Sharing the Wealth - NBA Style

Yes, ANOTHER sports-related post. 

Cue the groans from the few readers that have not bailed out. I don't blame you. Just give me another shot tomorrow.

This piece isn't REALLY about sports, but rather how an organization's distribution of payroll factors in to contract negotiations, employee movement, and even competitiveness.  As basketball fans are aware, the National Basketball Association, (NBA, or the 'association'), is in the midst of an old-school management vs. worker labor impasse.  Well as 'old-school' as you can get when the put-upon workers average seven-figure salaries, and the owners who are mostly billionaires, sit on franchise values that seemingly rise every year.

But the owners want to further control and restrict the total compensation available to players. They in the past have managed this by negotiating a maximum total percentage of basketball-related revenue that can be paid out to the players in compensation.  The expired labor deal set that figure at 57% of total basketball revenue. Now there are lots of arguments and disputes around the details of the deal, (what exactly constitutes 'basketball revenue' chief among them), and there are more detailed parameters that control how much each team can spend, and even rules around maximum contract values for individual players. 

But while percentage of gross revenue paid out in player compensation is the big issue, for teams and players individual compensation is equally important. How the 'pie' is spread inside the league, amongst superstars, solid contributors, and new talent trying to prove themselves is also a critically important angle here, both for the NBA and likely for your organization as well.

The chart below from a piece on Business Insider shows the relative total allocation of league player payroll across salary levels. For example, if 10 players made $4 million, then $40 million would be dedicated to that salary slot. If total payroll was $1 billion, 4 percent of total payroll would go to $4-million players. The higher the bar, the more total league payroll is expended on all talent at that salary level.

Take a look at the changes in distribution of player payroll by salary level between 1998 (the last year the NBA had labor issues), and 2011:

Two things immediately jump out on the chart. One, in 1998 a much higher percentage of total player compensation was clustered at the lower ends of the salary scale, i.e. in players making $6M annually or less. By 2011, the 'spread' of payroll spend smoothed out quite dramatically, with more players (and payroll spend), moving up the salary chain, particularly in the $10M - $20M range. But almost as strikingly, there has been almost no growth in the extremely high compensation levels - on aggregate, more salary was expended in 1998 on players making above $20M annually than in 2011.

In the 1998 contract negotiations, the owners successfully put in place a system that 'capped' individual contracts in a manner by 2011 has kept current stars like LeBron James from reaching the compensation levels of past stars like Michael Jordan, (represented by the lone orange bar on the far right of the chart).

In the period of 1998-2011, the NBA owners were successful in controlling the extreme high end of the salary scale, but for that, saw salaries at the lower end, and more importantly the middle-range increase dramatically.  Over time, contracts awarded to 'solid but not spectacular' contributors have grown out of proportion to those players' contributions to the team's success (with exceptions of course).

One of the primary goals for the owners in this current negotiation is to try and get those mid-range, $6M - $14M or so contracts back under control, while still maintaining the grips on the superstar end of the market as well.

If indeed the NBA owners are in financial trouble, it isn't because the true superstars like LeBron and Kobe make exorbitant salaries, but rather due to the last 15 years of owners overpaying for average performers. Sure, you need quite a few of these 'average' performers to fill out a team, and assembling the right ones with complimentary skills and good attitudes is necessary to actually compete for and win championships, but paying superstar prices for average performance might win you a few games in the short term, but in the long run it will likely tick off the true stars, and might possibly bankrupt the team as well.

I guess that is the challenge for all HR and compensation pros, knowing you need superstar talent to win, and having to spend what it takes to get that superstar talent, while making sure you have enough of the pie left over for everyone else so they won't jump ship chasing a few dollars.

Finally - I promise, no more posts about sports for the rest of the week!

The Free-Agent Machine

The teams in the National Basketball Association, (NBA), operate under the constraint of a 'salary cap'. Essentially, each team has the same maximum dollar amount that they are permitted to spend on player salaries (with a few exceptions/caveats).  The idea behind the salary cap is two-fold: it gives the team owners some predictability and control over the largest piece of their cost structure (player salaries), while also (at least theoretically), contributing towards increased competitive balance across the league since no team can simply load up on all the best, highest-paid players.

