Attention, NBA owners. You are now entering a No Chump-Change Zone. Be prepared to fork over long-term contracts in excess of $70 million. Expect further increases in compensation ahead. Extreme danger for dullards, cheapies and the weak of heart.
No, it's not some sort of warning sign from Demolition Man. It's flashing right here, right now. With players' salaries smashing through one multimillion-dollar barrier after another, NBA executives are numbly shaking their heads and checking their wallets. Many of the players who have been grabbing the big bucks, the execs grouse, aren't even household names; in fact, most are rookies. The $40 million deal Orlando Magic center Shaquille O'Neal signed last year as the league's top overall draft pick suddenly looks, well, paltry. Just skin and bones next to Golden State Warrior rookie forward Chris Webber's hefty $74 million contract or Charlotte Hornet forward Larry Johnson's fat $84 million deal. So what gives? How is it possible to pay a man 35 times President Clinton's $200,000 annual salary just to put a ball in a hoop?
Simple. It's the going rate. It's what the market says the owners have to pony up. A more salient question: Will these stratospheric packages eventually bankrupt the league? The answer here is simple, too. No one knows. Certainly if every Dwayne Schintzius or Manute Bol is handed $3 million a year, red ink will flow, but for now the NBA is more than capable of shelling out big clams to incipient superstars like LJ and Shaq, especially with Magic Johnson, Larry Bird and Michael Jordan doing the pasture thing. Remember, too, that these princely sums are being paid out over more than a decade, so the contracts aren't quite as mind-boggling as they first appear. And take a look at the kind of money the league takes in.
Since 1984, NBA revenues have grown from around $200 million to roughly $1 billion last season. The values of franchises have also soared. In 1980 the Dallas Mavericks anted up $12 million to join the league; the owners of the next franchise—most likely it will be awarded to Toronto—are expected to pay $125 million for the honor of joining the league. Meanwhile, the average NBA player's salary has climbed from about $275,000 in 1983 to $1.2 million last year. "It's fair to say these new salaries are keeping pace with the growth of the league," says Washington Bullet general manager John Nash.
November 8, 1993
Two things, however, are making Nash and other team executives quite nervous: the length of the new contracts and the big bucks being handed out to rookies.
So how did we come to these megacontracts? Each sprang from a unique combination of factors and is custom-tailored with bells, whistles and lollipops that reflect the high-stakes tug-of-war among players, teams and the league. The contracts have created a domino effect, each deal affecting the one that follows.
Grandmama Gets Her Nest Egg
The story of Larry Johnson's $84 million contract begins last February at the All-Star Game in Salt Lake City. According to his agent, Steve Endicott, Johnson, who was at the game as a first-timer, expressed to reporters an interest in signing a long-term contract. The news quickly reached Hornet president Spencer Stolpen, who that night at a party approached Endicott. The two men agreed to hash out a new deal over the summer. "It then became kind of a joke with Larry and me," says Stolpen. "After a win over the [Boston] Celtics in the playoffs, I said, 'How about a 10-year contract?' and he said, 'Why not?' After another win I said, 'How about 11?' " Turns out neither one was kidding.
According to both sides, the negotiations, which began in May, were almost a lovefest. The first order of business was the length of the contract. Both parties wanted to go long. Fine, but the league has a rule discouraging contracts that stretch out beyond a player's 35th birthday (any salary earned in a long-term deal after a player reaches 35 is factored into the team's payroll liability for the pre-age-35 years of the contract). So, since Johnson is 24, he and the Hornets agreed to an 11-year guaranteed deal, with a one-year option for the team in year 12.
