Last updated: 9/30/2019
Last updated: 9/30/2019
Last updated: 9/30/2019
The Underutilized Benefits of Front-Loaded Contracts
August 30, 2021
NBA teams are not front-loading contracts enough, and it's costing them cap space and flexibility.
For nearly five years, I have been advocating that NBA teams do not front-load contracts enough. In a salary cap league, financial flexibility is vital, and teams could be doing a better job of structuring contracts in a way that maximizes this flexibility.
The general concept is that, in many cases, giving a player extra money in the first year of his contract doesn’t matter given the current cap situation of the team, but saving some money on the later years of the contract could give the team additional cap space or additional wiggle room below the luxury tax in the future.
For various reasons included max salaries, progressing rookie scale contracts, and other situations where the team wants to offer the player the most money available with the current year resources that they have, most NBA contracts include raises and get more expensive over time. Therefore, front-loading a contract can help negate the effects of raises for other players on the roster.
In addition, players generally are easier to trade if they have a lower salary, as a player outperforming his salary will have more value in a trade than a player who is underperforming his salary. Thus, front-loading a contract makes the player more tradeable as time goes on, which is another benefit for the team. Having a lower salary at the end of the contract will also lower a player’s free agent cap hold, which could provide additional benefit to the team.
Now, it should be noted that whenever a team and a player agree to a contract, it takes two to tango, and the player would have to agree to structuring the contract in this manner. However, players generally should be agreeable to a front-loaded contract, as the time value of money principle shows that getting more money up front is financially the better alternative. One could argue that this is also true from the team perspective, but sources have told me that the business side of NBA organizations generally stay out of these matters, and would not raise an issue for its own time value of money reasons.
For the most part, this front-loading concept applies to teams that are capped out but below the luxury tax, so those are the teams we will be looking at for the current (2021-2022) season. Thus, for this exercise we will not be considering teams currently over the luxury tax line or teams that are close enough that frontloading some of their 2021 offseason signings would have put them close.
For example, the Heat, Lakers, 76ers, and Jazz all made signings this summer that they could have front-loaded, but doing so would have increased their luxury tax bill. There could be an argument that it’s still better to frontload based on the team’s future finances, but even if a team is looking like they will be more expensive in the future, or will be subject to the repeater tax in the future, the NBA is very unpredictable and you could be paying more luxury tax now in hopes of future savings that you might not even need. In addition, the Pacers and Raptors are extremely close to the luxury tax and front-loading some of their 2021 signings would have put them into the tax.
There are also a few CBA-related rules that need to be noted before going into more detail below.
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Players signed via cap space or using Non-Bird rights are limited to 5% raises (or deductions) of the first year of the contract (raises/deductions do not compound).
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Players signed via Bird rights or Early Bird rights are limited to 8% raises (or deductions) of the first year of the contract (raises/deductions do not compound).
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Options years cannot have a lower salary than the previous year (non-guaranteed seasons do not have this same limitation).
Now, before showing some examples of where teams failed to front-load contracts this summer, let’s show some teams that did so effectively.
Denver Nuggets
After the Denver Nuggets agreed to two-year contracts with Will Barton, Jeff Green, and JaMychal Green, they front-loaded Barton’s contract and gave both Greens flat contracts (both had player options for the second season and thus their salary could not decrease).
The Nuggets were able to structure these contracts this way while remaining just below the luxury tax, so there’s no harm this year, while giving them potentially $1.5M less in salaries 2022-2023, when they will likely get significantly more expensive by re-signing Michael Porter, Jr. and/or Aaron Gordon to new contracts.
Dallas Mavericks
After the Dallas Mavericks agreed to a four-year $75 million contract with Tim Hardaway, Jr., the Mavs fully front-loaded his contract.
The Mavs have plenty of room below the luxury tax (they could even use the full $10.8M trade exception obtained from the Josh Richardson trade and still be well below the luxury tax this year, so the extra $4.6 million in salary this season doesn’t hurt them.
While this does make them $1.5 million more expensive in 2022-2023, this cost is outweighed by the $1.5 million and $4.6 million in savings in 2023-2024 and 2024-2025, respectively.
Interestingly, the Mavericks did not take this tactic when signing Boban Marjanovic and Sterling Brown, who both got flat contracts rather than front-loaded ones. Front-loading both contracts could have saved the Mavericks roughly $236k in 2022-2023.
Now that we have shown some examples of teams that effectively front-loaded some contracts this summer, let’s take a look at some that could have done better.
Cleveland Cavaliers
The Cleveland Cavaliers and Jarrett Allen agreed to a five-year $100 million contract this summer. The contract is for a flat $20 million per year, but I think the Cavs missed out on a perfect opportunity to front-load the contract.
The recent acquisition of Lauri Markkanen gives the Cavs less wiggle room below the luxury tax, but adding an additional $3.8 million in salary this season would still leave them below the luxury tax given their current roster, and Cleveland could create more space by waiving some of their more expensive non-guaranteed salaries or trading minimum contracts at the deadline and signing 10-day contracts for the rest of the season. Therefore, the only negative to front-loading this contract would be the additional $1.9 million in salary in 2022-2023.
The Cavs could potentially have some luxury tax concerns in 2022-2023 depending on where their first-round pick lands and the starting salary of Collin Sexton if he is re-signed. However, I don’t think taking on $1.9M more in 22-23 would make enough of a difference to outweigh the benefits of saving $1.9 million in 2024-2025 and $3.8 million in 2025-2026.
