Thomas Van Riper – of Forbes.com – just published a story examining The NBA’s Most Overpaid Players. The story relies upon Wins Produced and the (somewhat crude) methodology I have employed in this forum in the past.
The method can be described briefly as follows: From the salary numbers of Patricia Bender we see that the NBA spent $1.976 billion on players in 2009-10. The players produced 1,230 regular season wins, so the “value” of each regular season win is $1.607 million. Consequently, LeBron James – who produced 27.2 wins for the Cleveland Cavaliers last season – has a “value” of $43.75 million. Since LeBron was only paid $15.78 million by the Cavaliers, King James was underpaid by almost $28 million. And that means LeBron was the “most underpaid” NBA player in 2009-10.
The Van Riper story, though, focuses on the “most overpaid”. And his story even has a great slideshow. In this forum, the best I can do is provide a table. So here are the fifteen most “overpaid” NBA players (following the Van Riper story, minimum of 60 games played).
And here are the fifteen “most underpaid” players:
A few of these players – like Kevin Durant – labored under their original rookie deal. So it is easy to understand why these players are underpaid. Players like LeBron, Dwyane Wade, and Carlos Boozer, though, are highly paid veterans who are still underpaid. This is because the NBA has placed a cap on individual salaries, a cap that appears to restrict the earning power of the most productive NBA talent.
Will this change with the new collective bargaining agreement (CBA)? It seems unlikely that the cap on individual salaries will be removed. The owners enjoy “exploiting” (where exploitation is defined as a worker receiving a wage that is less than their economic value to their employer) players like LeBron. And the majority of NBA players — who are not as productive as LeBron — are not going to fight to get King James more money.
What the owners hope will happen is that the players will agree to a CBA where the contracts paid to the “overpaid” talent can somehow be terminated. That is something I think the union will fight to prevent from happening. And that fight is one reason we might not have a complete NBA season in 2011-12.
– DJ
Wages of Wins Journal 
some dude
November 23, 2010
As an economist, how do you reconcile a player’s worth in relation to their wins produced rather than the team’s bottom line?
It makes no sense.
Since this is based on last year, if Cleveland’s total profits are $20 million and everyone besides Lebron make exactly their worth, how in the world does it make sense to claim Lebron should be paid $30 million more? Why should the team lose $10 million in this example?
Isn’t the marginal cost of production supposed to be equal to the marginal revenue of production?
IIRC, Marc Cuban once said a win is worth $500k to the bottom line of a team. Wouldn’t that mean Lebron is worth about $14 million?
Teams lost money last year, so you can’t use total salaries. Plus you’d have to ignore the ones being paid off by insurances due to injuries and medical conditions. Plus others who were ignored and weren’t expected to contribute (curry, tinsley) or abruptly retired (Iverson).
And we can throw the cap rules into the mix, too. if I pay Lebron $44 million, how can I fill out my roster to be good enough to justify that contract? Paying $44 million to a player to win 27 games out of a 33 win team doesn’t make much sense, now does it?
Anyway, the analysis seems silly to take total salaries and divide it by total wins.
That said, I think we can all agree we didn’t need to see a single stat or argument to know Rashard Lewis is easily the most overpaid player in the NBA.
dberri
November 23, 2010
some dude,
As I said, the analysis was crude (and as I have said before, not what I would publish in an academic journal). That being said…some of what you just said is nonsense. But let me ask you this… what is your method to value a player?
Lior
November 23, 2010
Regarding this list of “most overpaid”, there is a problem of temporal averaging here. Some players [e.g. Brad Miller above] are signed to long-term contracts which will last beyond their productive years. This comes from league-wide distortions in the CBA such as salary caps, salary minimums and rules about salary increments in contracts. The bottom line is that what Brad Miller was paid in 2009-2010 is deferred compensation for past services, not compensation for his 2009-2010 production.
I think the right way to measure these things is on a contract-by-contract basis (total wins produced during the contract divided by total salary paid during the contract), rather than on a year-by-year basis.
Similarly, Durant’s production should be evaluated over the duration of his contract (including his unproductive rookie season).
Daniel
November 23, 2010
Richard Jefferson isn’t going to be on the overpaid list this year. :)
Could this be the first time a player who was near the top of the overpaid list for years move to the underpaid list?
some dude
November 23, 2010
dberri – I think there are two ways to value a player.
1. How much do they add to profits. This is the standard approach and obvious one. Perhaps Amar’e isn’t better than Lee, but perhaps he brings in 3 times the profits in overall impact (I’m not claiming he does). If that’s the case, then he’s worth more to the Knicks than Lee. A better example would be Lebron being worth more to the Knicks and Cavs than Miami and quite obviously. And there’s factors like community worth and the like to boost PR.
2. How much they’re worth to the team in a “basketball sense.” But that can’t be solely measured in terms of wins produced. Do they make other free agents more likely to sign for less money? And it has to be evaluated in terms of the rules, specifically the salary cap rules. You can’t sign Lebron for $44 million and still put together a competent basketball team (or any player, for that matter) because of the rules. And you have to measure their worth as an opportunity cost too, because of the rules. For instance, Joe Johnson was valued higher to the Hawks this past offseason than any other team. Why? Because they couldn’t replace him via free agency because of the rules. That’s not to say he wasn’t overpaid, he was, but you have to factor in that because of the rules teams sometimes have to overpay a player to keep him. Player values to the team are variable and relative.
If your goal is solely to make money, you go option 1. If it’s to win, you go option 2. If your goal is in between, then you try to find the right medium.
dberri
November 23, 2010
some dude,
A player’s value is not defined in terms of profit. It is defined in terms of revenue. This is standard labor economics.
