Where would an employee turn down a long-term, eight-figure contract for a shorter-term deal at less money? Welcome to the National Basketball Association (NBA), where a team’s salary cap, which can change each year, affects a player’s maximum individual contract (known as a max contract).
The max contract is not the same for all players. There are three levels of max contract: with 6 years of experience or less, the max salary is 25% of the cap; with 7-9 years of experience, the max salary is 30% of the cap; and with 10 years or more, the max salary is 35% of the cap.
According to RealGM.com, the salary cap jumped from $58,044,000 in 2012-2013 to $58,679,000 in 2013-2014 and up to $63,065,000 in the recently finished 2014-2015 season. That puts max salaries in the range of nearly $16 million to $22 million per year. The salary cap is not guaranteed to grow — it has stayed flat and dropped slightly in the past — but given the NBA's popularity and TV contract money, it is rather likely to grow. The NBA signed a nine-year deal with ESPN and the Turner Networks for an estimated $2.66 billion annually starting in 2015-2016.
Seems straightforward, right? As sportscaster Lee Corso would say: Not so fast, my friend. There is another rule in play: a free agent has the right to draw a paycheck that is no lower than 105% of the salary from the last contract. The 105% rule trumps the overall cap rule for a player, and that perpetuates through to other max contracts that a player might get over the course of his career.
Raises with a max contract are 4.5% annually, but that is raised to 7.5% if a player signs a max contract with his current team, further compounding his riches — but his team must still accommodate everyone else on the roster with the remaining funds.
There is one more complicating factor known as the "Derrick Rose rule" after the oft-injured yet incredibly talented Chicago Bull. This rule rewards exceptional younger players with the 30% max designation at less than six years if they reach one of three goals in their cumulative career to date: be named to an all-NBA team twice, voted as a starter in the All-Star game twice, or be named the league's Most Valuable Player (MVP) once. Guess who met the criteria already? Rose did it first, followed more recently by Blake Griffin and Paul George.
Think of it this way: the salary cap goes up annually (generally) and the extra 5% increments from multiple max contracts compound as each one is incorporated into the next contract. That is how those who have been in the league for a long time, such as Kobe Bryant, can make millions of dollars more than others do. Of course, teams can choose to say they cannot afford to pay that much money to their superstar, or the rest of the starting five will be Larry, Moe, Curly and Shemp (who would earn more than half a million each). But if the star refuses to play for less than the max, what General Manager would let his superstar go via free agency? Only the bravest, most foolish or one who has his own long-term contract.
If everything goes up annually, what holds some contracts back? The length of the contract term does. By signing a max deal, a player keeps his salary at the max plus the annual raise, and the percentage rise in the salary cap can outstrip his annual raise.
The interesting decisions come in when a player is entering his contract year right before one of the experience thresholds. LaMarcus Aldridge of the Portland Trail Blazers is in that unique position this year. He is a free agent with nine NBA seasons completed. A max contract this year is only worth 30% of the cap, while a max contract next year is worth 35% of a considerably higher cap. Why would Aldridge possibly want to sign a max deal this year? Fear of career-threatening injury is about the only reason. Assuming a five-year max contract, The Sporting News estimates that Aldridge would make an extra $78 million over the next six years by waiting a year to sign.
Obviously, general managers prefer to lock up the best players at the best possible rate. That makes it in Aldridge's best interests to take a one-year deal next year for a much better contract in two years.
Such is the NBA and the max contract, where waiting can earn you tens of millions of dollars. If only we had these megabucks decisions to make. Speaking of megabucks, we’re off to buy a lottery ticket….