The Brooklyn Nets grabbed all the headlines at the start of free agency, securing commitments from both Kyrie Irving and Kevin Durant when the negotiation period began this past Sunday afternoon. But the terms of their agreements didn’t start trickling out until late Sunday night, and while those contract details have garnered much less attention than the commitments themselves, they’re far more interesting from a CBA / cap management perspective.
Neither Kyrie Irving nor Kevin Durant negotiated a straight maximum-salary contract. Rather, each player’s new deal guarantees only 85%-90% of his annual max salary, with the remainder of his max salary payable as a performance bonus based on team success. Reportedly those performance benchmarks are (a) 45 regular season wins and (b) reaching the second round of the playoffs.
Since the Nets failed to reach those benchmarks this past season—they won 42 games and then lost in Round 1—the bonuses are initially classified as “unlikely” and don’t count against the salary cap. And by structuring the contracts this way, the Nets freed up cap space that they then used to negotiate a 4-year, $40M deal with DeAndre Jordan.
That’s the simple explanation. The reality is a bit more complicated, as it should be. After all, if a team could reduce its cap hit on all new contracts by tanking the previous season and then offering “unlikely” bonuses for any team improvement, then tanking would become an especially attractive option. Couldn’t the Knicks—the team with the league’s worst record and most cap space—have signed THREE max-salary free agents by offering each one a substantial bonus if the team wins just 20 games? To answer this question and see whether the Nets’ moves will hold up, let’s turn to the Collective Bargaining Agreement.
CBA Provisions
The bonuses at issue are governed by Article VII, Section 3(d) (“Incentive Compensation”) in conjunction with Article VII, Section 5(d) (“Performance Bonuses”).
Section 3(d)(1) states as follows:
For purposes of determining a player’s Salary each Salary Cap Year, except as provided in Sections 3(d)(2)-(4) below, any Performance Bonus (provided such Performance Bonus may be included in a Player Contract in accordance with Section 5(d) below), shall be included in Salary only if such Performance Bonus would be earned if the Team’s or player’s performance were identical to the performance in the immediately preceding Salary Cap Year. [p. 173]
A performance bonus that’s included in team salary is labeled a “likely” bonus, whereas an “unlikely” bonus is one that’s excluded for cap purposes.
Section 5(d) sets a limit on any unlikely bonuses, stating that “no Player Contract may provide for Unlikely Bonuses in any Salary Cap Year that exceed fifteen percent (15%) of the player’s Regular Salary for such Salary Cap Year at the time the Contract is signed.” [Art. VII, Section 5(d)(1)] [p. 196].
Based on the above provisions, as long as the “unlikely” bonuses do not exceed 15% of a player’s salary, the Nets or even the 17-win Knicks could offer bonuses for any team improvement whatsoever, and those bonuses would not count towards the salary cap.
According to Bobby Marks in the previously-linked article, that max bonus figure is $5.7M for Durant and $4.9M for Kyrie. I’ve seen these same figures reported elsewhere, but they’re a bit off. These numbers are simply 15% of Durant and Kyrie’s max salaries. The actual max bonuses are somewhat lower, because the 15% figure in Section 5(d) is a percentage of the player’s guaranteed compensation, not a percentage of his max compensation. “Regular Salary” is defined to exclude incentive compensation and other bonuses under CBA Article I, Section 1(zz). [p. 8].
Given that Durant’s individual max salary as a 10+ year veteran is $38.2M, his max bonus is $5.0M (solving for X in 1.15X = $38.2M yields a guaranteed base salary of $33.2M). By the same calculation, Kyrie’s max bonus is $4.3M based on the $32.7M max salary for players with 7-9 years of experience. Creating $9.3M in cap space (sum of those 2 bonus amounts) would precisely enable Brooklyn to sign DeAndre Jordan to a 4-year, $40M deal—starting at that $9.3M level, with maximum 5% annual raises. The Nets know what they’re doing.
The next paragraph of Section 5(d) adds another limitation on bonuses:
No Player Contract may provide for any Unlikely Bonus for the first Salary Cap Year covered by the Contract that, if included in the player’s Salary for such Salary Cap Year, would result in the Team’s Team Salary exceeding the Room under which it is signing the Contract. For the sole purpose of determining whether a Team has Room for a new Unlikely Bonus, the Team’s Room shall be deemed reduced by all Unlikely Bonuses in Contracts approved by the Commissioner that may be paid to all of the Team’s players that entered into Player Contracts (including Renegotiations) during that Salary Cap Year. [Article VII, Section 5(d)(2)] [p. 197]
This provision is intended to prevent cap circumvention, and the Nets are acutely aware of its effect as well. The rule stipulates that, whenever signing a contract with an unlikely bonus, the team must have sufficient cap room to cover all unlikely bonuses offered to that point in the salary cap year.
