Friday, September 26, 2014

How Agents Make Money Out Of Rookie Contracts

(originally posted elsewhere)

The general rule for agents is that their earnings off of negotiated player contracts are capped at 4% of the player's salary. Indeed, 4% is an assumed amount unless otherwise agreed upon, as outlined in section 3(B) of the Standard Player Agent Contract:

If the Player receives compensation in excess of the minimum compensation applicable under the CBA for one or more playing seasons, the Agent shall receive a fee of four percent (4%) of the compensation received by the Player for each such playing season, unless a lesser percent (%) or amount has been agreed to by the parties [...]

In practice, this 4% is rarely deviated from. 4% is the norm, and rarely is it any different, especially in contracts involving the more powerful agents. There was an intriguing case involving Antoine Walker and agent Mark Bartelstein some years ago, in which Bartelstein had agreed the fairly unusual concession upon Antoine's signing of a contract with Atlanta of lowering his standard fee from 4% at the time of signing to 3%, at the player's discretion, if it was felt that Bartelstein 'wasn't doing a good job'. (The case went to arbitration over a disagreement over quite what that phrasing meant, and of how much Walker had to pay him. It was not in dispute that Walker owed Bartelstein, but merely how much, based on the arbiter's findings of whether Walker was entitled to pay only 3% or not. Bartelstein won the case and was awarded a judgement of $671,373.) But this case stands out for its novelty, and is certainly not par for the course.

However, the same handbook adds a few other criteria. In section 3(A) immediately preceding the previous paragraph, it states this:

If the Player receives only the minimum compensation under the NBA-NBPA collective bargaining agreement (“CBA”) applicable for the playing season or seasons covered by the individual contract, the Agent shall receive a fee of two percent (2%) of the compensation received by the player for each such season, unless a lesser percent (%) or amount has been agreed to by the parties [...]

Section 3(A) is itself an odd one. It protects the player somewhat, in that their smallest possible payday is not made too much smaller by an agent's cut, yet it penalises the agent. Minimum salaries are arguably the hardest contracts to get, because so many people are worthy of them, and yet because so many are worthy of them, it is even harder to get any significant amount of guaranteed compensation on them. For more work, then, comes less reward.

However, there exists a protocol these days for players drafted early in the second round - or, as is increasingly prevalent, anywhere in the second round - to sign contracts for longer than the two year maximum allowed by the minimum salary exception. Teams are using their mid-level exceptions or cap space, both of which provide for a maximum of four years in this scenario, to sign their players to a three year contract, and sometimes even a four year one. And because using the mid-level exception or cap space does not tie the player nor the team to the minimum salary, these players almost always get more than the minimum in the first season of the contract, before normally earning the minimum for the two years thereafter.

This season, the minimum salary for rookies is $507,336. A player signing a two year minimum salary contract this season - for the sake of argument, let us pretend all salaries included in this hypothetical are fully guaranteed - would thus earn $507,336 this season and $845,059 the next - 2% of that total for the agent would be $27,048. However, if the contract negotiated was actually a three year deal, paying $650,000 in the first year and the minimum in the following two, that would be a total contract of $2,475,490, on which an agent will earn $62,510 (getting 4% of the $650,000 in year one and 2% of the $1,825,490 for the combined two years of minimum salary). The player gets more money too (although the Omer Asik and Jeremy Lin affairs are testament as to whether three year contracts are really beneficial to the player and his representatives, while the Chandler Parsons saga really rather disproves the value of a fourth year), yet the agents get a significant pay increase for what are ostensibly negligible tweaks to the contract. The difference between a $507,336 standard minimum and an $800,000 feel-good contract is for the player about 150%, yet for the agent about 300%.

So, that's why that happens. And yes, it does mean that it is possible for a player to sign for so little above the minimum that it in fact costs them money.

There exists another criterion, too. Immediately after both of the above, Section 3(C) of the Standard Player Agent Contract states:

If the Player is a rookie drafted in the first round of the NBA Draft who receives compensation in accordance with the “Rookie Scale” set forth in Article VIII of the CBA, the Agent shall receive a fee that is the higher of: (i) 4% of the compensation in excess of the 80% amount that is guaranteed under the Rookie Scale; or (ii) the amount payable under subparagraph (A) above by a rookie who receives only the minimum compensation under Article II, Section 6(b) of the CBA, unless a lesser percent (%) or amount has been agreed to by the parties [...]

