Contract Value and Class Warfare in the NBA

Every NBA fan secretly wants to be a general manager.

It’s a biological fact. Go ahead. Look it up. I’ll wait. It has been scientifically proven[1. Okay, not actually, but bear with me. We’re almost through the lede] that as fans have developed a deeper understanding of the inner machinations of the league, the wheeling and dealing behind the scenes and the implications of every decision made by their favorite team’s front office, so too has their thirst for being that principal decision-maker grown.

‘Is (that contract) a steal?’ ‘Did they overpay?’ ‘How exactly do you pronounce Ognjen Kuzmic?’

It’s for this reason that the ‘free-agency’ season has become arguably a bigger spectacle than the NBA season itself. As news trickles in about Player X signing with Team Y, everybody wants to voice an opinion. ‘Is it a steal?’ ‘Did they overpay?’ ‘How exactly do you pronounce Ognjen Kuzmic?’

However, it’s important to take a step back from time to time and look at the forest as a whole instead of focusing on every little tree branch. How do you build a contender in 2015? Where is the real value hiding? What are teams missing?

In an effort to get at the answers to these questions, we will be taking a look at the 2014-15 season through the lens of Value To Contract (VTC) to see where teams were able to mine the most bang for their buck. This is done by first establishing each player’s Market Value using the following formula…

[(63,065,000 / 41) * (VORP[2. Value Over Replacement Player; methodology found here.] * 2.7)] + 915,243 = Market Value[3. Essentially, all we are doing is divvying up the amount of the salary cap with the goal of building a league-average (41 win) team. Multiplying VORP by 2.7 gives us a rough estimate of how many Wins Over Replacement Player that player created. $915,243 is the cap hold for a veteran minimum contract, as a replacement player is generally considered to be a minimum-salary player. Given that plenty of teams go over the salary cap, it is probable that Market Value will err slightly on the conservative side. However, it should serve as a useful approximation.]

From there, we simply subtract a player’s 2014-15 salary[4. Contract values gleaned from BasketballInsiders and Spotrac, with special thanks to BBInsiders’ Eric Pincus for additional help.] from his Market Value in order to ascertain his VTC.

So, what are some of the implications?

There is no ‘next Draymond Green’

Everybody wants to be the one to uncover a diamond in the rough. And with the season around the corner, it’s only a matter of time until we start hearing about how this player or that player is going to be ‘this year’s Draymond Green.’ Let’s get one thing perfectly clear: The ‘next Draymond Green’ is probably not going to come around for a long, long time.

Of course, that’s not to say that a second-round sleeper or unheralded free agent won’t have a breakout year. However, to put Draymond Green’s 2014-15 season into context, no player[7. As near as I can tell. Salary information for players becomes spottier the further back one looks.] has recorded a VORP over 4.0 while playing on a minimum contract since the advent of the three point line. It might even go back further than that, but it’s hard to know since the salary information from that era is woefully incomplete. Bottom line is: The odds of a minimum-salary player coming close to Draymond’s level of production in 2015-16 are extremely low.

So, what can teams expect from their minimum wage workforce? Unfortunately, if last year is any indication, the answer is not much bang for their buck.

Since minimum-salary players are unlikely to create much [value], that value must be created elsewhere in order to carve out a competitive advantage.

Of the 176 players who logged minutes on a minimum contract during the 2014-15 season, only 74 actually played at replacement level or better. The overwhelming majority of those 74 were worth less than 1 point per 100 possessions over a replacement-level player (which, conveniently, is valued at just under the $5.3 million mid-level exception line). In fact, of those 176 players on minimum deals, just six of them generated at least $5 million worth of value. Draymond Green, of course, provided the Warriors with max contract value for the bare minimum price. The other five landed somewhere on the spectrum of moderate value, sandwiched between the production levels of Solomon Hill and Marcin Gortat on the bottom and top end respectively. Good, helpful players, yes, but not guys who are necessarily going to change the course of your season. [5. The best of the bunch not named Draymond was Ed Davis, whose best efforts didn’t stop the Lakers from going 21-61.]

Here’s what it looks like mapped out:[6. The gentleman whose blip sits unfathomably far down below everyone else is Lance Thomas. He actually wasn’t even all that terrible on a minute-to-minute basis. The problem is the Knicks and Thunder combined to let him play damn near 1,500 minutes, helping him earn the title of the single-most destructive player to his own team’s cause in 2014-15.]

