They don't exist in most fields and those fields turn out fine.