According to Patricia Bender (who maintains an excellent NBA website), NBA teams collectively spent $2.06billion on player salaries in 2007-08. With 451 players taking the court for an NBA team this past year, the average salary in the Association was $4.56 million.
Certainly that is a huge sum to bounce a ball. So one could argue that all basketball players are paid way too much (my wife makes that argument). Economists, though, argue that a worker is only paid too much if the revenue the worker generates is less than the wage being paid. Or to look at it the other way, a worker is exploited if he or she is paid a wage less than the revenue being generated (this definition was first provided by Joan Robinson in 1933).
Given this definition, some NBA players are going to be exploited. But of course, some others are still overpaid. And it’s this group I want to talk about today.
Again, a worker is overpaid if he is paid a wage that exceeds the amount of revenue he generates. Last September I wrote a column on this topic where I detailed the crude approach I currently take to ascertain to find the most overpaid. Although this method is not perfect, I have not come up with a better approach in the past few months (not that I have spent much time thinking about it). Here is how I explained this approach last September:
A Crude Measure of Player Value in the NBA (this is a re-run)
Back in 1974, Gerald Scully published a study in The American Economic Review (perhaps the top journal in economics) outlining how a baseball player’s economic value could be measured. Scully’s method involved two steps. First he figured out the baseball player’s level of productivity. Then he figured out how much this production was worth in terms of revenue.
For basketball we can look at Wins Produced to measure productivity. So all we need to know is how much each win is worth to an NBA team.
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. According to USA Today, NBA teams paid their players $1.818 billion in 2006-07. 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).
Let me update the numbers for the 2007-08 season. Again, teams paid more than $2 billion in salary. With 1,230 regular season wins, this works out to $1,671,230 per win. Given this value, who is the most overpaid?
The Overpaid in 2007-08
Last year the most overpaid was Shaquille O’Neal. He was paid $20 million, but with only three Wins Produced, generated less than $5 million in revenue. Although Shaq was still overpaid this year, he did not top the list. That honor went to the other O’Neal.
Table One: The Most Overpaid in 2007-08
Jermaine O’Neal was paid more than $19 million last season. But his Wins Production was in the negative range. Consequently he cost the Pacers more than $20 million (and yet the Pacers only missed the playoffs by one game).
The name after J. O’Neal is a surprise. Andrea Bargnani is still working under his rookie contract. For the 2007-08 season he was paid $4.8 million. Had he produced just 2.9 wins, he would have “earned” this paycheck. Bargnani, though, produced -5.7 wins, so his value was -9.5 million. Given his salary, he was overpaid by more than $14 million (and yet the Raptors still made the playoffs).
After J. O’Neal and Bargnani, other prominent names on the list include Eddy Curry, Shaq, Tracy McGrady, Jeff Green. Here are a few quick comments on these names:
Eddy Curry
Readers of The Wages of Wins – or any fans of the New York Knicks — should not be surprised to see Curry on this list. What might be surprising is the following quote from Mike D’Antoni (the new head coach of the Knicks):
I would be surprised that a team with Curry (and many of the other current Knicks) could be transformed into a winning team by any coach. I understand it is good to confidence in your abilities. But a more useful comment from D’Antoni would have addressed how New York’s roster is going to have to change. And finding a new home for Curry might be a good place to start.
Shaquille O’Neal
Last September I noted that Shaq was the most overpaid player in 2006-07. The next day I noted that for his career, Shaq was exploited. For his career he had generated $238. 58 million (according the above methods) and he had been paid $231.61 million. So he was underpaid by nearly $7 million.
After 2007-08, though, that difference has been erased. Shaq has now been overpaid in his career- according to the method employed here – by about $3 million. The method utilized here ignores the substantial impact Shaq has on TV ratings and road attendance. In other words, if we considered everything Shaq does for the NBA, he is still exploited. Still, the level of exploitation is going down.
Tracy McGrady
T-Mac was voted to the 3rd All-NBA team by the sportswriters. Certainly McGrady deserved such honors in the past. But as has been noted, T-Mac ain’t what he used to be. For the 2007-08 season he only produced 5.4 wins. With a salary of more than $19 million, T-Mac was clearly overpaid. In other words, he is not the reason the Rockets made the playoffs (I also don’t think his play is the reason why the Rockets lost to the Jazz).