The Cavs, in particular, were forced to go to the minimum-salary well early and often to try to find depth. Cleveland trotted out nine different minimum-salary players over the course of the season and failed to find a viable rotation player among them. That lack of depth arguably cost them the Larry O’Brien trophy, as the visibly worn-out Cavs were run off the court in Games 4 and 5 by an insanely deep Warriors team.

Since minimum-salary players are unlikely to create much VTC, that value must be created elsewhere in order to carve out a competitive advantage.

Obligatory section on rookie contracts

Everyone and their mother knows that the single-biggest (legal) competitive advantage a team can have in a salary-capped league comes in the form of cost control. And when it comes to cost control, an NBA rookie-scale contract is pure manna from heaven. Of course, everyone already knows this, so no need to dwell.

Just to put it into perspective: In 2014-15, half of the players ranked in the top 10 in VTC were on rookie-scale deals. If we expand that to include the top 50, rookie contracts comprise 42% of the list.

This is what the group looks like as a whole:

Yes, that’s Anthony Bennett in the bottom corner. Let’s move on[5. As have the Cavs and now Wolves. Oy.].

#NotAllMaxContracts

The other type of contract often cited as a surefire bargain is the max contract. The logic is simple enough. If a player is worth even a single dollar more than the league allows his team to pay him, it’s all upside for the team. However, as great as that sounds in theory, how often does that actually play out in practice?

During the 2014-15 NBA season, 24 different players were playing under max contracts. Exactly half of them are rookie-scale max extensions[7. 25% of the cap], while the other half are full max contracts[8. 30% or 35% of the cap, depending on how long that player has been in the league]. Ironically, whenever a deal of the former variety is announced, it is often accompanied by cries of “No way is he worth that much!” Conversely, most full max contracts are accepted at face value by the casual fan.

I say ironically because if this past season is any indication, the reverse is much closer to reality.

Even taking injuries into account, the disparity is striking. On the one hand, it makes sense that the bottom of the graph would be more favorable to the rookie-scale max guys, as their downside is reduced by virtue of having lower salaries. On the other hand, the sheer number of red squares drowning in deficit is appalling.

As much as we acknowledge the upside that comes with having an artificial cap on potential earnings, there is a very real risk to allocating upwards of a quarter of a team’s cap to one player.

[T]here is a very real risk to allocating upwards of a quarter of a team’s cap to one player.

Derrick Rose and Amar’e Stoudemire are obvious examples, but it’s not always a career-altering injury that sinks a team. Deron Williams was a top-flight point guard and unquestionably worthy of a max contract when he signed a 5-year, $98.8 million extension with the Nets in 2012. They just paid him $27.5 million to go away. Nobody batted an eye when Carmelo Anthony signed either of his max contracts with the Knicks. Based on VORP, he’s had exactly one season where his on-court value neared max territory; the rest haven’t even been worth the rookie-scale max.

If rookie-scale max players continue to routinely outperform veteran max players, it may be time to re-evaluate how we view the max contract. The shine might begin fade from the “full” max, as deals signed today at the tail end of a player’s prime state to age badly in years four or five. The real value appears to be in the rookie-scale max. Score another one for the kids.

Why the Spurs are STILL the Spurs, and you are not

Of course, not all player salaries are automatically dictated by the collective bargaining agreement. This brings us to the NBA’s ‘middle class,’ which is comprised of two tiers: lower-middle class and upper-middle class.

Lower-middle class consists of all contracts above the minimum all the way up to the non-taxpayer’s mid-level exception at $5,305,000, while upper-middle class runs from the mid-level exception (non-inclusive) upwards, encompassing every non-max contract. This demarcation is important because it essentially separates the players who can be signed by teams above the salary cap and players who can only be signed into open cap space or re-signed via the Larry Bird exception.

Presumably for this very reason, the sub-MLE tier has become immensely popular in recent years. By using the mid-level exception, mini mid-level exception or bi-annual exception[9. Or BAE, as the kids say.], a capped-out team gets a “free” shot at adding a non-minimum player to its roster. As such, it doesn’t entirely matter if the player lives up to his contract, as long as he creates more value than a replacement-level player would have[8. There are of course exceptions, given the interaction between the MLE and the hard cap. “Missing” on Spencer Hawes was disastrous for the Clippers last year because not only was he quite bad, signing him forced L.A. into shipping off a future first and a quality rotation piece in Jared Dudley to duck underneath the hard cap.].