In addition, front-loading Allen’s contract would make the contract easier to trade in the future, which could be beneficial as the Cavs move toward potentially playing Evan Mobley as their starting center.
Chicago Bulls
The Chicago Bulls could have front-loaded the contracts of both DeMar Derozan and Lonzo Ball, although Ball’s contract could not have been completely front-loaded because the starting salary would not have fit within the trade parameters allowed under the CBA.
Note: Alex Caruso could not have been front-loaded because his starting salary was as low as possible considering the Bulls wanted to sign him using the full MLE while still having some left over to sign Marko Simonovic to a three-year contract.
The Bulls are currently $6.5 million below the luxury tax with 13 players under contract, so I do not expect that an extra $4 million in salary this season would hurt Chicago.
Although the Bulls could have luxury tax concerns in 2022-2023 if Zach Lavine is re-signed on a max offer, I believe that the $3.5 million and $1.7 million savings in 2023-2024 and 2024-2025, respectively, outweighs this cost, especially considering Lavine would be getting raises and thus be only more expensive in these years.
As noted in the Pelicans section below, there is also a scenario where Garrett Temple’s contract was also front-loaded, which thus could have allowed Ball’s contract to be more front-loaded, as such:
This would actually lower the additional salary in 2022-2023, while increasing the savings even more in 2024-2025 and 2025-2026.
San Antonio Spurs
The San Antonio Spurs could have front-loaded the contracts of both Doug McDermott and Zach Collins, and had enough cap space to do so before signing Jock Landale to a minimum contract and Bryn Forbes using most of the Room MLE.
The Spurs could have lowered their team salary by $1.5M in 2023-2024, or even still $723k if Collins is waived by then, as his salary is partially-guaranteed for 2022-2023 and non-guaranteed for 2023-2024.
New Orleans Pelicans
The New Orleans Pelicans could have front-loaded the contracts of both Josh Hart and Garrett Temple.
Note: The Pelicans could not have front-loaded Devonte Graham’s contract as it was just low enough to fit within salary matching for trade purposes.
The Pelicans are well below the luxury tax so the additional $1.9 million in salary this season would not hurt them. And they could potentially lower their team salary by $676k and $1.2 million in 2022-2023 and 2023-2024, respectively.
Other
The Sacramento Kings could have lowered their team salary in 2022-2023 by $358k by front-loading the contracts for Alex Len and Terence Davis. It should be noted that Len although Len was signed using the MLE, his starting salary this season was the amount for the Bi-Annual Exception (BAE), and thus if the Kings had used their MLE elsewhere and the BAE on Len, they could not have front-loaded his contract. However, they did not use the MLE elsewhere and thus could have still front-loaded Len’s contract.
The Houston Rockets could have lowered their team salary in 2022-2023 and 2023-2024 by $87k and $459k, respectively, by front-loading David Nwaba’s contract (assuming his third-year team option is picked up).
The Charlotte Hornets could have lowered their team salary in 2022-2023 by $231k by front-loading Ish Smith’s contract (assuming his non-guaranteed salary in 2022-2023 is retained).
Phoenix Suns
One interesting case is that of the Phoenix Suns, who structured the contracts of Chris Paul and Cameron Payne to reach their lowest in 2022-2023.
This situation is not nearly as clear-cut as the ones mentioned above. With De'Andre Ayton and Mikal Bridges likely both signing large contracts that start in 2022-2023, the Suns will most likely be in the luxury tax, so it's understandable they would want to lower the salaries of Paul and Payne in this season.
Another complicating factor is that in 2023-2024 Paul's salary is about half guaranteed and Payne's is only $2 million guaranteed, and Paul's 2024-2025 salary is non-guaranteed, so the potential savings from front-loaded contracts may not even come to fruition.
I can see an argument that front-loading would still be beneficial and just eating the cost in 2022-2023 would be worth it, but I understand what the Suns are doing.
Finally, I should note that one important downside to front-loaded contracts is that it can potentially hurt the viability of an extension. For example, in 2018 Aaron Gordon signed a four-year, $76 million contract that was front-loaded. Therefore, his salary in the last season of the contract (this year), is $16.4 million. Because the first year of an extension is limited to 120% of the last season, Gordon could only get a starting salary of $19.7 million (a four-year extension at this number would total $88 million). If his current contract had raises, his current year salary would be $21 million, which means his starting salary in an extension could be up to $25.2 million, and he could get a four-year $113 million extension.
So there could be scenarios where a front-loaded contract makes it so an extension is not viable, or at least makes it less preferable for the player. However, I think sometimes having those limitations makes things easier for the team in negotiations. If Julius Randle could have been offered a much larger extension than the four-year, $117 million, would the Knicks have offered that, or would there have been much more haggling over giving Randle something in the four-year $150 million range? For a front office, being able to go to a player and say "here's the most we can legally offer you, will you take it?" somewhat makes things easier.
While it feels like more contracts are being front-loaded than they used to, teams are still missing out on some opportunities to increase their flexibility, and agents are losing their players some money in regards to the time value of money principle. Some of these advantages are marginal for the teams, as an additional $1 million here or there may or may not make a difference. But as they often say, winning happens on the margins.