Third-year NFL players and the new rookie contract system

One of the biggest changes of the 2011 NFL lockout and subsequent collective bargaining agreement was the introduction of mandatory slotting for rookie contracts. In addition to slotting, the players association consented to mandatory four year contracts for all draft picks with a mandatory team option for first rounders. The league certainly gave up some things in exchange – minimum cash spending to all players and stronger guarantees for top rookie contracts – but the net effect was a severe restriction in the cash available to rookies.

A lot of analysis has been written about the value of draft picks in this new era. I am guilty of printing a few words on the topic myself. Bill Barnwell’s recent NFL trade value column  highlighted the incredible value of a rookie contract by placing Cam Newton, Colin Kaepernick, Russell Wilson, Andrew Luck and Robert Griffin III among the most valuable assets in the league.

One attribute of the new system, however, is being downplayed in most of the analysis out there: the restriction on renegotiation ends with the final game of a player’s third season. I expect the agents for Newton, Kaepernick, Wilson, Luck and Griffin have the Monday following week 17 this year (Newton and Kaepernick) and next year (Wilson, Luck and Griffin - and Brandon Weeden) circled on their respective calendars.

The calm descended over younger players’ contracts is a lull before the first wave of elite players hits the end of their third season. At that point expect lots of contract extensions with big guaranteed money. Colin Kaepernick is probably aware that Joe Flacco signed an extension with $60 million coming in the first three years while Kaepernick himself is scheduled to earn $740,844 in salary this year (the remainder of his cap hit comes from amortized bonus).

Teams certainly have leverage in the extension negotiations given the additional year plus a fifth year option for first rounders, but NFL teams always have leverage with the franchise tag lurking. Look for bargaining to split between those who take care of their young players quickly – buying off the immediate pain with higher cap hits down the road – and those who drag it out, risking a holdout or very unhappy player to control costs. The scope will be relatively limited as fewer players have leverage the way that draft picks do (what draft pick has ever underperformed before suiting up?). Those who have do have leverage based on their on-field performance will have it on par with the top picks of the old system.

The pending big extensions for Newton and Kaepernick won’t diminish the value they have provided in their first three seasons, and structural features such as the franchise tag will help maintain some surplus value for teams in new deals. These extensions should, however, make it clear that teams that hit the jackpot on their picks got a three year bargain contract rather than five.

Returns to inequality in MLB

Take a look over here if you want to get the background for this series, otherwise read on.

Sports + Numbers Prediction: "This is anyone’s guess. The returns to inequality – after controlling for the wide distribution in overall team salary – might be strong or they might not. I don’t have a good feel for it so this will be more of a fact finding mission."

The data

To see the impact of inequality we will look at each team’s Gini coefficient against their winning percentage, controlling for team spending. The resulting equation gives us an r-squared value of 0.13 with only salary spending being significant (P-value of 0.00001) while the Gini coefficient comes in at a P-value of 0.18.

Payroll vs Winning % - MLB 2008-2012

For every million dollars in team spending the expected increase in winning percentage is 0.000654. For a team that spends $10 million more than a comparable team – all else equal – we would expect them to win an additional game.

Gini vs Winning % - MLB 2008-2012

On inequality the - insignificant - coefficient is -0.14. Within the range of Gini coefficients in baseball (0.35 to 0.66) this would mean a difference of 7 wins from the most equal to the least equal (more wins to the most equal). Not nothing but not exactly a huge impact. The gap in payroll ($19 million to $206 million) projects to a gap of nearly 20 wins.

Payroll vs Gini (color-coded by winning %) - MLB 2008-2012

How much should LeBron James be paid?

Well look at this, my little blog post has gotten some attention from ESPN. There is also the slight possibility that the brief surge of media interest following NPR’s publication of the story had an impact, but it’s not worth quibbling about the source. The LeBron is underpaid story simply will not go away.

As has been explained at length, LeBron is incapable of being paid what he “deserves” in the NBA. The structure of the collective bargaining agreement between the players association and the owners dictates the maximum that any specific player can earn given their tenure in the league, tenure with their current team and several other factors. As I noted in my earlier post, this has taken the ratio of top salary to average salary from over 20:1 in 1998, when Michael Jordan dominated, to just about 5:1 now with Kobe Bryant leading the way.

But what if it didn’t? What if players could freely sell their services to any team with no limits on the player’s salary or the team’s payroll?

There are a couple different ways to crack this – so I will try them all

Soccer (EPL and La Liga) - $51.5 million

LeBron would probably be quite a soccer player, but would he like to be paid like one? If the NBA’s labor market were like soccer’s (still with the same average salary) he would be in for a big raise.

The average player in the English Premier League in 2011-2012 made an annual salary of 1.16 million pounds (roughly $1.96 million). The highest-salaried player in the world – outside of well-known players slumming it in Russia for massive, oil-fuelled paydays – was Cristiano Ronaldo at Real Madrid with $19 million according to Forbes. Don’t worry about the comparison between EPL and Real Madrid, suffice it to say that there is a roughly 10x multiple above the average player for the best-compensated one.  Taking the NBA’s $5.15 million average, even I can do the math on this one.