Jeff Green
The last player I want to talk about is All-Rookie first team member, Jeff Green. Green had a very poor rookie campaign and was one of the big reasons the Sonics last season in Seattle went so badly. Although he was only paid $3 million, his -3.8 Wins Produced means he was overpaid by more than $9 million. Again, it is hard for a player working under a rookie contract to be overpaid. These contracts are designed to exploit the players. For Green (and Bargnani) to manage to be overpaid by such a large margin is truly remarkable.
Looking Past the Cut-Off
Table One only considers players with 1,000 minutes played. If we look past this cut-off we see a few more famous names. Stephon Marbury and Antoine Walker each made the list last year but did not play enough minutes to qualify this year. If we ignored the minutes played restriction, though, each would make the top 10 list in 2007-08. Marbury was paid $19 million and only produced 0.6 wins. So he was overpaid by nearly $18 million (good for second on the list reported in Table One). Walker was paid $8.3 million and produced -1.8 wins in only 892 minutes. Consequently he was overpaid by more than $11.3 million.
Sometime this week I hope to look at both the Underrated and Exploited (i.e. underpaid). Hopefully those columns will be posted by the end of this week (or end of the month).
– DJ
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 
Lior
May 18, 2008
I think the example of Shaq should tell you the basic problem in your analysis: attributing current pay to current performance. Rather than saying that Shaq was first exploited and is not getting money back, you should realize that Shaq is being paid today for revenue he generated in the past.
Due to the structure of the CBA, the league favours long-term contracts at constant per-year compensation. In other words, when Shaq signed a 5-year $100M contract in 2005 (or, J. Kidd signed a 6-year $103M contract in 2003), the pay was divided equally throughout the length of the contract, while it was clearly anticipated that the player might not perform at the same level during the whole time. In a sense, next season the Mavs will be paying Kidd for services already rendered to the Nets, and the Suns will be paying Shaq for past services to the Heat.
Because of this way in which contracts are structured, you can’t look at a single season and decide whether the player was over- or underpaid. Rather, you have to look at his performance during the whole contract period. If you and your students have the time, you should go over all the contracts in the NBA over the last several years, and compare player performance and pay for each contract. That analysis would be much more interesting than the per-season figures you are found for 2007-2008 and 2006-2007.
Andrew G
May 18, 2008
Smart teams don’t pay for past performance, though.
The Spurs are the best example, IMO.
When it looks like a guy is d-u-n, they let him go.
Anon
May 18, 2008
I think Lior is more saying that teams frequently structure contracts in such a way that some players are underpaid in the first couple of years of their contracts, but then overpaid near the end of their contract. Overall, however, the contract could theoretically be perfect for that player’s value during the contracted years.
I suppose the simple solution would be for teams not to give ridiculous long-term contracts, but then they run the risk of losing that player completely and not being competitive.
Also, in terms of the value of a win, is there any evidence that some wins are worth more than others in terms of revenue. For example, my instinct would tell me that signing a player worth 10 wins would be more valuable (all other things equal) for a team that previously won 40 games than a team that previously won 10 games, simply because the first team will go from .500 team to “competitive” team, while the second one goes from terrible to bad, and fans still won’t care.
Jason
May 18, 2008
Evaluating a player’s performance over the life of the contract for assessing value has merit, but that contract may not be paid by a single employer. If Shaq’s current salary is a reward for past performance, then the Suns are currently paying off Miami’s championship. Miami used the total contract value as an enticement to get Shaq to re-up there. In their view the total reward vs. the total contract they’d have paid may have been the right equation. For the Suns, only what he’ll bring while receiving paychecks signed in Phoenix matters. If they’re in the business of compensating the early part of his career, they’re making big, big mistakes.
Davorin
May 19, 2008
You use the word ‘exploit’ a lot. I don’t think Shaq was ever exploited. 200+ million dollars for an individual is a ridiculous amount of money. Also, I can’t agree that rookie contracts are made to exploit the players. It is like an entry level salary for a college graduate; you have to work your way up and prove your worth.
