Steve Walters’ brilliant discussion of general managers in baseball provides a nice jumping off point for the annual review of “overpaid” and “underpaid” NBA players. Such a review begins with observations that are quite similar to what was said last summer.
According to the USA Today, the NBA spent $2.2 billion on player salaries in 2008-09. With 445 players taking the court, the average salary in the Association was $4.85 million.
Although this is a large sum of money, one suspects it could be even higher. The NBA has instituted a variety of salary restrictions. There is the famous salary cap, which limits how much each team can spend on its payroll. There is also a maximum salary, which is a cap on individual player salaries (and yes, this should be called a salary cap). Finally there is a cap on rookie pay, which limits how much a first round draft choice can earn on his first contract. All of these restrictions are designed to limit a player’s pay. And whenever we observe an employer trying to limit an employee’s pay, we suspect that those employees might be exploited.
What does it mean to be exploited? In 1933, Joan Robinson argued a worker is exploited if he or she is paid a wage less than the revenue being generated. Given this definitions, if a worker is paid $10 an hour, but only generates $8 of value, then that worker is not exploited. But if a worker is paid $10 million, but generates $12 million in value, then by definition he or she is exploited.
Given this definition, which players in the NBA are the most exploited? And on the flip side, which players are exploiting the NBA?
To answer these questions I am going to follow the same methodology I have employed the past two years. Here is the description of this methodology:
The standard approach is to simply regress team revenue on wins (and other stuff). But I think there’s a problem with this approach for the NBA (a problem I wish to avoid getting in to for a blog entry), so I am going to estimate the value of a win differently. We know from our research on revenue and attendance [mentioned in The Wages of Wins, which is soon to be published as a paperback :) ] that players primarily generate value in the NBA via their ability to generate wins. And we also know that a player’s wage is only for the regular season. Consequently, we could say that the value of one win in the NBA is simply the amount of money the league paid its players divided by how many wins these players produced in the regular season.
Such an approach makes three assumptions. I am assuming that all players in the NBA are collectively paid what they are worth (which may be true if the union bargained effectively), players are only paid to produce wins (which is a reasonable assumption given the research cited above), and the value of a win is the same for all teams (okay, not true, but two out of three ain’t too bad).
I have noted in the past that I am not thrilled with this approach. In fact, last year I stated: “After thinking about it a bit more, I think I can do better. But I don’t feel like working through my idea for a blog post.” When I read those sentences this year I wondered why I never bothered to write this “better idea” down someplace. I am sure it will come back to me someday. In the meantime, though, we are left with the same old methodology.
We have a measure of how many wins each player created (i.e. Wins Produced). And if teams spent $2.2 billion on players, and these players produced 1,230 regular season wins, we can argue that each win is worth $1.755 million. With a value of win in hand, all we need to do is to multiply the value of a win by each player’s Wins Produced. This calculation gives us a measure of what a team could have paid for a player’s productivity; a measure which can be easily compared to a player’s salary. Once again, players who produced more than they were paid are, by definition, exploited or underpaid.
So who were the most exploited in 2008-09? The answer is in Table One.
Table One: The Underpaid in 2008-09
Topping the list of underpaid players is Chris Paul [who also led this list in 2007-08]. According to the USA Today, Paul was paid $4.6 million in 2008-09. For this money, the New Orleans Hornets received 28.2 wins. At $1.7 million per win, the Hornets should have paid $49.5 million to Paul; so Paul was underpaid by nearly $45 million (at least, that’s the answer if we accept this particular methodology). HoopsHype says that Paul is scheduled to make $13.5 million in 2009-10. If this was Paul’s salary in 2008-09 he would have only been underpaid by about $36 million. Such a mark would still lead the list of underpaid players, but the gap between Paul and LeBron James — the number two player on the list — would be much smaller.
When we look over the list of underpaid we see the work of two institutions in the NBA; the rookie salary scale and the limit on how much can be paid to any individual player. The limit on rookie pay allows teams to dramatically underpay players like Paul, Rajon Rondo, Brandon Roy, David Lee, Kevin Durant, and Al Horford. LeBron, Dwight Howard, and Dwyane Wade are each paid quite a bit, but nowhere near what these players would command if each win cost their employer $1.7 million. And then there are players like Dominic McGuire and Jamario Moon. These players are underpaid because what they do is underappreciated (or underrated). If a general manager employs one of the players listed in Table One he is either smart or lucky.
