NBA sets milestone for reining in sky-high salaries
Listen up, America. If you're tired of those huge executive pay packages and the ever-widening gap between rich and poor, the National Basketball Association has crafted a solution.
The nation's richest athletes agreed this week to cap the salaries of future star players and raise the league's minimum pay. The surprise agreement not only saved the basketball season from cancellation, it may have set a milestone.
No other major professional sport in the United States has limited the earning potential of star players. If corporate America tried that, future chief executives would have to take a pay cut and use the excess money to raise the minimum wage.
Of course, basketball's new six-year agreement contains loopholes. And team owners are notorious for bending the rules on salary caps to snag great players. Nevertheless, if the new contract works, it sets pro basketball on a new course that runs counter to the prevailing economic winds.
"It looks like we could get the equivalent of salary compression," says Dean Baim, professor of economics and finance at Pepperdine University in Malibu, Calif. In the past, "the richer have gotten richer. [But] the future wealthy are going to get poorer."
Well, relatively poorer.
Under the new agreement, even the most talented young players will have to make do with a maximum $9 million a year. Players with six to nine years of experience can make up to $11 million, then they can make $14 million a year after that.
Few Americans would scoff at lavish salaries like that. But it's far less than the record $33 million that the game's current star, Michael Jordan, pulled in last season. Thanks to an exception in the new contract, Jordan and other established superstars won't be bound by the salary cap. If they're already earning more than the salary cap and they re-sign with their current team, their pay can still rise 5 percent this season.
But as those players retire and new superstars take over, their status as the nation's richest players could be in jeopardy. If baseball salaries keep rising as they are, star baseball players would eventually earn more, Professor Baim points out. As for basketball's "minimum-wage" players, the new contract raises their salaries from $272,500 to $287,500 a year.
The new limits on individual salaries are separate from the caps on overall team payrolls that several pro sports have already adopted. Pro football has a "hard" cap, meaning that teams cannot exceed it; basketball has a "soft" cap that can be exceeded under certain circumstances.
The National Basketball Association lost three months of the season because negotiators couldn't decide on limits for overall team payrolls for the last three years of the new contract. Owners wanted to limit salaries to 54 percent of the league's $2 billion in revenue. Players pushed for 57 percent, the same as they received last season. The new contract calls for 55 percent for years four through six. If the league uses a special option to extend the contract to a seventh year, it would devote 57 percent of its revenue to paying players.
THE problem is that salary caps rarely work in professional sports. Owners who push for such rules as a group invariably try to bend them as individuals.
They lure star players by offering a little bit more. Almost invariably, lesser-talented players see their pay fall behind. "The middle class in professional sports is definitely being squeezed," says Michael Leeds, professor of economics at Temple University in Philadelphia. "I can't see where it's going to end."
In his study of professional football, for example, he found that the 40 percent of the players at the bottom of the pay scale actually lost money in the 1990s. This was largely because the league allowed free agents to play for the highest-bidding teams. Meanwhile, the 20 percent of players at the top of the scale saw their salaries skyrocket.
The same thing had happened in basketball - although the new deal intends to change that. When the Minneapolis Star Tribune analyzed the league's pay last year, it found that the chasm between low-paid and high-paid players had widened dramatically in the last four years. During the 1993-94 season, the league's highest-paid player earned 38 times what his minimum-salary colleagues made. By last year, the top player made 122 times the minimum salary.
And by upping the salaries of star players, team owners find creative ways to circumvent league limits on pay. In much the same way that OPEC nations cheat on their oil-producing quotas, almost all professional teams exceed their caps, Professor Leeds says. "I guarantee you that by the weekend the owners will be trying to find ways to get around this."
Owners will have their hands full. Having missed slightly more than half their 82-game regular season, they'll have to scramble to assemble teams to play a shortened and more concentrated 52-game season. Owners will begin signing free agents Jan. 18, according to published reports, and start playing Feb. 2. The playoffs are scheduled to start around May 1 and players' salaries will be prorated for the shortened season.
What's not known is whether fans will forgive the three-month hiatus and return or stay home as many baseball fans did following that sport's 1994-95 strike. For his part, Jeffrey Rosenthal says Americans have grown used to sports strikes. Says the sports law specialist at Cleary, Gottlieb, Steen & Hamilton, a large international law firm with its main office in New York: "The fans will eventually go back."