I doubt any NBA player would say that they feel ‘exploited’. Compare the stupid amounts of money they’re earning with the crap most of us get.
Mountain
May 19, 2008
Spurs are good with cap management but I would contend Bowen, Horry, Finley, Oberto and Barry on the previous contract are getting paid now more than they are currently worth on market and that the pay is higher in recognition of past contribution, the pay makes sense when averaged over contract as cited in other cases.
Lior
May 19, 2008
Here’s a more detailed analysis:
The problem here is that because of regulation, the situation is different from the POV of the player and the team. From Shaq’s point of view the situation is simple: in 2005 he signed a contract promising to deliver $100M worth of services over 5 years, probably in a declining fashion. From the Heat’s point of view, the situation was the same.
What happened after the trade? From Shaq’s point of view, nothing changed: he’s still continuing to deliver, at approximately the level that was anticipated when he signed the contract. In addition, he moved from a bad team to a playoff team, which is more fun. From the Heat’s side, things are even better: they paid him half the money, but got more than half the performance (and they also got Shawn Marion, who is an underpaid player).
What about Pheonix? (this is for Jason) They are certainly overpaying Shaq (especially next year), compared to his current level of play. However, at the time of the trade he worth something to them beyond the “wins” he contributed — the hope of winning a championship this year. It was clearly a long shot, but the Suns management decided that winning with Nash needed to happen this year or not at all, and that the best chance of winning was with this trade. For this to happen they accepted a deadweight $30M contract (well, less since Shaq does make a positive contribution). Not a great bargain a-la Brown for Gasol, but not completely unreasonable.
To conclude: the Heat landed a great deal, Shaq is approximately where he expected to be, and Phoenix made a knowing gamble and lost.
In an unregulated system, where salaries didn’t have to match and cash could be transferred freely, Phoenix would have insisted that the Heat send along cash together with Shaq, reflecting the part of his salary based on services already rendered. This would have made the trade fairer.
Lior
May 19, 2008
Davorin: NBA rookies are not average college graduates and shouldn’t be compared to them. They should be compared to the very best college graduates. In fact, unlike college graduates, they are already qualified to practice their professions.
There are about 400 players in the NBA. You can be pretty sure that an NBA rookie is one of about the 600 best basketball players in the world. How much do you think are the best 600 financial analysts in the world paid? What about the best 600 doctors? Of course, there is more moeny in the global medical and financial markets than in the global basketball market. But still, the NBA had $2B in its salary budget — since basketball is popular with people who will pay to watch it. This “kitty” is not divided according to employee performance for many reasons. One of them is that the rookie salaries are set below the performance share of the rookies, on average.
The same reasoning applies to Shaq, at some point arguably the best basketball player in the world. Do you think Bill Gates was underpaid by Microsoft (when he was still getting a salary)? His leadership made the company a lot of money. Shaq, an immensely popular entertainer, was making his teams (in fact, the whole league) a lot of money too. Why should he not deserve his fair share of that money? Since he contributed more than the other players, he could command a higher pay rate.
Another Pete
May 19, 2008
But a more useful comment from D’Antoni would have addressed how New York’s roster is going to have to change.
Probably not more useful from his perspective… even if he’s a superb player evaluator, it probably doesn’t make sense for him to share his real evaluations with the world. ie Someone who truly understands a market may not want an efficient market.
Of course, he might also believe what he says…
Jason
May 19, 2008
Indeed that true. There’s little incentive for D’antoni to be candid about his roster now. Until the season ends, they can’t make trades, they don’t know exactly where they’ll end up drafting, and they don’t really know what the market for other players will buy. At this point, his job is to sell the team and fans on his ideas and generate interest in the game for MSG to sell ad revenue. Tipping his had by announcing a fire-sale wouldn’t appear to serve a purpose at this point.
Chigozie
May 19, 2008
After the CAVs lost to Boston in game 7, people (including James http://sports.espn.go.com/nba/playoffs2008/columns/story?page=lebronlookahead-080519) were quick to point out that his supporting cast was clearly lacking however I began to contrast them with a team whose future is seen to be incredibly bright and 4-12 I couldn’t see much of a difference. How does Cleveland’s 4-12 compare to the other teams in the league (specifically focusing on the Lakers sans Bynum)?
