Negotiating an $82 Million Contract
Former NBA player and current ESPN analyst Jalen Rose often says that in life “you never get what you deserve; only what you have the leverage to negotiate.” One of the most interest aspects of the course that we have studied was the power of negotiation within a network. Today, basketball player Tristan Thompson signed a 5-year, $82 million contract to play for the Cleveland Cavaliers. While this may seem like another massive money contract so common in the professional sports industry, this scenario captures many of the themes we discussed in class regarding relative negotiation strength in a network.
To fully appreciate the network setting in this negotiation, one must first understand a little bit about the NBA salary cap rules. In the NBA, all teams are held to a salary cap, or a fixed value for which the sum of the players’ contract values for a specific season cannot exceed. There are many exceptions to this rule, one of which being the concept of “Bird Rights” (named after Larry Bird) which allows a team to exceed their salary cap to retain a player who has previously played for three consecutive years for them. Should a team exceed the salary cap, the team owner will face additional “luxury tax” expenses. Similar to the salary cap, NBA players are limited by the size of contracts they can sign with a players’ potential “Max” contract value being determined by previous experience in the league.
In this specific scenario, the Cleveland Cavaliers, under owner Dan Gilbert, faced an interesting dilemma. Gilbert had resigned almost all of his eligible “Bird Rights” players and was already facing one of the largest luxury tax bills in league history. However, prior to this signing, Gilbert still needed frontcourt depth to put the Cavaliers in championship contention. Being that his team was already significantly over the salary cap, Gilbert had no options in signing an external free agent other than Tristan Thompson, who had played for the Cavaliers for at least three years, meaning the team maintained his “Bird Rights” and could further exceed their cap to sign him.
Thompson, above average power forward in the league known primarily for his off the bench rebounding potential, took full advantage of his leverage in this negotiation. Despite not being considered close to providing max contract value as player, Thompson understood that he was the Cavaliers’ only option. As a free agent, Thompson had the ability to test the open market and sign with any other team who offered him a contract. For example, as a Canadian native, Thompson began garnering interest from the Toronto Raptors. Essentially, this created a network that looked like this:
From this diagram, we can see why Thompson was so powerful in his negotiation. The Cavaliers were desperate for his services as a power forward. The Cavaliers had no outside options to threaten Thompson with, while Thompson had the ability to threaten the Cavaliers with the idea of leaving to play in a different city. Similarly, we can also see how Thompson was able to further hedge his leverage for a large contract by looking at the relationship with his agent and the Cavaliers. Rich Paul, Thompson’s agent, also works with Lebron James, regarded as the best player in the league. Lebron himself will be a free agent at the end of the year and the Cavaliers desperately want to keep him happy, and forming a strong relationship with his agent is a way to do so, to avoid any possibility that he leaves Cleveland once again. This further places Gilbert in a position of desperation to retain Thompson, to both improve his team this year and maintain a strong outlook going forward.
Therefore, Thompson had the positioning to push for a close to max contract (Max contract would have been around $90 million for 5 years) with the Cleveland Cavaliers. In essence, the Cavaliers needed Thompson more than he needed Cleveland, leading to a lopsided deal that makes perfect sense when seen in a networks perspective. On a fair and open market, Thompson, based on many experts’ views of his value, may have been worth close to half of the $82 million he ultimately received. In the end, we see the importance of networks and how proper negotiation positioning can be the difference of millions of dollars.
Source: http://www.businessinsider.com/tristan-thompson-signs-with-cavaliers-2015-10