LeBron James’ Contract Options and Earning Potential

LeBron

Image Source: latimes.com

LeBron James just capped off his 12th season in the NBA with his third Larry O’Brien trophy. In just his second year back in Cleveland, he brought an NBA Championship to the city that hasn’t seen a title in over 50 years, arguably his greatest accomplishment to date. Despite the win, LeBron is expected to opt out of his 1-year player option with the Cavs. Of course if LeBron opts out, he is going to get the maximum amount of money possible. However, given LeBron’s current situation, his options are somewhat limited in terms of the type of contract he can sign this summer and what options maximize his earning potential moving forward. This post explains his contract circumstances and options.

Recent Contract History

First, it is important to explain LeBron’s recent contract history with the Cavaliers. In the summer of 2014, LeBron signed a 2-year, $42,217,798 max contract with the Cavs. The second year was a player option worth $21,573,398, making this a 1-year plus 1 player option contract (a 1+1 deal). Last summer, LeBron opted out of that contract and signed another 1+1 deal with the Cavs via the Non-Bird Exception.[1] This contract was another 1+1 deal; a 2-year, $46,974,673 with the second year being a $24,004,173 player option. With the cap expected to jump approximately $24,000,000 this summer, LeBron is expected to opt out of his second year and sign a deal to take advantage of an increased max contract.

It is important to note here that because LeBron has only been under contract with the Cavs for two seasons, he is an Early Bird Free Agent. As such, in order to go over the cap to sign him, the Cavs are capped at 175% of his prior salary and, given the Cavs payroll, they will be well over the salary cap even after the cap jump is official. Fortunately for the Cavs the Early Bird Exception is enough to sign LeBron to a max contract, but it still affects his earning potential, as explained in the section below.

LeBron’s Short-Term Contract Options 

The first year of a max contract for LeBron in 2016 projects to be $30,738,000,[2] which is well within the confines of what the Early Bird Exception allows. However, signing a player with the Early Bird Exception requires a 2-year commitment, not including any option years. As a result, LeBron would be barred from signing another 1+1 contract to take advantage of another astronomical jump in the salary cap next summer. Instead, he would likely sign a 2+1 deal with 7.5% raises in each year.

Theoretically, there are two ways around this, but neither allow the Cavs to sign LeBron to a max deal and only one is realistically available. The first option for the Cavs (albeit an unrealistic, if not impossible one) is renouncing LeBron and signing him with cap space. A team signing its own Early Bird Free Agent with cap space can sign him to any amount of years up to 4 with 7.5% raises. The second (and more feasible) option is for the Cavs to renounce their right to use the Early Bird Exception on LeBron, thereby making him available for the Non-Bird Exception. With the Non-Bird exception LeBron could sign a 1+1 contract, though the most he could sign for in the first year is $27,564,600, which is $3,173,400 below his max contract amount, and the contract is limited to 4.5% raises.

It might be helpful to examine LeBron’s earning potential in detail for each of the Cavs’ two most realistic options. Table 1 below shows LeBron’s earning potential signing a 2+1 deal via the Early Bird Exception.

Table 1. LeBron James Early Bird Earning Potential – 2+1 Contract

Year Salary Raises
2016-17 $30,738,000
2017-18 $33,043,350 7.5%
2018-19 $35,348,700 (Player Option) 7.5%
Total $99,130,050

After completing his second year under this contract, LeBron could opt out and sign a max contract for the 2018-19 season based on a projected salary cap of  $100,000,000.

Table 2 below shows LeBron’s earning potential if the Cavs were to renounce their right to sign him as an Early Bird Free Agent and instead signed him to a 1+1 deal via the Non-Bird Exception.

Table 2. LeBron James Non-Bird Earning Potential – 1+1

Year Salary Raises
2016-17 $27,564,600
2017-18 $28,805,007 (Player Option) 4.5%
Total $56,369,607

After completing his first year under this contract, LeBron could opt out and sign a max contract for the 2017-18 season based on a projected salary cap of $108,000,000. It’s difficult to judge which is the better option when looking at Tables 1 and 2, because this isn’t the entire picture. The benefit to signing a 1+1 is the ability to take advantage of a higher max contract at an earlier date. But in order to get the full picture, there’s another rule that must be considered for LeBron and that is the Over-36 Rule.

The Over 36 Rule

The Over 36 Rule applies to any contracts entered into that cover 4 or more seasons including 1 or more seasons that start [3] after the player has reached the age of 36. The rule basically states that the salary in the later of (i) the fourth season of the contract or (ii) the first season that follows the player’s 36th birthday, is treated as deferred compensation and, as a result, the cap hit for such season will be applied pro rata to the prior seasons of the contract. For example, Table 3 shows the cap hit for a 34 year-old that signs a 4-year contract for  $3,000,000 per year.

Table 3. 

Contract Year Cap Hit
1 $4,000,000
2 $4,000,000
3 $4,000,000
4 $0
Total $12,000,000

As you can see, the 4th year cap hit is redistributed pro rata over the first 3 years of the contract. Year 4 is considered a “Zero Year.” On the second year prior to the first Zero Year (in the example above, this would be Year 2), the salaries for such year and all remaining years are aggregated and attributed in equal shares across all years. Table 4 shows the player’s cap hit beginning on the July 1st after Year 1.

