It's early in the free agency period and we've already seen some outrageous-looking deals. Jodie Meeks turned a single good year in the barren landscape that was the Lakers' roster into a three-year, $19 million contract with the Pistons. Notorious disappointment Ben Gordon will get paid $4.5 million a year. Marcin Gortat will get $12 million a year until he is 35 years old. And career backup Darren Collison just signed a three year contract worth $15 million.
Those have traditionally been the type of contracts that kill a team's cap management. Paying has-beens like up-and-comers, back-ups like starters, and starters like stars is simply bad business. So why are we seeing the same type of deal after there was a lockout in which owners used those contracts as examples of a broken system? In simple terms, the league is making more money.
The salary cap is tied to the amount of basketball-related income generated by the league. Players as a group get 50% of the revenue, regardless of individual contracts. If teams don't have contracts adding up to that percentage, the money that they come up short still goes to the players' union. If a specific team fails to reach the salary floor, the difference is spread between the players on that roster.
On a macro level, it doesn't matter who gets the big contracts. 50% of the league's basketball related income (BRI) goes to the players. What the franchises can do is decide which players get what salary and how much each franchise is on the hook for. The Nets, for example, reportedly lost $144 million dollars in large part because they had a ridiculously expensive roster. Other teams turned a small profit by being a bit more frugal. But once again, the league as a whole took in 50% of the income.
Brooklyn is an extreme example, but it's a good sign to see contending and rebuilding franchises on opposite sides of the spending see-saw. The Sixers know they won't generate revenue with a terrible roster, so they control their spending. Other teams know they will get a profit (or the value of the franchise will go up by getting to the playoffs) so they spend more. Once the Sixers' promising youngsters hit their prime and the team is ready to contend, they will spend more, while teams whose windows have closed will lower their payroll. It would make little sense for every team to spend the same despite having different short terms goals.
There is a salary floor on individual teams, and a ceiling on how much of of the BRI pie they receive. Teams spend according to their goals, for the most part. Of course, that doesn't explain why someone would spend over $5 million a year on Darren Collison instead of targeting a better player for more money.
The issue is that there aren't enough elite players to go around. The Kings know they can't sign LeBron, which means their resources have to go elsewhere. They could simply sign minimum salary players until they get a shot at a star but if they don't reach the salary floor, the contracts of everyone on their team would be increased until the floor is attained -- which would end with those guys not being minimum salary players after all. So teams compete for these "middle class" players and award them with slightly inflated contracts because a) they are the best they can realistically get and b) there is no great financial harm in it; just reduced cap flexibility.
In the past, only smart teams that craved room to maneuver stayed away from those contracts. But two of the owners' wins in the last lockout changed that dynamic to the point where smart teams might start re-calibrating their approach.
First, contracts are shorter now. At one point, teams would not only have to offer mid-level salaries to mediocre players but would sometimes have to offer the best among them five-year contracts. Five years is a long time in the NBA and a lot of those players failed to live up to their contracts, and were also untradeable -- making it very hard for teams to rebuild or reload after a mistake.
The second development might end up being even more important in the near future. Previously, the mid-level exception was tied to the average salary. Now it's fixed. Regardless of what the league audit determines to be the average salary for this past season, the MLE will be set at $5.3 million. If the projections hold, it will represent 8.4% of the cap. In 2005/06, the MLE represented more than 10% of it. If the league's BRI keeps increasing, the exception will represent an even smaller percentage of the cap.
Maximum salaries, meanwhile, are still tied to the cap and to years of service. LeBron James certainly should get more money than Carmelo Anthony. But because there is a cap on max salaries, they'll both get, at most, 35% of the cap if they sign for the max, since they both have been in the league for over ten years. At the same time, rookie scale contracts restrain what a young player can earn, keeping players like Anthony Davis from being properly compensated.
So teams are spending more on sub-max players by the following combination: short contracts, maximum salaries that are tied to the salary cap, and rookie scale contracts that contain the salaries of elite young players -- which ends with teams to spending more on sub-max players while maxing out players that simply aren't elite.
Which brings us back to Meeks. The Pistons know that Andre Drummond's max salary after his cheap rookie contract will only be equivalent to 25% of the cap, since he'll have fewer than seven years of service. So they'll offer it to him even if he's not a franchise player. They also know that teams that are over the cap can offer $5.3 million without hurting much, which means the only way they can get a guy like Jodie Meeks is to outbid those teams. Even if Meeks isn't worth 9.5% of the cap, his contract is up in three years. There is no great financial risk, since someone has to sign contracts adding up to the 50% of the BRI and the combined salaries of Meeks and Drummond will add up to the max Melo can get.
The lockout produced the result the owners wanted. The elite players young and old continue to be severely underpaid thanks to capped max salaries and rookie scale contracts, and the volatility in the market is fixed on mid-tier players and not stars. Franchises always get their stars for at least seven years after drafting them and can always offer more money. The idea is to make the complementary pieces more widely available and to reduce the risk of signing them. In other words, C.J. Miles will change teams, Kyrie Irving won't.
What this approach fails to take into account is that players are not as predictable as some think. James, Wade and Bosh took less money to allow the Heat to poach them in free agency while still being able to sign complementary pieces. The Spurs' Big Three did the same while staying put. Vets take smaller salaries to play for contenders all the time. And there will be a time when a young player will sign the qualifying offer and leave a team after four years. The system is set up to account for maximum greed and when the players subvert that expectation, that's when things get really weird.
Signing mid-tier players is less risky now and there are more players of that level available on average every off-season. But nailing the right player for the right money is still paramount to building lasting success because at any time, your star could decide that the supporting cast is not good enough and bolt for less money in free agency, despite all the mechanisms in place to prevent that. The owners have done a great job of reducing risks. But fortunately, making the league foolproof is simply impossible.