In terms of pure return on investment, it could be argued that the average replacement-level player is more likely to play to the level of his contract than a lower-middle class player. And indeed, only 30 of the 115 middle class players finished the 2014-15 season with a positive VTC.

[O]nly 30 of the 115 middle class players finished the 2014-15 season with a positive Value to Contract.

However, for a capped-out team, the only thing that matters is raw production. Whereas only 42% of minimum-salary players matched or exceeded replacement-level production and a paltry 3.4% outpaced the mid-level exception, those numbers jump to 56.5% and 15.7% among lower-middle class signees[10. 62.1% and 26.2%, respectively, for rookie-scale contracts. Seriously, how great are they?].

That amount can make a tremendous difference over the course of a season. Back in 2013, I conducted a study similar to this one, examining Win Share generation on a per-game basis. The superstars of that study were the NBA Finals runner-up Spurs, who had exactly four players on their roster with a cap hit higher than $4.5 million[11. Tim Duncan, Tony Parker, Manu Ginobili and, of course, the immortal Stephen Jackson]. Beyond that, they had two players on rookie-scale contracts in Kawhi Leonard and Cory Joseph. Everyone else was on a sub-MLE deal. Of course, the natural assumption is that having Kawhi Leonard on a rookie deal and the Big 3 under reasonable contracts created quite a bit of value — and they did. However, Manu Ginobili had a very rough go of it that year and effectively wiped out the value created by Duncan and Parker, while Captain Jack’s $10.1 million presence negated Leonard’s impressive output.

Of the 16 players who suited up for the 2012/13 Spurs, 13 produced at an above-replacement rate, while the least productive player clocked in at a VORP of -0.2.

Instead, it was the Spurs’ role players — guys like Danny Green, Tiago Splitter, Boris Diaw and DeJuan Blair — who overachieved across the board, creating a tremendous amount of VTC in the process. Of the 16 players who suited up for the Spurs that year, 13 produced at an above-replacement rate, while the least productive player clocked in at a VORP of -0.2.

Since then, the Spurs have had to pony up to keep some of those players around; however, the process has remained the same. If a player’s price tag becomes unfeasible, they’re set free, and a younger, cheaper option is brought in to replace them. Gary Neal begets Marco Belinelli. Cory Joseph begets Ray McCallum. For a long time, it seemed as though the league would never catch up to the Spurs. However, in 2014-15, an heir apparent emerged.

Hawks ‘swipe right’ on the Upper-Middle Class

The 2014-15 Atlanta Hawks weren’t supposed to happen. I mean, sure, they looked like they could fill out the playoff ranks in the Eastern Conference — but even being generous, adding a healthy Al Horford to a team that went 38-44 the year prior sounded like the recipe for a nice 46-or-so win season, a playoff berth and maybe a couple of memorable moments along the way. Nobody, including the Hawks’ own bloggers, was willing to go as far as saying they’d win 50 games.

They won 60.

But amidst all the what-the-hell-is-happening glances between fans, buried under a mountain of Kyle Korver 3s, something even more radical than fans realized was taking shape. As the Hawks piled up win after win after win, they did so without the benefit of a max player, whose value could exceed his artificially suppressed salary. They did it without hitting the jackpot on a minimum-salary player whose production towered over his meager contract. And they did it while hardly taking advantage of cost-controlled rookie-scale contracts.

Almost the entirety of Atlanta’s production came from middle class players. The Hawks out-Spursed the Spurs.

Even more impressively, the Hawks got the vast majority of their production from upper-middle class players.

In many ways, contracts that fall under the upper-middle class are the least beneficial contracts a team has at its disposal. Rookie deals and max contracts artificially suppress player salaries. Minimum deals and lower-middle class contracts enable teams to climb above the salary cap to sign new free agents. Upper-middle class contracts? They offer no additional benefits.

Upper-middle class contracts can be classified into one of two groups. The first group is comprised of players who are on their second contract in the league. These are players who did not impress their team enough to warrant a rookie-scale max extension but did at least earn a raise over their rookie deal. This group includes guys like Steph Curry, DeAndre Jordan and Al Horford, along with lower-end guys like Gerald Henderson and Greivis Vasquez. Needless to say, players in this group can carry immense upside. However, to that same point, if those players’ agents thought they could make a plausible case for a max contract, they wouldn’t be in this group. So, there’s some risk involved as well.[12. Remember how good Lance Stephenson’s deal looked a year ago?]