Next came the dollars. Two years ago Johnson, the No. 1 pick in the 1991 draft, signed a six-year, $20 million deal with the Hornets. He proved to be a bargain, averaging 20.6 points per game during his first two seasons. Last year O'Neal signed his whopper, and this summer the Philadelphia 76ers signed part man, part project Shawn Bradley, the No. 2 pick in the '93 draft, to an eight-year, $44 million deal. All of this set the stage for Johnson's final number. "I broke Larry's 12 years into three parts," says Stolpen, "and tried to calculate what someone of Larry's talents would be worth. For the first four years I figured $5.5 million a year; the next four, $6.5 million; and the final four, $7.5 million." Endicott countered with higher figures, but the quibbling was brief. They shook hands on $7 million a year for 12 years, or $84 million, the biggest team-sport contract ever.
Then came the tricky part. How would the money be paid? The arcane collective bargaining agreement between the NBA and the players, which expires at the end of this season, prohibits a team from renegotiating a contract, which means that Johnson's deal would have to be an extension of his original contract. So he will continue to be paid under his old contract, from $3.1 million this season to $4.4 million in 1996-97. In the summer of '97 the Hornets will pay him a signing bonus of $6 million. Then it's let the good times roll. The dollars climb from $8 million in '98-99, peak at $10 million in 2000-01—what a way to ring in the next millennium—then fall to $6 million in 2004-05. Why the up and down? To leave room under the cap for the Hornets to sign new players as Johnson's skills diminish.
Can the Hornets afford Johnson's contract plus the rest of their payroll? "We ran projections going out for 12 years, using worst-case scenarios, and no question we're fine," says Stolpen. According to Financial World, the Hornets, a well-managed small-market team, grossed about $39 million last year. Assuming modest 3% growth over the next eight years, the team would produce revenues of about $49 million in 2000. The average NBA team spent about 43% of its revenues on player compensation last season. At that rate the Hornets would spend about $21 million for salaries in 2000, $10 million of that amount going to Johnson. That could be tight. But by 2004 the team would be grossing $56 million, with $24 million for salaries—and only $6 million of that to Johnson. The numbers are ballpark, but Stolpen confirms the gist of these computations.
Any way you cut it, the Hornets are stuck with a monster liability. Since the contract is guaranteed, they must pay Johnson even if he dies, becomes disabled or merely fizzles. To protect itself, the team has constructed a bulwark of insurance policies. It wasn't easy: You can't just pick up an $84 million policy. And insurance companies became wary of basketball players after Magic Johnson said two years ago that he was HIV-positive, and they turned all the more leery following the deaths this summer of Boston Celtic guard Reggie Lewis and New Jersey Net guard Drazen Petrovic.
So far the Hornets have obtained two types of insurance on Johnson—a "key man" term life policy and a disability policy. The key man policy pays off if Johnson dies, compensating the team for the loss of his services. Stolpen will say only that the death benefit is eight figures. As for the disability insurance, the Hornets have insured themselves in the event Johnson has a career-ending injury. Annual premiums for the disability insurance are in the low six figures. Should Johnson suffer such an injury, he has additionally agreed to revise his schedule of payments. If he is hurt in the first four years of the contract, the balance owed him will be paid over 25 years; in the next four, it will be spread over 15 years; in the last four, the Hornets will pay the balance over 10 years.
Finally, the Hornets and Johnson are still piecing together an additional insurance package that will contain both whole-life and term components. It will work something like this: The team will pay about $50,000 a year for a $50 million death benefit—a 1,000-to-1 ratio. After 1998, when the value of Johnson's contract drops below $50 million, the Hornets will continue to pay 1,000-to-1 premiums for the balance of the deal. Johnson will pay about $450,000 a year for 10 years to build the whole-life component into a nice nest egg in a family trust. After his contract expires, the $50 million death benefit reverts to him. The Hornets' total bill for LJ's key man, disability and life premiums? In excess of $200,000 a year.
Penny to Heaven
The problem the Magic faced was how to sign Anfernee (Penny) Hardaway, the team's No. 1 pick in the '93 draft and the third overall selection, when it had no room under the salary cap. First, trade reserve center Brian Williams to free up a $1.24 million slot. A million-two? Pittance. Says agent Carl Poston, who worked with his brother, Kevin, in negotiating Hardaway's contract, "We wanted to get Penny what he deserved, but with that kind of slot we really had to be creative." The league allows a player to be paid the value of an available slot for the first year, and 30% of that amount—in this case about $372,000—can be added in each of the remaining years of a contract. For Hardaway that meant $1.61 million in year 2, up to $5.72 million in year 13, a total of $45 million, or about $3.5 million a year. Chicken feed, the Postons said, Hardaway needed significantly more.
