Saturday, July 12, 2014

Dwyane Wade's Contract and Promises to the Dead

by Michael Dorf

When Lebron James, Dwyane Wade, and Chris Bosh all opted out of the last year of their Miami Heat contracts at the end of the 2013-14 season, many people, including me, believed that their intention was to renegotiate as a trio, in order to give the Heat maximum flexibility to upgrade the roster under the salary cap. The key to that conclusion was Wade, who stood to earn nearly $42 million in the next two years if he had opted into the remaining two years of the contract he signed in 2010. James and Bosh were also relinquishing their rights under their 2010 contracts, but James remains the best basketball player on planet Earth and Bosh is, if not quite a superstar, still a reliable All-Star, as reflected in the maximum salary offers James and Bosh received from the Cleveland Cavaliers and Houston Rockets, respectively.

James took the Cleveland deal but Bosh turned down the Houston deal for an even better offer from the Heat. By contrast, Wade's on-court value has diminished as his knees have deteriorated. Although still a dangerous mid-range shooter, Wade is often a defensive liability and cannot provide enough minutes to justify anything close to a maximum salary, which explains why he did not receive highly competitive offers from other teams, in the way that James and Bosh did. And because that was predictable at the time that Bosh, James, and Wade all opted out of their prior Heat contracts, I assumed that they were acting in concert. Otherwise, it would not have made sense for Wade to opt out. So what kind of deal will Wade now receive?

I'm hardly an NBA salary expert, but if I had to guess what Wade could get on the open market, I'd put it in the range of $10 million/year for two years, or less than half of what he would have gotten if he had opted into the last two years of his Miami contract. I seriously doubt that any team other than the Heat would sign him for more than two years, given his durability concerns.

But the Heat are different for two reasons. First, it's possible that the Heat secretly assured Wade that if he opted out, he would still get a very favorable deal. Let's put that possibility aside to focus on what I find the more interesting possibility: Wade was given no advance commitment but the Heat nonetheless will pay him a very substantial premium above his market value. Why would they do that?

Part of the answer is that Wade is more valuable to the Heat than to any other team, given his championship history with them. The obvious recent comparators are Derek Jeter with the New York Yankees and Kobe Bryant with the Los Angeles Lakers. Each of Wade, Jeter, and Bryant only ever played for his current team, each won multiple championships, and each is generally beloved by fans (although in Bryant's case it's a bit more complicated because of the feuding with Shaquille O'Neal and the ultimately-dismissed 2003 rape charge). In their most recent contracts (which is Jeter's final one and may end up being Bryant's final as well), Jeter received a "Yankee premium" and Bryant received a "Laker premium." By the same logic, Wade would be entitled to a "Heat premium."

The game theory here is relatively simple. Suppose that Wade would be worth $10 million/year for two years to a random team; he could then be worth $15 million/year for the Heat, because Heat fans get value out of seeing Wade play for the Heat beyond what he does for their chances to win. Thus, depending on how the negotiations go, the Heat and Wade would split the $5 million Heat premium. Again, the particular numbers here are made up, but the principle holds.

I nonetheless suspect that the Heat will pay Wade more than he's worth, even accounting for the Heat premium. I suspect that Wade will end up with close to a max contract, in much the way that the Lakers are paying Bryant $23.5 million next season (Bryant's 19th in the NBA) and $25 million the season after that (his 20th). It looks to me like Bryant is being rewarded for his past value to the Lakers, substantially beyond the Laker premium. And I think the same will be true for Wade.

Does it make business sense to pay an employee more than he is worth to the company as a reward for his past service to the company? It might seem not, but I want to defend the rationality of such behavior. Paying an athlete (or other employee) more than management thinks he is worth as a reward for past contributions is a bit like honoring promises made to the dead.

Why do our laws and social norms enforce promises made to the dead? If one believes in an afterlife, then the answer is straightforward: The dead look down on us from Heaven and are disappointed if we break our promises.

But even many atheists believe it is appropriate to honor promises to the dead. Why?

The standard answer is that honoring promises to the dead provides reassurance to the currently living that their wishes will be carried out when they are dead.

Likewise with fading star athletes. By paying Derek Jeter, Kobe Bryant, and Dwyane Wade more than they are worth today, the Yankees, Lakers, and Heat respectively send a signal to other players--including potential future players who may be recruited through free agency--that these sports franchises will treat them very well.

There may also be another benefit of overpaying: It makes the fans feel better (even beyond the home team premium). The Lakers were terrible this past season, but fans could at least tell themselves that they still have a superstar on their team because Bryant is being paid like a superstar. Ditto for Wade and the Heat next year. Keeping him and Bosh will enable some Heat fans to delude themselves into thinking that the loss of James was a loss of only 1/3 of what made the Heat formidable.

Obviously, there are apparent counter-examples to this phenomenon: fading stars whose oversized contracts are regarded as a sign of management's ineptitude. As a Yankees fan, I think of ARod. As a Knicks fan, I think of Amar'e Stoudemire. But they are in a different category; they signed their current contracts at a time when management thought they would perform in a way that justified their high salaries. In order for overpaying to count as a positive, the team needs to overpay a beloved longtime winner at a time when it's obvious that the team is overpaying--or at least obvious to an objective observer.

13 comments:

Howard Wasserman said...

Jurgen Klinsmann, the USMNT coach, explained his decision to cut the beloved Landon Donovan for the World Cup in similar terms. He criticized the general American fascination with over-paying for past performance, specifically pointing to Bryant's contract. Klinsmann was ripped by many sports-media types, although no one recognized the nuance that you have here.

Michael C. Dorf said...

Howard: Good point about Klinsmann and Donovan (although my soccer fan cousin claims that Donovan still should have been chosen based on the skills he continues to possess). I think part of what all of this shows is that we have complicated views about how to evaluate sports as a business. Witness the weirdness of the reaction to Lebron in 2010 and 2014. In 2010, he was widely criticized for SACRIFICING money to win championships. In 2014 he is being widely praised for taking a max salary. (I realize that the PR in "the letter" was good, whereas the PR of "the decision" was terrible, but still . . . .")

Michael C. Dorf said...

And now ESPN reports that Wade has signed a two-year deal with the Heat (after no competing offers) for $31.1 million. http://goo.gl/LKEOJV
That's almost exactly what I guessed: It means that instead of splitting the Heat premium evenly, Wade got all of it, i.e., the Heat paid about an extra $5 million to Wade on top of the extra value he is worth to him, as a reward for past service.

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Shak Olreal said...

I suspect that Wade will end up with close to a max contract, in much the way that the Lakers are paying Bryant $23.5 million next season (Bryant's 19th in the NBA) and $25 million the season after that (his 20th). It looks to me like Bryant is being rewarded for his past value to the Lakers, substantially beyond the Laker premium. And I think the same will be true for Wade.League of Legends coaching
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