Thu January 24, 2013
At $17.5 Million A Year, LeBron James Is Underpaid
Originally published on Fri January 25, 2013 9:29 am
LeBron James is arguably the best player in the NBA. His salary is $17.5 million a year. He's worth much, much more.
"He's getting hosed," says Kevin Grier, an economist from the University of Oklahoma.
James used to play for the Cleveland Cavaliers. When he left, the value of the team fell by tens of millions of dollars — and the value of his new team, the Miami Heat, rose by tens of millions. The economists I talked to said James should be making closer to $40 million a year.
James is profoundly underpaid because there is nothing resembling a free market for NBA players. And, weirdly, this is good for James. (It's also good for weaker players, and for team owners.)
There's a "salary cap" in the NBA, which limits the total amount each team can pay in salaries. This reduces the amount top players make, and boosts the salaries of mediocre players.
On top of that, the NBA draft means that rookies have to play for whatever team drafts them (or not play in the NBA at all). And there's a limit on what rookies can be paid.
Imagine if other fields were set up this way. You're the best young software engineer at MIT, and instead of getting hired for an insane starting salary by Google, you just put your name in a pool with other engineers. The worst companies in America draw random numbers, and you get a letter saying you've been hired to work in the IT department at Best Buy.
Now all these rules are all laid out in the collective bargaining agreement between the owners and the players. Why would the players want this system? Because most players are not LeBron James.
"The union votes on the contract by majority rule," Grier says. "The guy in the middle is the crucial voter."
The salary cap means that some of the money that would otherwise go to James goes to the guy in the middle.
Another reason James' teammates vote to hose him: They want the league to be competitive.
The salary cap makes it impossible for rich teams to hire all the superstars. That means even teams in smaller markets have a shot at greatness, which draws more fans to support those teams. More fans means more revenue for the league as a whole — and that means bigger paychecks for the players.
And this, Grier says, is why Lebron James has a reason to support the system. Playing in a more competitive league helps him make more money in other ways.
"If he was a three-time Olympic decathlon champion, he would in no way be making nearly the amount of endorsement money that he's making," Grier says.
To earn those tens of millions of endorsement dollars, James needs passionate fans of professional basketball. For that to happen, he needs good teams to play against, even if it's costing him over $20 million a year.
STEVE INSKEEP, HOST:
NBA superstar LeBron James is arguably the best player in basketball and he's paid like it. His team, the Miami Heat, pays him around $17.5 million per year. But there's an argument to be made that LeBron is actually underpaid by a lot. Let's hear that argument from Taylor Tepper of NPR's Planet Money team.
TAYLOR TEPPER, BYLINE: To make the case that LeBron is underpaid, you first have figure out what his actual economic value is. One way to do that is to go back a few years to the moment when LeBron decided to leave his old team in Cleveland.
LEBRON JAMES: This fall I'm going to take my talents to South Beach and join the Miami Heat.
TEPPER: This decision caused the value of James's old team to fall by millions and millions of dollars. And it raised the value of his new team by almost the same amount. When you crunch all the numbers about how much value LeBron adds to the team he's on, economists say Lebron should be making closer to $40 million a year. Economist Kevin Grier from the University of Oklahoma puts it bluntly
KEVIN GRIER: You're getting hosed.
TEPPER: The rough mathematical amount by which he's getting hosed: about $20 million a year. The question then, why don't teams simply go to LeBron and say we'll pay you your full value - 40 mill. Grier says the reason is that they're just not allowed to do that.
GRIER: There are rules about how much any one player can be paid.
TEPPER: And these rules have been hosing LeBron James since the day he came into the league. Superstar salaries are capped, and so is the money promising rookies can make. In the NBA, potential job applicants - that's the best young basketball players in the world - are drafted. They put their names into this big pool, and then there's a lottery.
The worst teams in the league draw numbers, and whichever team draws the winning number gets to pick first. And this is the weird part - whatever player that team picks, that player can't say no. And not only that, his players union has negotiated an upper limit to how much he can get paid. A that's the way it works, even if you're LeBron James.
(SOUNDBITE OF NBA LOTTERY)
UNIDENTIFIED MAN: The Cleveland Cavaliers select LeBron James.
TEPPER: Imagine if other fields were set up this way. You're the best young software engineer at MIT, and instead of getting hired for an insane starting salary by Google, you just put your name in a pool with other engineers. The worst companies in America draw random numbers and you get a letter one day saying you've been hired to work in the IT department at Best Buy.
Now, all these rules are all laid out in the collective bargaining agreement between the owners and the players. Why would the players want this system? Economist Kevin Grier says it's precisely because most players are not LeBron James.
GRIER: The union votes on contracts by majority rule. All right? So we would think if it's like majority rule that it would be the guy in the middle who would be the crucial voter. If you pick a thing like salary cap and line everybody up for who wants it the most versus who wants it the least, it would be the guy right in the middle of that distribution of players whose opinion would be decisive. So you want to say what are the interests of the median player.
TEPPER: The answer is, the average players don't want all the money to go to LeBron. They want some it for themselves. But there's another reason LeBron James's teammates vote to hose him. They want the league to be competitive. If there's a limit on how much teams can pay, rich teams can't hire talent away from poor teams. Economist Victor Matheson at the College of Holy Cross says that makes games closer and more fun to watch.
VICTOR MATHESON: If the average sports fan, nationwide, is kind of like me, saying we want every team to have a chance at least every once in a while to be a contender, then that's going to generate more for the league as a whole. And so the players want that pie to be as big as possible so when they get their slice it's as much as they can get.
TEPPER: And this, says economist Kevin Grier, is why LeBron James has a reason to support this system. Having a more competitive league helps him make more money in other ways.
GRIER: I mean, if he was the world's - the three-time Olympic decathlon champ, alright, he would in no way be making nearly the amount of endorsement money that he's making.
TEPPER: To earn those tens of millions of endorsement dollars, LeBron needs passionate fans of professional basketball. For that to happen, LeBron needs good teams to play against, even if it is costs him $20 million a year. For NPR News, I'm Taylor Tepper.
(SOUNDBITE OF MUSIC)
INSKEEP: It's MORNING EDITION from NPR News.
(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.