In contrast, if a general manager employs a player listed in Table Two he is not so lucky.
Table Two: The Overpaid in 2008-09
Topping the list is Jermaine O’Neal, who is a repeat winner of the Most Overpaid Player (MOP). To be fair, this year I set the cut-off at 2,000 minutes played. O’Neal didn’t play this many minutes in 2007-08, so he would not have been the MOP last year by the 2008-09 standard (that award would have gone to Boris Diaw). Nevertheless, O’Neal didn’t contribute much in 2007-08. Despite his high salary and lack of production, both the Toronto Raptors and Miami Heat thought it was a good idea to trade for his services.
Once upon a time, Jermaine O’Neal was a productive player. In 2002-03 he posted a 0.194WP48 [Wins Produced per 48 minutes], a mark that is nearly double what we see from an average player. As recently as 2006-07, he was still above average. Across the last two years, though, O’Neal has struggled; and before the next season he will turn 31. So it seems likely that the days of a productive O’Neal are over. His days of getting paid like a star, though, are not. HoopsHype indicates that O’Neal will get paid nearly $23 million in 2009-10. This means it’s possible O’Neal will repeat his MOP title in 2009-10.
In fact, this is likely. HoopsHype reports that Jermaine O’Neal will rank third in the NBA in salary in 2009-10. Allen Iverson – who was the runner-up for MOP this past year – will take a substantial pay cut if he joins another NBA team. Al Harrington may be able to repeat his third place MOP ranking, but it’s unlikely that his productivity will fall enough for him to catch O’Neal. No, if O’Neal manages to log 2,000 minutes again in 2009-10, it looks like this title stays with him.
Beyond 2010, though, a new name will emerge. O’Neal will probably take a pay cut after this season. This means a player like Andrea Bargnani, Al Thornton, or Spencer Hawes could rise up and take a future MOP title. Once again, though, that probably won’t happen until 2011.
Let me close by noting that this is the end of the underrated, overrated, underpaid, and overpaid columns for this year. So look for something different in the next column. Not sure what that topic will be, although I am sure it will have to be something different.
– DJ
The WoW Journal Comments Policy
Our research on the NBA was summarized HERE.
The Technical Notes at wagesofwins.com provides substantially more information on the published research behind Wins Produced and Win Score
Wins Produced, Win Score, and PAWSmin are also discussed in the following posts:
Simple Models of Player Performance
What Wins Produced Says and What It Does Not Say
Introducing PAWSmin — and a Defense of Box Score Statistics
Finally, A Guide to Evaluating Models contains useful hints on how to interpret and evaluate statistical models.
Wages of Wins Journal 
Tball
August 5, 2009
I’ve posited this thought in football forums, but I’d love your take on it in basketball. If the next NBA CBA made all contracts non-guaranteed (not going to happen), like in the NFL, would the players as a whole get hurt? My thought has always been that the owners are going to pay X for salaries each year and guaranteed contracts primarily affects wealth distribution among players. If anything, the owners might pay more for top performers knowing they can cut their losses if the player stops performing.
coachbean
August 5, 2009
Where are Steve Francis, Eddy Curry, Jerome James, and Stephon Marbury? Any overpaid list that does not include these guys despite not making the 2000 minute threshold is incomplete. How about their names with an asterisk at the bottom of the list?
Italian Stallion
August 5, 2009
“In 1933, Joan Robinson argued a worker is exploited if he or she is paid a wage less than the revenue being generated. Given this definitions, if a worker is paid $10 an hour, but only generates $8 of value, then that worker is not exploited. But if a worker is paid $10 million, but generates $12 million in value, then by definition he or she is exploited.”
I’m not sure I understand this.
For a business to make economic sense, the owners must make a profit because virtually every business has capital invested and could easily get a return in risk free securities like treasuries instead. In fact, the business has to earn a reasonable “risk adjusted” return on that investment, not just a profit.
That makes estimating a “fair” wage quite complex because you’d have to know what a fair profit/ROIC is for that business. It gets even more complex than that because high returns are sometimes a function of unique advantages, brand value, etc… that have nothing to do with the current employees.
All that said, I enjoyed the blog entry and think it did a good job of evaluating compensation on a “relative” basis.