But how could he get it? There's a way, but to figure it out you have to put on your creative salary cap. The Postons obtained a $20 million line of credit at 10% from the Magic that Hardaway can tap, in various increments, during the first six years of his contract. He can borrow $2 million this year, up to $4.9 million in 1997 and $2.8 million in 1998. What's so great about that? Any schmo can take out an unsecured personal loan. But not any schmo can be forgiven the debt. Though it isn't written in the contract, the speculation is that Hardaway won't have to repay any money he draws. If he doesn't repay, however, he could run afoul of the league, which would likely view the arrangement as an effort to circumvent the salary cap.
But the truth of the matter is Hardaway probably won't mine the line of credit, not too deeply anyway, since the Postons have every intention of renegotiating his contract. How is that possible under league rules? The brothers tucked a floating option clause into Hardaway's deal that allows him to become a restricted free agent if he achieves any one of 15 goals, all of them cream puffs: for instance, if he averages 2.5 assists or eight points or two rebounds a game. "The floating option allows Anfernee to play peekaboo with the market and come out whenever he wants," says Carl. Because a team may resign its free agents for any amount, regardless of its status under the cap, Hardaway could look for more money. While he's at it, he might find a new nickname. Penny doesn't cut it anymore.
Webber Goes on the Grill
The Warriors knew what they were getting into when they tried to sign Webber, the first overall pick of the 1993 draft. "We were last," says Warrior president Dan Finnane of the megadeal parade. "We saw Hardaway's and Bradley's contracts. The stage was set." Like the Magic, the Warriors had a measly slot available, $1.6 million. And Webber's salary could increase by the aforementioned 30%, or $480,000 annually. But since Webber won't turn 21 until March 1, 1994, the Warriors could stretch out the contract for 15 years and offer an eyepopper. Webber would take home about $8.3 million for the 2008-09 season. Over 15 years he was looking at a total of $74.4 million.
Yet Webber's agent, Bill Strickland, wanted more. He insisted on a one-year termination clause so that Webber could elect to become a restricted free agent at the end of this season, much as Chris Dudley can under his controversial contract with the Portland Trail Blazers (page 100). Webber could then either seek bigger bucks or try to increase the present value of his contract by asking for a greater chunk of his dollars to be paid during this decade. Of course, if Webber's a bust this season, he'll keep his mouth shut and just go raking in his $74.4 million. Says Finnane, "If that contract is a worst-case scenario, I'll take it." Critics of Webber's deal say it puts too much pressure on him to produce as a rookie.
"It's a huge contract," says Finnane, "but if you want to be competitive in this league, that's the price you have to pay."
So where will NBA contracts go from here? Higher and higher, without a doubt. Last month New Jersey Net forward Derrick Coleman, a no-time All-Star, turned down a contract extension worth $69 million over eight years. Soon we'll see the first $100 million man, especially if the new collective bargaining agreement loosens the cap. Maybe Shaq will land the first nine-figure contract, or perhaps it will be a college star such as California's Jason Kidd or Purdue's Glenn Robinson or even North Carolina frosh Jerry Stackhouse.
But is it right that basketball players become richer than Croesus? No reason at all why they shouldn't. They work hard, and millions of people pay to see them play. Sure, it's terrible that a high school teacher makes $25,000 a year, but that's not Webber's fault. Just look at what other first-tier entertainers earn. Oprah Winfrey takes home more than $50 million a year, Garth Brooks gets more than $20 million. Hell, Neil Diamond still pulls in more than $10 million. Neil Diamond! Viewing the NBA's megasalaries in this context, you could argue that at $7 million per, Larry Johnson is a steal.