The other group of upper-middle class players is made up of veterans who have established their worth at this point and are not willing to settle for less. The vast majority of these players are re-up deals with the same team, for instance Tim Duncan or Kyle Lowry. Occasionally, though, an upper-middle class free agent will foray into the open market and find an ideal fit with sufficient cap space. These deals are… kind of terrifying. For a team, it means tying up significant cap space on a veteran player without the benefit of having seen him play in your system before. If you break even on one of these deals, you have to consider it a success.

Naturally, when one of those players generates almost double the value of his contract as Paul Millsap did for the Hawks this past season, it’s going to turn some heads. Or at least it would have if Millsap had been the only one on his team to do so. Thanks to a historic shooting season, Kyle Korver more than doubled the value of his $6.2 million contract, a deal for which the Hawks were roundly criticized at the time. As if that weren’t enough, second-contract stars Al Horford and Jeff Teague racked up a few million apiece in VTC. And for good measure, forward DeMarre Carroll outplayed his lower-middle class contract by nearly $10 million. Who needs cost control when you hit a grand slam in middle class free agency?

On paper, Atlanta’s roster-building strategy seems dangerously brazen. There’s a reason teams gravitate towards max contracts, mid-level deals and the minimum. The more control you have over your financial situation, the less likely you are to have one or two bad deals completely capsize your operation. However, it’s possible that the Hawks have actually uncovered a market inefficiency. By blatantly disregarding the upper-middle class of free agents, the rest of the league allowed a player like Millsap to fall into Atlanta’s lap at a below-market rate. Similarly, when Korver became a free agent, other teams were either unwilling or unable to beat Atlanta’s $6 million offer. Many figured they could find a close enough approximation with a cheaper price tag. They were wrong.

The Warriors were another team that benefitted from dipping heavily into the upper-middle class, and not just in the obvious way. It goes without saying that Steph Curry and Draymond Green’s contracts were a ridiculous bargain for Golden State last season. To a lesser extent, so too were Harrison Barnes and Klay Thompson’s. The four of them alone combined to create an excess of $56.8 million in VTC. Yes, you read that right.

The Warriors have known they were onto something since the spring of 2013, at the absolute latest. Armed with the knowledge that they were going to have at least two if not three All-Star level players at a serious discount for the next few years, the Warriors shelled out $36 million to keep Andrew Bogut around, even though his shaky health suggested it might end up being an overpay. They gave up two first-round picks for the right to pay Andre Iguodala $12 million a year to serve as their sixth man. They let David Lee hang out on the bench rather than being forced into giving away assets to offload his albatross of a contract. They brought in Shaun Livingston and Marreese Speights on mid-level deals. With the clock ticking on new contracts for Curry, Thompson, Barnes and Green, the Warriors spent as much money as necessary to guarantee that they would be able to roll 10 players deep. And with that depth, they rolled over the competition en route to 67 wins and an NBA championship.

Never give out max contracts… unless you’re the Cavs, in which case don’t expect too much out of minimum-salary players… unless you’re the Warriors, in which case feel free to ignore the middle class… unless you’re the Hawks, who everyone says is going to need a max player if they ever want to win a title…

Huh.

It’s not always about getting the best deal possible. Sometimes, it’s about getting the player that your team needs.

Putting it all together

So, what do we take away from all this?

Never give out max contracts… unless you’re the Cavs, in which case don’t expect too much out of minimum-salary players… unless you’re the Warriors, in which case feel free to ignore the middle class… unless you’re the Hawks, who everyone says is going to need a max player if they ever want to win a title…

Huh.

If anything, it should be abundantly clear by now that there are multiple ways to build a contender. The key, as always, is timing.

For Atlanta, the right mix of middle class players became available at a time when the league was overly focused on the next big free agent.

For Cleveland, the combination of improbable draft lottery fortune opened a door for them to acquire Kevin Love, and with the window about to slam shut on any future cap space, David Griffin made a couple of savvy moves that ensured that Cleveland will have at least some level of depth moving forward.

For Golden State, they saw that they had something special on their hands, so they acted quickly and were willing to pay a premium to bring in guys like Andre Iguodala and Shaun Livingston, knowing full well that any overpay would be more than offset by overachievers like Steph Curry and Klay Thompson.

The beauty of the league is that the rules for success are always changing. It’s only fitting after years of nothing but zigs, San Antonio finally zagged this offseason, signing LaMarcus Aldridge to a max contract. It’s the team that’s able to stay ahead of the pack that will ultimately find success. I, for one, welcome back our old Spurs overlords.