Jeff
August 5, 2009
I may be way out of my league here, but if the idea here is for teams to not exploit players, would it make sense to figure out how much revenue each team makes when leaving players’ salaries out of the equation and using that total revenue as a starting point? Maybe it would be a similar number, but I have to believe there are some teams running in the red already, so saying they are exploiting their players seems a bit off. Greater revenue sharing would probably make this idea more accurate.
Italian Stallion
August 5, 2009
I think another thing to consider (aside from any potential funky accounting rules for professional sports franchises) is that some businesses are not really considered money making “businesses”.
To give you another example from personal experience, very few racehorse owners make money. In fact, the economics of the business are pretty much a horror show on average. Yet owners continue to put money into the game. That has always intrigued me.
I think some businesses are not really considered “for profit” businesses by their owners. They are considered primarily fun with some potential for profit but more likely to be money losing or close.
I suspect that sports franchises fit somewhere between the extremes of Wall St and horse racing where some of the owners are willing to accept marginal profits or even minor losses just to own the team because of the pleasures associated with it.
Peter
August 5, 2009
Welcome to the Anti-NFL CBA.
brgulker
August 5, 2009
0 Pistons in Table 1.
3 Pistons in Table 2.
I can’t help but think Ben Gordon will land there next season, given his pay hike this summer.
Ugh….
INFO
August 5, 2009
So Bargnani is going to be the most over paid player by making 10Million.
Sorry you lost your credibility with that statement. 10Million is not overpaying concidering Varejao is going to make 8.3.
DSMok1
August 5, 2009
“In 1933, Joan Robinson argued a worker is exploited if he or she is paid a wage less than the revenue being generated. Given this definitions, if a worker is paid $10 an hour, but only generates $8 of value, then that worker is not exploited. But if a worker is paid $10 million, but generates $12 million in value, then by definition he or she is exploited.”
That is reasonable enough, except it is impossible to know the value generated without a free market to quantify it. Thus assuming the CBA accurately calculates it is probably wrong. I would guess that the players are underpaid, as a whole, but there is no way to know…. Abolish the draft! True free agency without salary caps! Then we’d actually find out what the actual value of the players is (as a whole). Methinks the caps by definition force the player wage rater down as a whole.
dustin
August 5, 2009
it takes some truly amazing players to make the overpaid list on their rookie contracts
Concerned Statistician
August 5, 2009
I think you really need to read this, it sums up what many have been thinking for a while:
http://www.sportingnews.com/blog/The_Baseline/entry/view/29332/paul,_james_underpaid;_in_other_news,_the_sun_came_up_again_today
dberri
August 5, 2009
Concerned Statistician,
As always happens when I read Bethlehem Shoals, I am left wanting the last few moments of my life back. He generally offers a few personal attacks and then reveals he didn’t quite read what was written.
Patrick Minton
August 5, 2009
Hi David,
As usual, love your stuff. But I am wondering what you actually mean about the “value” of a win being $1.7 million. Is this the expected revenue? Gross Profit? Net Profit?
In other words, if a win is “worth” $1.7 million to an owner, that doesn’t mean he will PAY $1.7 million for it — he wouldn’t make any profit, and that isn’t even considering the costs of TV advertising, non-player salaries, rent, league fees, yadda yadda yadda. Is there a way for us to come up with a number that an owner SHOULD pay a player for 1 win, while still leaving some acceptable profit margin (say 10% to be conservative)?
Or is that what the number already represents?
dberri
August 5, 2009
Patrick,
If we assume players are only paid to produce wins, then teams are paying their players $1.7 million per win. This is not the same thing as saying players “should” be paid $1.7 million per win. To address that issue we would have to calculate marginal revenue product, which is difficult in basketball.
WDecker
August 5, 2009
So, all other things being equal, having O’Neal and Wade on the Heat roster together ensures that, on average, they are not exploited!
Riley runs the team with a social conscience? Who knew?
DR
August 5, 2009
Although it does insure that the best rookies are underpaid, the entry level contracts also insures that the worst are overpaid, yes?