NFL - $62 million

With an average salary (as of 2011) at $1.9 million and top salary at $23 million (way to go 2011 Peyton Manning!), the NFL boasts a 12x multiple from average to top.

MLB – $49.8 million

The average MLB player pulls in $3.31 million (again as of 2011) and Alex Rodriguez managed to convince the Yankees to pay him $32 million in the same season.

MLB, but fancier – $120 to $164 million

Buying a win via free agency, in terms of WAR, tends to cost MLB teams roughly $4.5 million. With half the games, however, the wins are worth twice as much in the NBA, so $9 million. Alas, the payrolls are lower overall ($67 million in the NBA vs $92.9 million in MLB) so we will drop it back to $6.5 million to stay in line with the overall spending as it is.

Stepping into our time machine for a second, way back in 2009-10 when LeBron was still shouldering most of the load himself in Cleveland he put up an insane 25.3 WARP according to Kevin Pelton. Basketball-reference.com has him on a slightly less-high 18.5 of their not-quite-comparable Win Shares stat.

Basketball WARP (Kevin Pelton) - $40.5 million

Pelton, who developed WARP for basketball and now writes for ESPN.com, puts $/WARP at $1.5 million and derives $40.5 million from that. 

Three Letters: CBA

All of these numbers, but especially the Baseball to WARP/WS-based metrics, imply that LeBron is seriously underpaid at $17.5 million this season. 

Pelton's $40.5 million is very different from my $120-$164 based on the same WARP (or Win Shares) metrics, but his is based on what teams pay for WARP within the current structure. The MLB number is (relatively) free market compensation for talent and I believe represents a better version of what LeBron would make in a similarly free market.

The NBA’s unique individual player salary caps make it the only league here where the top paid player is neither the best in the league nor had any claim to being the best at the time the contract was signed (calm down Kobe lovers, he used to be really good but he signed that contract in 2010).

NPR says LeBron is overpaid

An NPR segment went around this morning on why LeBron James makes less than he should. To this I say “what took so long?”

The NBA has had an individual salary cap in place since the 1999 collective bargaining agreement between the players and owners. By definition this provided top players with less than they “deserved” because otherwise it would be unnecessary.

Given a relatively normal distribution of talent (or at least the right-most part of it) there are a few superstars who are far and away better than all other players in the league. In competitive bidding they would exceed even the lofty value they provide due to the Winner’s Curse which results in auctions going to the bidder most optimistic about the value of the asset.

As an example, Michael Jordan earned in excess of $33 million for the 1997-98 season when the league average was $1.4 million. In 2012-13 the average is up to roughly $5 million while the highest in the league is Kobe Bryant at almost $28 million. The ratio has gone from 20x to just over 5x since the introduction of the individual salary cap and Jordan never really faced competitive bidding for his services so the real ratio may have been higher.

Maybe the real story is that NPR is now covering basketball. I blame the Brooklyn Nets.

The Winner's Curse

As the funstravaganza (not a real word) that is NFL free agency winds down, I am reminded again that there is a structural reason that free agent contracts in every sport pay more than players are “worth.” It turns out that the reason is slightly more complicated than: The owners are all crazy (though it still explains why Daniel Snyder, in particular, is crazy). The exception to this is the late 1980s in baseball, when owners agreed to simply not offer contracts to free agents from other teams. This actually happened, you can look it up. It bears mentioning that if this were attempted today, the internet would melt.

One more graph on the NFL Draft Value Chart

After re-reading my post from last night, I realized that I left out one more graph that may be of interest to readers. The normalized chart showing the change in the salary cap and guaranteed money to number one overall picks from 1994 to 2009 came up but then was never revisited to see the impact of the new CBA. With the final data point with Cam Newton’s $22 million and the new salary cap number of $120 million the graph below shows the full set (2010 salary cap excluded because it did not exist):

Guaranteed money (red) and salary cap (blue) 1994=100

In terms of relative difference between the change in the cap and guaranteed money from 1994, this puts 2011 on a level with 2003, 2000 and 1995. The big unknown now is whether the straitjacket the owners placed themselves into will hold or if salaries will somehow creep up faster than the cap as they did from 2003 to 2009.

Thoughts on the NFL Draft Value Chart

Edit - Take a look at my expanded thoughts on the NFL Draft Value Chart - and a proposal for revising the Chart - in this post from November 2012.

Let’s say, hypothetically, that you had just traded the best player on your team (one of the best in the league) for a whole mess of draft picks. If you had just done this, wouldn’t you want to convince people of the wisdom of your choice? Wouldn’t the best way to do that be to convince everyone that draft picks, particularly of the type you received, were highly valuable assets? I am not suggesting in that the Herschel Walker trade was anything short of brilliant for the Cowboys (this was not a hypothetical), but in order to convince people of the wisdom of the trade it certainly helped to establish a baseline valuation for draft picks that made the Cowboys’ haul look even better before those picks even had a chance to play out.

Since that time the Draft Value Chart developed by Jimmy Johnson’s organization in Dallas has become the gospel for a great number of NFL teams. At various times much of the NFL has used the chart and reports suggest that a number of teams still do. At a minimum it is still the go-to for reporters speculating on potential trades. Once the chart became widely accepted, draft picks became easily exchangeable as teams agreed on the value and constructed trades accordingly.