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The Yao Conundrum: harder than the Pythagorean Theorem*

My mother routinely tells me that she glosses over the statistics I use to frame my arguments. So I can assure you, I will not take offense if the proceeding paragraphs remind you why you let that subscription to The Economist expire.

A quick primer: The NBA has a limit teams can spend on player salaries called a salary cap. Much like the national budget, this cap is routinely exceeded. To preserve the intent of the salary cap, the NBA has a luxury tax that assesses a dollar-for-dollar fine to teams in the amount they exceed it. The luxury tax does its job fairly well, but deep pocketed owners can be impervious.

Also, for your ‘glossing over’ pleasure:

  1. The 2010-11 NBA Salary Cap is $58,044,000 and the Luxury Tax Threshold is $70,307,000.
  2. For the 2010-11 season, the Rockets have player salary obligations totaling $72,319,761 (not including newly signed Eric Dampier).
  3. Yao Ming will make $17,686,100 this season, and his contract expires after this season.
  4. Shane Battier ($7,354,500), Jared Jeffries ($6,883,800), Aaron Brooks ($2,016,692), and Chuck Hayes ($1,972,500) also have expiring contracts – totaling $18,227,492.
  5. The Rockets have a total of $35,913,592 (#2 + #4) in expiring contracts, roughly half of which is attributable to Yao.
  6. The Salary Cap figure is stipulated by the Collective Bargaining Agreement (CBA), which the NBA (League Office, Teams, Players, etc.) has been operating since 2005.
  7. The CBA expires after this season, making the 2011-12 Salary Cap unknown.
  8. Current CBA negotiations between the Player’s Association and the League Office are moving slowly. The League Office wants to reduce player salaries thus instituting a lower salary cap.

So…Yao Ming…(insert horrible “you don’t even have to say there’s an elephant in the room because the dude is already huge” joke). Yao is the 8th highest paid player in the NBA, but the Rockets are only planning to play him 24 minutes a game. This almost makes him a safe entry as the fourth choice in the “would you rather be a MLB bullpen catcher, back-up NFL QB, or professional golfer?” question.

One might consider the Rockets lucky that Yao’s contract expires after this season as his salary would no longer count against the team’s salary cap. The Rockets could therefore use that space to acquire a healthier, 7’5”, dominantly skilled, immediately-marketable- to-a-nation-of-billions player. Except if that were the case, I would not have had the chance to mention my mother in the disclaimer above, and we would all lose out.

No, the Rockets will not immediately have Yao’s $17 million at their disposal. While that money is removed from the Rockets’ payroll, it is still applied to their salary cap at the end of the season in the form of a “free agent amount,” or cap hold.** Larry Coon is a little more technical in his explanation than me and my asterisk.*** Cap holds are a necessary pain as they close a loophole that would allow a team to circumvent the salary cap.****

Cap holds can follow teams around for a long time.

How long?

Good thing you asked or I would not have been able to drop this little nugget: Does the name LaSalle Thompson mean anything to you? Indiana’s cap has had his $854,389 clogging its system like a bunch of swallowed gum. The guy last played in the NBA during the year of the following events:

Princess Diana was buried, Bill Clinton was sworn in a second time, the Dow Jones first closed above 7,000, the Heaven’s Gate cult committed suicide, and my favorite episode of Seinfeld, The Voice, aired – “Attention Play Now employees, George Costanza’s handicapped bathroom is now open on the sixteenth floor to all employees and their families.”

Essentially cap holds go away when a free agent signs with a team, new or former, or is renounced by his former team. If a free agent resigns with his former team, the cap hold amount is replaced by his new contract amount. If the free agent signs with a new team, the cap hold is erased from his former team’s salary cap. The reason for the longevity of some cap holds, like Mr. Thompson’s, is explained here.

So the Rockets must first decide their plans for Yao and the players mentioned in #4, above, in order to begin to calculate the amount of money they will available under the salary cap next summer. But this is currently rendered impossible due to the Collective Bargaining Agreement expiring after this season.

The Rockets are able to plan ahead in a limited capacity as the fundamental purpose of the future CBA will remain unchanged from what is currently in place: namely that the NBA needs it to operate. Profits will still be divided amongst the players and teams, players will have contracts, teams will be able to draft, sign and trade players, etc.

Ideally, a team would not want to allocate 24% (30% of the cap) of its payroll to a player who is only going to play the league average of minutes per game. Yet, the Rockets have no choice this season. Which makes the following points of great interest to me: a) can Coach Rick Adelman incorporate Yao into a successful rotation; b) how will the front office assess Yao’s performance in order to understand his value going forward into future seasons; and c) how will (a) affect (b)?

We can evaluate the first point in terms of wins and losses. If Adelman pulls it off, the Rockets win more games. To evaluate the second point would require Dustin Hoffman’s character from Rainman and a book on actuarial sciences.

That is not to diminish Adelman’s role but to highlight that no one knows if Yao is going to be Rik Smits or Zydrunas Ilgauskas. Both were tall, both had issues with their feet (presumably due to their size), but only the latter recovered well enough to extend his career for a meaningful duration.

It is guess work on how much longer Yao can last. Likewise, no one knows what the exact terms of the new CBA will be or what next year’s salary cap will be. There are significant unknown variables that the Rockets must take into account when formulating a plan.

Ideally, Yao makes it through the entire season under the imposed time constraints. Ideally^2, Adelman effectively incorporates Yao into a winning rotation. Then, at the very least, the Rockets would have an idea of Yao’s future effectiveness and a foundation from which to negotiate a new contract.

Yao in a diminished role is still a valuable asset to keep on the team. I have no knowledge of the Rockets’ revenues, much less the amount above league average that is attributable solely to Yao/China. But according to Tad Brown, the Rockets’ CEO, five Chinese companies have courtside signs, and Anheuser-Busch and HP have signs in Mandarin at the team’s arena in Houston. While the Rockets must share the broadcast and merchandise revenue equally with the other teams, the team keeps 60% of revenue generated from its arena signage. At what cost does that figure justify keeping Yao?

*“Our offense is like the Pythagorean Theorem.  There is no answer.” – Shaq

**Yao Ming’s cap hold can be described in terms, very rough terms, as a situation that occurs when you are on a budget but are still taking your girlfriend out to a nice dinner at her favorite spot. Let’s pretend that you have a certain amount of monetary space on your credit card, which, if exceeded, will result in embarrassment leading to irreconcilable differences.

At the restaurant, you are waiting for your girlfriend to order what she wants so that you can make your order based upon how much of your budget her order eats up. But she tells the waiter to come back to her because she can’t decide. You don’t know what she is going to order, but have to book it as the max to accommodate her future decision. Until she makes that decision, your budget is restricted by the highest amount she could spend ordering.

Your budget has been slapped with a cap hold.

Cap holds, however, are league enforced. So instead of you getting to estimate her cost, the maître d’ remembers what she ordered on your last date, takes your credit card and bills her meal in advance, plus 5% more. (The percentage varies based upon the player’s previous contract. Yao’s dictates a 5% increase.)

*** “little more technical” = better

**** The loophole is created by the Larry Bird Exception (which allows teams to exceed the salary cap to resign its own free agents). Without the cap hold, a team could:

- let their expiring contracted players become free agents,

-sign other teams’ free agents with the cap space vacated by those free agents, and then

-use the Bird Exceptions to go over the Salary Cap to resign their own free agents.

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