Table 4.

Contract Year Cap Hit
1 $4,000,000
2 $2,666,667
3 $2,666,667
4 $2,666,666
Total $12,000,000

As the example above shows, the Over 36 Rule doesn’t necessarily affect how much the player can be paid over the course of the contract. However, the total dollar amount is affected if the player is signed using limited cap space or to a max contract. For example, for an Over 36 Contract for the max, teams must offer the player less money in order for his contract to be legal. Tables 5 and 6 show why that’s the case using a 4-year max contract with 4.5% raises as an example.

Table 5. Standard 4-Year Max Contract signed in 2016

Year Cap Hit
1 $30,738,000
2 $32,121,210
3 $33,504,420
4 $34,887,630
Total $131,251,260

No player can make more than his max in any given season. For this reason, a max player cannot have his salary and cap hit redistributed seamlessly in accordance with the Over 36 Rule. Table 6 shows how limiting an Over 36 Contract for the max is by comparing it to a standard 4-year max contract.

Table 6. 4-Year Max Over 36 Contract Comparison

Year Cap Hit (Standard) Cap Hit (Over 36) Over 36 Breakdown
1 $30,738,000 $30,738,000 $19,108,790 + $11,629,210
2 $32,121,210 $32,121,210 $20,492,000 + $11,629,210
3 $33,504,420 $33,504,420 $21,875,210 + $11,629,210
4 $34,887,630 $0
Total $131,251,260 $96,363,630

Because the money in the 4th season needs to be redistributed and this max contract is limited to 4.5% raises in each year, the 4th year doesn’t add any value to the contract. And because the money will be redistributed again after Year 1, this player would be receiving 3 years worth of max money over 4 years. So there are essentially no benefits to signing a max contract of 4 or 5 years if it is subject to the Over 36 Rule.

The one exception to the Over 36 Rule is if a Bird Free Agent who is 33 or 34 signs a 4-year contract for any amount with his prior team. In such a case, the Over 36 Rule would not apply and the 4th year does not need to be redistributed, even if it occurs after the player’s 36th birthday.

LeBron James’ Total Earning Potential

This brings us back to LeBron James and the big picture. LeBron is currently 31 years old and will turn 32 on December 30, 2016. In other words, if he agreed to a 1+1 using the Non-Bird Exception, LeBron will not sign a 5-year max contract because he would turn 36 before the 5th season (Note: technically LeBron could sign a 5-year max, there would just be no benefit to doing so). If, on the other hand, he agreed to a 2+1 using the Early Bird Exception, LeBron would be able to sign a 4-year (but not 5-year) max contract with the Cavs because he would fall under the exception of a 33-year-old signing a 4-year contract with his prior team.

Assuming he does sign one of those two short-term contracts this summer, his most lucrative options would be to (i) opt out of his 2+1 deal and sign a 4-year max deal at age 33 (via the Bird Exception) or (ii) opt out of his 1+1 deal and sign a 4-year max deal at age 32 (via the Bird Exception)[4]. Tables 7 and 8 below show the total earning potential of both options assuming LeBron finishes his career with the Cavs.

Table 7. LeBron James Total Earning Potential, 2+1 Contract

Year Salary Raises
2016-17 $30,738,000
2017-18 $33,043,350 7.5%
Decline 2018-19 Player Option
2018-19 $32,700,000[5]
2019-20 $35,152,500 7.5%
2020-21 $37,605,000 7.5%
2021-22 $40,057,500 7.5%
Total $209,296,350  

Table 8. LeBron James Total Earning Potential, 1+1 Contract

Year Salary Raises
2016-17 $27,564,600

Decline 2017-18 Player Option[6]

2017-18 $35,316,000  [7]
2018-19 $37,964,700 7.5%
2019-20 $40,613,400 7.5%
2020-21 $43,262,100 7.5%
Total $184,720,800

Signing a 2+1 allows LeBron to sign a longer contract overall, earning him approximately $210 million over 6 years. On the other hand, signing a 1+1 results in LeBron earning more money over fewer years, giving him approximately $185 million in 5 years, which is $15,481,950 more than he would earn over the same 5 year period under a 2+1 deal. So the better deal ultimately depends on how LeBron’s body holds up, his desire to continue playing, and what the salary cap will be for the 2021-22 season.

_____________________________________________________________________________________________

[1] The Non-Bird exception allowed the Cavs to go over the cap to sign LeBron to a contract worth 120% of his prior salary or, if that amount exceeds his max contract, a max contract.

[2] This is based on the projected salary cap of $94,000,000 for 2016-17.

[3] For the purposes of the Over 36 Rule, the season starts on October 1.

[4] It’s unclear whether renouncing the right to sign James via the Early Bird Exception in 2016 bumps him down a status year overall, but either way his contract restrictions after signing a 1+1 are the same.

[5] Current salary cap projections set the 2018-19 salary cap at $100,000,000.

[6] The Cavs could sign LeBron with the Early Bird Exception in 2017-18 or, if enough can be created, cap space.

[7] Salary cap projections set the 2017-18 salary cap at $108,000,000.

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