Successes & Messes: From boom to bust: Up-and-down contract negotiations in the NBA

By PON Staffon / Business Negotiations

In negotiation, one great deal can beget another. For the National Basketball Association (NBA), its stellar 2016 national television contract begat not just one great deal but dozens for top players and even mediocre ones. But now that the boom year has passed, players’ expectations are bouncing up against reality.

Charging ahead

In October 2014, just about everyone involved in the NBA’s nine-year $24 billion deal giving networks ESPN and TNT broadcast rights to the league’s regular-season and postseason games felt like a winner. The NBA’s annual TV revenue was set to nearly triple starting in 2016, from $930 million to $2.6 billion. The networks expected to benefit from adding more regular- season games to their schedules while keeping technology companies such as Google and Apple out of the bidding for another nine years. And players heading into free agency prepared to set new salary records.

Among 26 players who signed contracts worth a collective $1.7 billion, none was chosen for the All-Star game that season, and many performed below expectations.

The NBA foresaw a problem, though: Teams’ annual salary cap is tied to league revenues. This meant the salary cap, which had grown steadily at around 3.6% per year for a decade, would jump 34.5% in 2016—from about $63 million per team per year to about $92 million in 2016. Players entering free agency in 2016 were likely to be able to negotiate amazing long-term deals. But if teams spent the TV money all at once, they’d have little left to spend on free agents the following year, setting up arbitrary pay inequities league-wide. In addition, top teams might try to stockpile talent in 2016, cementing their dominance for years and arguably diminishing the NBA’s appeal to fans.

Smoothing things over

To try to address these risks, the league made a proposal to the National Basketball Players Association (NBPA): They could distribute the players’ guaranteed 51% of profits from the TV deal evenly among players right away, then artificially slow annual salary cap increases—a process called “smoothing”—instead of allowing a one-year jump in 2016.

Union executives rejected the smoothing proposal, saying they were offended by the notion of artificially lowering players’ earning potential. Players had been suspicious and resentful of the league since at least 2011, when a collective bargaining agreement lowered players’ share of revenue from 57% to 51%, reports It was their turn for a victory, many players believed. Moreover, NBPA executive director Michele Roberts said that economists had advised the union to reject the smoothing proposal. Sports unions generally believe it’s better for each player to try to negotiate the highest possible salary than to distribute earnings more evenly, according to the New York Times.

On the rebound

As the league predicted, NBA teams went on a spending spree in 2016, signing almost 150 free agents to deals worth more than $3.6 billion. To take just one example, Timofey Mozgov, a decent center but hardly a standout, negotiated a four-year, $64 million deal with the Los Angeles Lakers—more than twice what NBA Most Valuable Player Stephen Curry was earning.

Many of the 2016 deals turned out to be bad bets. Among 26 players who signed contracts worth a collective $1.7 billion, none was chosen for the All-Star game that season, and many performed below expectations.

Having blown through so much cash on the free-agency class of 2016, teams had little left over for the classes of 2017 and 2018. Even as the salary cap climbed to $102 million, spending on player contracts dropped from $3.6 billion in 2016 to $2.4 billion in 2017, then to about $1.7 billion this year. Spending on player contracts won’t significantly increase until some of the disappointing 2016 deals wind down in 2019 and 2020.

Playing defense

As a result of the uneven spending in 2016, “the sheer monetary values of players are connected less than ever before to their ability,” writes Ben Cohen in the Wall Street Journal. And as predicted, dominant teams, including the Golden State Warriors, have stayed on top, leading to complaints from fans that the league isn’t competitive enough.

Critics have said the NBPA could have avoided these issues by accepting the league’s smoothing offer in 2015. In emails to the New York Times, Roberts said she “vehemently” disagreed with the notion that player contracts negotiated in 2016 were too large. “If that’s the beef folks have, take it up with the [team general managers] who negotiated them,” she wrote.

Noting there had always been dominant teams in the NBA, Roberts said those cycles were unconnected to the size of the salary cap. It had been important to the union to meet the expectations of players who had timed their free agency to coincide with the NBA’s new TV deal, she said.

Winning in negotiation

We don’t expect you to shed tears for the NBA players who are earning millions less than their peers (while still earning millions). But, well beyond basketball, the situation does raise several interesting issues for job negotiators:

  • Prepare for domino effects. It’s common for each of your negotiations to impact your subsequent negotiations. Carefully think through the possible effects of your deal— including a great deal—and prepare for them even before closing.
  • Factor in fairness concerns. An organization’s financial ups and downs can significantly affect negotiations over salary and benefits. Because fairness concerns loom large for employees, strive to institute hiring practices that will be equitable over time.
  • Earn their trust. If counterparts believe you took advantage of them in past negotiations, they’re sure to view your future proposals—even ones that would benefit them—with suspicion. Work hard to regain parties’ trust if you’re the “winner” in a deal. Better yet, focus on crafting win-win deals from the start.