It has long since been established that first rounders, who are eligible for anywhere between 80% and 120% of their pre-determined salary amounts, almost always get the full 120% of it. Indeed, since 2002 and as best as can be ascertained, the only players to take anything less than that full amount have been as follows:

- Raul Lopez (2001, #24; signed in 2002): 80% in year one, 120% thereafter.
- Beno Udoh (2004, #28): 80% in year one, 120% thereafter.
- Yaroslav Korolev (2005, #12): 100% in year one, 97% in year two, 120% in years three and four.
- Sergei Monia (2005, #23): 100% in year one with incentives to reach 120% [see below], 120% thereafter.
- Sergio Rodriguez (2006, #30): 100% all four years.
- Ian Mahinmi (2007, #28): 80% in year one, 80% in year two with incentives to reach 100%, 90% in years three and four with incentives to reach 110% in both [see below].
- George Hill (2008, #26): 120% in years one and two, 80% in years three and four [see below].
- Donte Greene (2008, #28): 100% in all four years with incentives to reach 120%[see below].
- James Anderson (2010, #20): 105% in year one with incentives to reach 120%, 105% in year two with incentives to reach 115%, 107% in year three and four with incentives to reach 117% in both [see below].
- MarShon Brooks (2011, #25): 115% in year one, 120% thereafter.
- Marquis Teague (2012, #29): 100% in year one, 120% thereafter.
- Dennis Schroeder (2013, #17): 100% in year one, 120% thereafter.
- Andre Roberson (2013, #26): 80% in year one, 120% thereafter.

[NB: It is very common for rookie scale contracts to have incentives to reach the full 120%. Very common, in fact - it applies to more than half of all first round draftees contracts every year. However, these incentives are normally for things such as participating in summer leagues and summer development programs. It is very rare indeed for rookie scale incentives to not be met. Monia and Greene are listed here because they were deemed to be unlikely to be met as opposed to the usual likely, and because they were in fact not met, not in any of the four applicable years for Greene and nor in the one year Monia managed. John Salmons also had incentives that were unusually considered initially to be unlikely in his rookie scale deal, in the same way as those two, but he met them, received the full 120%, and thus is not listed. In Mahinmi's case, his incentives for years two and three were initially considered likely, and subsequently met, but he never got to his fourth season as his option was declined. Furthermore, as a side note, the 80% amount in George Hill's third season was so small that it was actually less than the minimum salary, and had to be adjusted upwards to be that instead.]

In the 386 first round draft picks covered in that time period, those are strongly believed to be the only thirteen players to have not signed for the full 120% of the rookie scale contract. It self-evidently is therefore a rare situation to encounter, especially when it is considered which teams are the ones that do this - of the above, one was done by the as-then New Jersey Nets, one by the Chicago Bulls, one by the Oklahoma City Thunder, one by the Atlanta Hawks, one by the Utah Jazz, one by the Houston Rockets, one by the L.A. Clippers, two by the Portland Trail Blazers and four by the San Antonio Spurs, so it is often times a select practice by a certain team. Other circumstances often play a part - for example, Lopez was only offered 80% on account of missing the previous season due to severe knee injury, and luxury tax concerns played a part in both the Teague and Roberson decisions. Teams will also occasionally leverage the "no one else was going to pick you that high" card in negotiations, as seen with Hill, and as was recently seen with 2014 draft pick Josh Huestis. Even with all these exceptions to the rule, however, the norm is the norm is the norm, and that norm is 120% throughout the life of the contract.

Remember that agents do not get 4% of rookie scale contracts. Instead, they can get only 4% of the amount above the 80%. Therefore, if a payer gets 120%, the agent gets 4% of that 40%, and if the player gets 80%, the agent gets zero. To put that into some actual numbers, the #15 pick in this past draft had a scale amount of $1,546,100 for the 2014/15 season. 80% of that amount is $1,236,880, and 120% of it is $1,855,320. The difference between the two is $618,440, 4% of which is $24,738. This is a decent one year pay day for negotiating a contract normally so automatic that 95% of eligible players get it.

You can see, then, why it is a very big thing for an agent to get his played signed for the full 120%. And so you can see why an agent might do everything in his player to get that full 120%. You can see why they would not wish to work for free. And you can see why they might advise a client taking the 80% tender offer. After all, if the player does that, the agent gets nothing. And that's not how agents work. So if the only offer on the table is an 80% one, you can see perhaps why an agent might advise against it.

[Edited to note that a decent percentage of agents actually take 0% on rookie contracts, instead making their money off of endorsements. But not all.)

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