And you mis-understood my question. I wanted you to give me the specific steps you would follow to measure value.
Adam C. Morrison
November 23, 2010
“I wanted you to give me the specific steps you would follow to measure value.”
Why?
You’re putting him on the back foot. You want him to be transparent when your motive is opaque itself. That’s unfair imo.
You said “some of what [he] said is just nonsense.” Why don’t you go into more detail?
some dude
November 23, 2010
dberri – i already said the value is based on marginal cost and marginal revenues. I was simply speaking in layman terms when I mentioned adding to profits. Let me be more specific then. When I say “add to profits,” I am referring to the profit maximization problem. It is also not completely correct to say marginal revenues alone because, as we know, sports leagues function with monoponistic characteristics. Plus the assumptions of perfect information and such don’t hold true, either, so the profit maximization equations are not the ones from “standard labor economics,” but rather much more complex ones. But I wanted to keep it simple. and easy to understand for others besides yourself to what I was referring.
Now to your question on measuring value. I don’t know, exactly. As far as measuring a player based on profit maximization, I have never run a sports franchise and have no real idea how that would go. I’ve never looked numbers that would allow me to make some kind of informed decision.
As for a player’s value to a team in a basketball sense given the constraints of the CBA, not exactly sure, either. How do I quantify the worth keeping Joe Johnson is versus losing him and trying to sign a MLE player and drafting into the position? How much risk is involved? Etc etc. Too many variable to account for to ever accurately do this. However, I’m comfortable with ranking players and putting them into tiers of worth. Someone like Lebron is in tier 1. However, I don’t believe any player is worth $20 million given the cap rules (yes, even Kobe) so I would say anyone making $18 million has to be a tier 1 player. If not they’re overpaid.
I’m sure it doesn’t answer your question the way you’d like it to be answered, but it’s the only way.
But as I mentioned earlier, it doesn’t take a genius to know Shard is overpaid a lot. Some things you just know like you know water is wet.
some dude
November 23, 2010
One more thing. I don’t need to give a valuation formula or process to discount the one provided anymore than I need to prove our existence just because I discount the existence of God.
If a good, or better, way of measuring a player’s value comes around, I’m all ears. I don’t think the one provided is any good at all because it ignores other variables completely.
Rudruff
November 23, 2010
We can argue over the specifics of the rating system, but does a ‘better’ method change the list?
You can’t be happy as a GM to see one of your players on the list.
Leroy Smith
November 24, 2010
Dude, do you really believe that teams lost money last year? Do you really think that 4 teams recently changed hands, 3 of which with huge premiums, yet the league and the teams are losing money? Sure, man smart successful business men just love buying worthless busineses losing money. I, for one, am not drinking Stern’s Kool Aid on that one. What Lebron added to the Cavs was more than basketball related income, he added franchise value, equity, visibility, and the ability to make money off of the brand of the cavs outside of the players (the primary product)
Italian Stallion
November 24, 2010
This is a great discussion, but to be honest if I was the owner of a team, I wouldn’t even consider what economic theory suggested a player was worth.
I would look at how much capital I had invested in the team, calculate the risk adjusted rate of return I needed on that capital for the ownership to make sense compared to other investment opportunities, look at my fixed costs, and then whatever was left over would be what I was able to pay the players assuming it was allowed under the rules.
If I had either a competitive advantage or disadvantage that allowed/caused me to generate a higher/lower return on my invested capital than the average franchise, I would either gain or lose financial flexibility in considering winning or financial benefits as the primary goal.
Revenue may be the key in theory, but in the real world each franchise has different fixed costs, different revenue sources, different profit margins, different risks etc… and each owner is an individual with different priorities, values, goals, circumstances etc… So the fair value of the players can actually change even if the revenues remain flat.
Italian Stallion
November 24, 2010
Maybe I should state that another way.
If economic theory suggests the value of a player is defined in terms of revenue instead of profits (as if an adequate ROIC is not imperative for a capitalist system to make reasonably efficient decisions and work properly ) then the same guys that blow up hedge funds on a regular basis must have come up with that theory. :)
some dude
November 24, 2010
IS – very well put.
Leroy – I don’t believe that MOST teams lost money, but some definitely did. Did you see the stands for some of the teams last year? Over half empty. Again, not most, but some. I know for a fact that the Clippers tried to hand me for free at least 10 different games last season just so I would go to buy concessions. I still think Sterling made money, but it’s cuz it’s L.A.
The league definitely made money, but a few franchises did struggle. Cuban claims the Mavs lost money, but he says he allowed that because he looks as the Mavs as part of his whole portfolio and he’s willing to lose a bit here to try to win since he makes everywhere else. I consider Cuban honest and forthcoming so I take his word for it.
FFR
November 24, 2010
Uh, why does an economic analysis have to rest on revenue and profit?
How is determining the cost of wins (a good) in terms of player salaries not valid?
It makes plenty of sense, and is not incompatible with economics in any way.
some dude
November 24, 2010
because not all wins are worth the same and we expect companies, in general, to profit maximize.
brgulker
November 25, 2010
Two Pistons named Ben … At least from the looks of it, we’ll only have one next season.
FFR
November 25, 2010
“because not all wins are worth the same and we expect companies, in general, to profit maximize.”
Yeah, so. We’re concerned with GMs, Players and Wins, not companies and profits. That doesn’t mean that economic analysis from the perspective of the GM based on wins rather than the CEO’s perspective based on profits is invalid. Economic analysis is not confined to business decisions. Your claim is just bizarre.