But recent NBA history, with teams like the Lakers, Celtics, and a few years ago, the Bulls all enjoying extended periods of high performance while operating under the same salary cap constraints suggests that management, coaching, talent evaluation, and support staffs (all not subject to a salary cap by the way), all have a significant impact on overall success.  Said differently, each team can only acquire about $55 million of 'talent', but the resources, support, development, and motivation of that talent may matter just as much to winning games and championships.

The NBA, in addition to the team salary cap, also has an official start to 'free agent' season, the date from which players that have completed their contracts are free to change teams. This period started on July 1.   On televised analysis and commentary of where the most highly sought after free agents would sign (LeBron James, Chris Bosh, Dwyane Wade, etc), much of the discussion centers around salary cap considerations, as each team only has so much available budget to spend (which varies based on the amount the team already has committed to other players). ESPN on its SportsCenter shows has NBA experts manipulate giant touchscreen displays with the ability to 'slide' free agents to potential destination teams, while calculating the salary cap implications dynamically.  It is a pretty cool technology, especially when you see middle-aged former NBA coaches and executives occasionally struggle to master its nuances.

But what the free-agent machine can't do of course, is evaluate any of the scores of other things that go a long way to determining team success.  A player's 'fit' into the system of play, the relationship they may have with the coach, how the 'left-over' players will adjust to the new big name signee, and whether or not a player's past success on his former team will be transferable to the new team. And perhaps most importantly whether or not the relationship the player developed with his former teammates was a much larger contributor to his individual success than anyone realized - let's see how Amare Stoudemire fares without Steve Nash to work with.

I think some of the same considerations have to be taken into account in the 'real' world of organizations where most of us operate. When a 'free-agent' joins the team, often for a better opportunity manifested in more pay, more prestigious title, or a chance to play on a winning team, the simple fact that they scored the big contract, landed the big title, etc. are no guarantee that the 'fit' will be right and that past demonstrated success will continue in the future in the new environment. 

When free-agents jump to a new team, everything changes for them, the route they take to the office, the people they talk with every day, the basic systems and processes to find information, and hundreds of other things that you or they probably never thought about. The organization may look at bringing in new talent from the perspective of budget, filling in key skills, or enhancing the organization's reputation, but in the short-term the new team member does not care about any of that.  

They have to first get through the mundane details that matter - where can I get coffee in the morning, who do I speak to when I am confused, and just why do I have to request permission to do some of the things that at my old place I did all by myself for the last 5 years?  

It is easy to move players around on a cool touchscreen LCD display to make sure the numbers add up.

It is not easy to make sure everything else adds up. 

Show Me the Money

Last night on the HR Happy Hour show we took on the always interesting, sometimes controversial, and seemingly universal subject of Compensation, or put more simply - money.

Now I know that compensation is not just about cash, that the total value that an employee receives from their employer is a complex mixture of cash, benefits, development, opportunity, and probably a million other things.

Or maybe it is really just about the cash.

That is in a way why the subject, and to some extent the show reflected this, can be so frustrating. 

Compensation seems much of the time a 'Me vs. Them' kind of struggle, the little guy employee fighting for his or her fair piece of the pie, against the faceless corporate monolith bent on sharing as little as possible, all the while funding exorbitant executive comp packages. For some reason the value in the exchange always seems tipped in favor of the employer, that cash, benefits and perks always seem to be perceived as having more worth than the employee's time, attention, dedication, and commitment.

Whenever the conversation turns to compensation, there is bound to be some discomfort. Whether it is a deal to buy a car, sell software, or negotiate a salary and benefits package, there are some people that will feel uneasy, mostly due to an imbalance of information and power.

The newest new hire does not know what kind of a deal the last person in their situation was able to swing, so they often go in blind.  The 'man' has the information, the leverage, and the ability to, for the most part, to control the deal.

Don't like what is being offered?  Ok, walk away then, and good luck.

Oh, and by the way, the outgoing CEO just walked away with a $25 million package.

We did not have time to really solve any of these issues on the 'Show Me the Money' show, and I wonder if we talked for another few hours if we really could have.

But it was, and remains a fascinating topic, and one that will never be completely solved as long as corporations and individuals exchange time and effort for compensation.

Have a listen to the show, and let me know what you think. 

Why are these issues so complex, sensitive, and enduring?

Can we ever just be honest and open about compensation and with each other?