The Nets created enough cap space to sign both Kyrie and KD to full max contracts, so they are in compliance as long as they sign DeAndre Jordan last. Whereas both Kyrie and KD’s contracts contain unlikely bonuses triggering the requirement to count all unlikely bonuses for cap purposes, DeAndre’s contract does not. His contract adds no “new Unlikely Bonus,” rendering Section 5(d)(2) inapplicable. Thus, any existing unlikely bonuses are excluded when calculating the cap room remaining to sign him. Again, the Nets know what they’re doing.
However, there is still one potential roadblock in the way of the Nets’ plan. Section 3(d)(1) merely states the default rule for classifying bonuses as “likely” or “unlikely,” which is subject to challenge as set forth in the following paragraph, Section 3(d)(2):
Notwithstanding Section 3(d)(1) above, in the event that, at the time of the signing of a Contract, Renegotiation or Extension, the NBA or the Players Association believes that the performance of a player and/or his Team during the immediately preceding Salary Cap Year does not fairly predict the likelihood of the player earning a Performance Bonus during any Salary Cap Year covered by the Contract, Renegotiation or extended term of the Extension (as the case may be), the NBA or the Players Association may request that a jointly selected basketball expert (“Expert”) determine whether (i) in the case of an NBA challenge, it is very likely that the bonus will be earned, or (ii) in the case of a Players Association challenge, it is very likely that the bonus will not be earned. The party initiating a proceeding before the Expert shall carry the burden of proof. . . . If, following an NBA challenge, the Expert determines that a Performance Bonus is very likely to be earned, the bonus shall be included in the player’s Salary. . . . [pp. 173-74]
The challenge system described above provides another mechanism to prevent cap circumvention, particularly in the event that a team seeks to exclude as “unlikely” a bonus that will almost certainly convey. For example, if the Knicks were to cut enough salary to (a) sign Kyrie and Jimmy Butler to contracts with maximum “unlikely” bonuses for the Knicks winning 20 games and then (b) sign Kawhi as well, I strongly believe that the NBA League Office would intervene with a successful challenge on the basis that those “unlikely” bonuses are very likely to be earned.
The Nets’ bonuses present a closer question. Will the NBA League Office mount a challenge on the basis that Kyrie and KD’s bonuses should be deemed likely rather than unlikely? I believe the answer is no, for 4 principal reasons.
Why the League Office Won’t Challenge Kyrie and KD’s “Unlikely” Bonuses
(1) Kevin Durant’s Injury
In this one very specific context, Durant’s injury works in Brooklyn’s favor. If he were healthy, the Nets would be a title contender projected to finish with one of the NBA’s best records. The League would be in a strong position to argue that the team performance benchmarks will be achieved and thus the bonuses should be reclassified as “likely.” With KD potentially out all year though, it’s hard to say how much the Nets have improved on last year’s 42-win roster.
There’s a curious phrase in Section 3(d)(2) that complicates the analysis. Rather than restricting the inquiry to whether a bonus is likely in the first year of the contract, the CBA states that a challenge may be requested where a party believes that performance “during the immediately preceding Salary Cap Year does not fairly predict the likelihood of the player earning a Performance Bonus during any Salary Cap Year covered by the Contract.”
Frankly, I find this aspect of the provision confusing and ambiguous. If the League believes that the bonus is likely in Years Two and Three but not necessarily in Year One, what’s the remedy? Should the initial classification for cap purposes be based on the bonus’s likelihood of being earned in the majority of the contract years rather than in Year One? Would the deciding expert be asked to deem the bonus “likely” for Year Two irrespective of whether it’s earned in Year One, overriding the standard whereby each subsequent year’s bonus is classified as “likely” or “unlikely” based on whether it was earned in the immediately preceding contract year? I don’t see anything in the CBA that’s instructive here.
The upcoming season is more straightforwardly relevant than future seasons, and I’d expect it to be the focus of any review. The early lines set Brooklyn’s 2019-20 over/under at 47.5 wins. Is that a large enough deviation from the 45-win benchmark to warrant reclassification?
Such questions lead to reason #2 why the League is unlikely to mount a challenge.
(2) The League Office’s Burden of Proof
The CBA explicitly states that the party initiating a review, i.e. the League in this instance, “shall carry the burden of proof.” [Article VII, Section 3(d)(2)]. For non-lawyers, burden of proof is a legal concept concerning the allocation of evidentiary responsibility. More simply, the party with the burden of proof must present evidence demonstrating that its position should prevail. Where evidence is lacking or unpersuasive, the party with the burden of proof loses.