Mark
May 19, 2008
The stats did not pick up Jerome James. In 2007-2008 he played for 5 minutes for which he was paid 5.8 million for the season.
Ryan J. Parker
May 19, 2008
Clearly this isn’t a perfect measure of revenue generated, as stars are what sell seats. When Shaq was traded to Phoenix, how many jerseys did he sell? How did he impact attendance?
I don’t dispute he was overpaid for what he generated on the court, but we must look deeper into the business to find the true value.
Tommy_Grand
May 19, 2008
Mountain,
Four of the players players you mentioned (Bowen, Horry, Finley, Oberto) got the Spurs to the conference finals. I realize the topic of this post in regular season value, but I think the Spurs built their team (stocked w/ veteran role players) for the playoffs.
Tom
May 19, 2008
Ryan, you should re-read berri’s book. In it he argues that stars are NOT what sell seats and that wins are what sell seats.
Animal_
May 19, 2008
Please, please, lpease stop writing “the association” instead write the NBA.
Jason
May 19, 2008
The Suns sold out every game after the Shaq trade. Clearly he impacted home attendance as before the trade, they only had capacity crowds.
Shaq had no effect on attendance.
I am not sure what sort of revenue individual teams get from Jersey sales. My crude understanding is anything with the official NBA logo requires that a huge part of that goes to the league for licensing rights, though I don’t know the exact figures. I suspect that those sold at the arena do generate revenue for the arena. Whether or not this goes into the team coffers is a different story. Some may. Much doesn’t.
Ryan J. Parker
May 20, 2008
I understand the argument, but in this case Shaq is probably a bad example since the Suns were already filling seats.
What if Shaq had been traded to a small market team? He would have still been overpaid, but I suspect his impact on revenue for the small market team would have been different.
mrparker
May 20, 2008
There is something to be said for increasing the value of a franchise. An example is Dan Snyder. While his roster moves have not provided a winner for us redskins fans, he has built the best franchise in American sports in terms of what the team would sell for. These owners have more on their minds than just winning. After all, this is a business.
Jason
May 20, 2008
According to Dave’s research, a star has negligible impact on home attendance for the team he plays for unless that star brings victories. If there’s a boost in ticket sales, it’s exceptionally short lived. The “hey, we got ” factor dies rather quickly if it doesn’t convert to wins. That’s not a suspicion, but his analysis of the data.
The value of a franchise is something rather curious. There was some talk last week in the Bay Area about ‘franchise value’ as the SF Giants managing general partner stepped down. While Forbes lists theoretical franchise value, apparently few in the ownership community regard their methods for estimating value to be peculiar and perhaps useless and didn’t accurately reflect the liquid value of a company. The Marlins team president went as far as labeling them as “pure fantasy”.
I’m certain that there are decisions ownership can make that increases the value of a team, but it seems incredulous that team value gets a significant bump by acquiring an overpaid player in the twilight of his career.
andrew g
May 20, 2008
Please continue calling it “the Association.”
mrparker
May 20, 2008
Jason,
Acquiring an overpaid superstar will hurt your teams ability to win, but it will also increase the public awareness of your team. Though I’m sure we all hate those head on commercials the point is that we are all now aware that head on exists.
What this means to the value of a franchise I’m unsure of. But I’m not a billionare business owner so these things are out of my realm of understanding.
Daniel
May 21, 2008
Rookie contracts aren’t designed to exploit the players. They’re designed to make the draft work so that players can’t sign massive, long term contracts that kill their teams when their teams don ‘t know if the players are any good yet. Rookies are traditionally unproductive, and thus system forces teams to pay unproductive players lower wages, resulting in a better product for all. Too bad the Association doesn’t have capped second contracts for free agents that take the qualifying offer.
Franklin Achu
December 31, 2008
I was particularly interested in your work because I have been trying to find what Joe Johnson of the Atlanta Hawks makes yearly. I do not see him in commercials nor the much publicized sports programs. Is this something that the general public is entitled to know about? Thanks