And since you yourself have acknowledged that it is very difficult to predict young players success I’m curious to know wether your system show rookie contracts to be unfair on average? (rather than just on outliers like Chris Paul)
paorta
August 5, 2009
I think your methodology is confusing. The commentator “Jeff”, from above, is probably closer to the mark…
You’ve made an awful lot of assumptions regarding “wins/dollars” and ended up with a model that not only doesn’t do anything useful, but totally ignores the fact that NBA players aren’t mutual funds, but entertainers. In that sense, home losses will always be worth equal (or nearly equal) to home wins as long as the particular market is a viable one.
Wins and losses can’t be predicted beforehand, and in some cases even near-sure losses can be worth more (if LeBron James comes against a small market and a bad team) so I think your model is a bit disingenuous in that respect.
Joe
August 5, 2009
(yes, I know a thing or two about win shares).
Best line ever from a guy ridiculing David Berri?
The man obviously has a point, though. And he presents such fine evidence to support it.
Leon
August 6, 2009
Wow that guy on the link has a chip on his shoulder.
@dberri. I have a bit of an issue with your assumptions. Is it the case that certain players don’t produce more revenue from merchandising etc.? And thus obviously their value is increased slightly. Also surely different markets must have different values placed on their wins, but this difference could be very large.
Im from the UK and here in football (soccer to you guys) those two assumptions probably wouldn’t hold. For one there are mega-star players (not unlike LeBron etc.) who sell merchandise for their teams, Beckham is a fine example of a player bought and sold for his brand appeal. The last assumption definately holding thin if at all. In the UK wins will definitely vary in value due to market, but also to pre-disposition. For a team fighting off relegation the wins up until safety have a far greater value than those after the safety. And vice versa for the teams battling to win the league
todd2
August 6, 2009
There are also less tangible rewards to consider. Players choose teams to some degree based on their records, a city’s climate, a state’s tax advantages, the size of the media market, etc.
On another note, it’s going to be difficult watching CP#3 and D-Wade take beatings this year while their respective GM’s run their franchises into the ground. It’s a serious slight to fans to field (?) a less-competitive team and wait for 2010.
Jason E.
August 6, 2009
The value derived from merchandising has been something I’ve wondered about.
I do not know what percentage of things like jersey sales go to the team and what percentage go to the league, but given that they tend to say things like “official NBA apparel” rather than “official apparel”, I suspect that Stern’s accountants get to tally up a big chunk of it.
If the league takes in the largest share, then the merchandise promotion for “stars” wouldn’t be the greatest incentive for a team to pay a player a bunch. If not, then this might change the equation.
Does anyone actually know the breakdown?
Jesse Stout
August 6, 2009
Dave, I’d like a little clarification about the Spencer Hawes comment. There’s a bit of confusion at some sites regarding your wording. He’s going to be in the last year of his rookie contract in 2011, so it’s hard to imagine he’ll be overpaid then.
What, exactly, did you mean by this:
his means a player like Andrea Bargnani, Al Thornton, or Spencer Hawes could rise up and take a future MOP title. Once again, though, that probably won’t happen until 2011.
agent58
August 6, 2009
Don’t tell this to the Yankees.
http://fiestamovement.com/agents/view/58
Joe
August 6, 2009
Jesse,
He says one of those 3 could eventually become the MOP. You may have to wait until 2011 though for one of them to be MOP.
He was improperly grouping Hawes with the other 2 I am guessing. Does it matter? you are talking about an off-the-cuff remark on Spencer Hawes, of all people. Dave makes mistakes constantly on this blog. It isn’t a big deal. It is a blog for christ’s sake. One he offers free of cost, free of ads.
He is a teacher and author before a blogger.(The blog is just marketing for his book really)
Are we going to start crucifying him for grammatical errors or misspellings?
dberri
August 6, 2009
Joe,
I make mistakes constantly? How about once in awhile :)
Yes, Spencer Hawes will not be paid enough to win MOP in 2011. I was realy just noting a group of players who can someday hope to win this award. It was essentially just a way to close the post.
Jesse Stout
August 6, 2009
Joe,
I haven’t read the blog enough to know much about him, but it seemed to me that most people were jumping on Dave for something he never really said. I’m actually one of the only people at the aforementioned blog (JediLeroy’s the handle) that took some time to analyze what he had actually said. It seems there’s some deeply rooted dislike for Dave in the basketball blogging world.
Joe
August 7, 2009
Jesse,
That is because Berri is the antichrist.
Promosyon Tekstil
August 22, 2009
Your website is very good. I wish you continued success.