Super-star economics in a salary-cap world
Is it possible to be underpaid when your base salary is more than $17 million? It is when your name is LeBron James.
Yes, that is more money than 99 percent of families make in a lifetime. Yes, James is already the world's highest-earning athlete in any team sport. But that's not the question we're answering. The question we're answering is whether LeBron James' salary reflects his economic value, and the answer is ... almost certainly not.
"At the end of the day, I don't think my value on the floor can really be compensated for, anyways, because of the (collective bargaining agreement)," James said Friday. "If you want the truth. If this was baseball, it'd be up, I mean way up there."
Economist James is right. In the NBA, there are limits to how much a basketball team can pay its players, collectively, and there are limits to how much a team can pay one player, singular. These salary caps, negotiated and tweaked every few years between the owners and players, accomplish a variety of goals. They prevent an arms race between rich owners. They aim to give small-market teams the same chance at sustained success as big-market clubs. And they limit the amount the best players make to protect the salaries of average NBA players. LeBron James is the most talented basketball player in the world. It's logical that he has the most to lose from a rule that caps rewards to talent.
But you shouldn't feel sorry for LeBron (and not just because he's ridiculously rich). There are three reasons why a higher salary could make him poorer.
First, as long as the salary cap is in place, LeBron James' worldwide marketing value is based on his global popular appeal. The fact that LeBron makes as much money from Nike as he does from the NBA is a testament to superstar economics at work: Even people that can't watch his games can still buy his merchandise. This patina of marketability is exquisitely sensitive to perceived success -- which is to say, championships. (LeBron's endorsements rose 10 percent after making the finals in 2011.) So it's in LeBron's interest to share his millions with star role-players who improve his odds of winning a title.
Second, if LeBron sought higher annual pay in an overseas league like Turkey, he might make a higher annual salary, but his endorsement deals (which clearly account for the majority of his income) would decline because rich markets don't care about Turkish basketball, and they still wouldn't care to watch the weird freak-show of The King beating up on a bunch of fourth-tier European and Western Asian players.
That raises a third argument, which is that the NBA's appeal is rooted in its egalitarian principles, which increase each market's chance of winning the championship and makes the game more appealing to a wider audience. NPR's Planet Money makes the case elegantly:
I want to believe this is true as an economic argument -- that the salary cap makes basketball, and in particular its stars, more valuable in the aggregate. But, as an NBA fan, it's a harder case to make. The small number of players on the court leads to a handful of superstars dominating the game anyway. In the 1990s, Chicago and Houston won eight out of ten titles; in the 2000s, LA and San Antonio represented the West in nine out of ten championships. Individuals can dominate a five-on-five game, and a savvy owner in a big market without a salary cap would be crazy to not pay James something like $50 million a year, which is already about as much as he makes in salary and endorsements combined. Any team comprised of professional basketball players that includes LeBron is going to compete for a championship every year, so a rule allowing owners to pay him whatever they want wouldn't change the competitive landscape of the NBA, but it would make James much richer.
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.
In short, LeBron James is right twice. First, he's right that he's underpaid in a salary-capped NBA. Second, in electing to sacrifice salary to play with other superstars, he understands exactly how much being underpaid in a salary-capped NBA can potentially pay off.
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