There are various levels of proof required depending on the situation. In business disputes and other civil matters, a “preponderance of the evidence” standard is most common. This means that a party need only show that its position is more likely than not. Section 3(d)(3) offers an example of this standard, stating that where a free agent was inactive the previous season, any dispute shall be determined based on “whether the bonus is likely to be earned or not likely to be earned.” [pp. 174-75].
Fortunately for Brooklyn, this relaxed standard of proof would not apply to any challenge of the Kyrie and KD bonuses. Rather, the League must demonstrate that “it is very likely that the bonus will be earned” in order to prevail. [Article VII, Section 3(d)(2)].
The term “very likely” connotes more than a mere preponderance of the evidence, though it probably falls short of the “beyond a reasonable doubt” standard employed in most criminal trials. I’d liken it to the intermediate “clear and convincing evidence” standard, which would require the league to show that a 45-win season is substantially more likely than not.
Although there’s no fixed probability associated with such a standard, I expect that the retained expert—the decision-maker in any challenge—would want to see wide agreement among statistical models and oddsmakers that the Nets should reach 45 wins this year with room to spare.
If that’s the standard, I doubt that the NBA League Office would prevail. As noted earlier, the consensus Vegas line has the Nets at 47.5 wins, just 2.5 over the 45-win benchmark. Further, I’ve seen statistical models that are less sanguine about Brooklyn this year. For example, even after all the reported deals, Jacob Goldstein’s model projects the Nets as just a 37-win team:
Updated 2019-20 win projection for the Nets after agreeing to deal with Wilson Chandler: pic.twitter.com/WdycT1y4Sx
— Jacob Goldstein (@JacobEGoldstein) July 3, 2019
Considering Kyrie’s injury history, Durant’s unavailability, and the losses of D’Angelo Russell and several other rotation players, it wouldn’t be particularly surprising if the Nets failed to improve on last year’s win total. And making the 2nd round of the playoffs is no easy feat either. Those aforementioned betting lines show 5 other teams in the East projected to win at least as many games as the Nets: Milwaukee, Philly, Toronto, Indy, and Boston.
Looking beyond this upcoming season, I think it’s too speculative to say with a high degree of confidence that the Nets should reach those benchmarks. Durant’s ruptured Achilles isn’t like most injuries; you can’t assume it’ll fully heal and he’ll be the same player he was. Plus, the confusion and ambiguity identified earlier weighs against the party with the burden of proof. I’m skeptical that seasons in the more distant future should even be taken into account when determining whether a bonus is likely or unlikely.
In all, the NBA League Office would have a difficult time proving that it’s “very likely” the performance bonuses will be achieved.
(3) Minimal Competitive Balance Concerns
This is a very different situation from one where a team manipulates the cap in order to sign a third superstar. DeAndre Jordan is a solid role player; he’s not Kawhi Leonard.
The balance of power in the East doesn’t hinge on whether or not the Nets are able to sign DeAndre Jordan, and no team’s offseason planning was built around signing him. The NBA is a collection of teams, and it’s hard to imagine any other team making a huge fuss about this. Lacking pressure from other teams, the League probably doesn’t have much of an appetite to bring a challenge.
(4) Maintaining a Positive Relationship with the Players Association
In free agency, the Players Association (NBPA) has two main objectives: promoting player autonomy and maximizing player salaries. The Kyrie, KD, and DeAndre Jordan deals serve both objectives.
The essential purpose of Kyrie and KD’s bonuses is to enable their preferred teammate DeAndre to sign for more money than he would otherwise make, either in Brooklyn or elsewhere. I sincerely doubt that any other team would offer DeAndre Jordan a contract as big as his 4-year, $40M deal with the Nets. Looking around the league, center is the deepest position with the highest replacement level. Veteran centers who don’t spread the floor, i.e. non-shooters like DeAndre, are taking pay cuts this summer and typically signing for substantially less than $40M. Robin Lopez, Enes Kanter, and Ed Davis each agreed to a deal for the 2-year, $9.8M room exception.
If the League challenged the Kyrie and KD bonuses, it effectively would be seeking to reduce DeAndre Jordan’s salary. Practically speaking, that’s all a successful challenge would accomplish.
Given this reality, I think that the NBPA would be especially annoyed by such a challenge and would fight it vigorously. And that’s one more reason why the League won’t employ the challenge system here. I expect that maintaining goodwill with the NBPA is more important to the League than securing a relatively inconsequential bonus reclassification.
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