The Economics of an NBA Team: Introducing the Concept of Relative Player Cost

If we take the salary of a player and divide by the adjusted real player rating, we get how much that player costs relative to how good that player is. Obviously, from a raw financial perspective, the lesser the player costs, the better it is for the team, not because it "saves money," but because there is more money within the salary cap and all of the salary cap exception rules to get better players than otherwise. Think what the Nuggets could do if Carmelo Anthony would play for free. Why, they might actually be able to become a contender if he played for free.

Now you have to be very careful about how you look at this, because you might make the false conclusion that everyone is nuts for paying huge money for the best players, where they could get a lot more production per dollar if they used cheaper players. The problem is that you can not possibly win in the NBA unless you have enough players who produce at an extremely high level as measured by the real player rating, preferably adjusted for made them miss defending. And the overwhelming majority of the very high level players come with very steep salary price tags.

This fact by the way is the main reason why the Nuggets were total jerks for giving Marcus Camby away for nothing; there are very few players who play at as high a level as does Marcus Camby. You should never, ever, ever simply give away a high performing player with a player rating of about 1.000 or more. Regardless of what your overall plan is, you can't do that and expect to succeed.

Specifically, the objective of every NBA team must be to have five starters all of whom perform at an extremely high level, with minimum adjusted real player ratings of as close to 1.000 as possible. Then you want to have up to three role players who do not start, but who are quality players regardless, substantially better than the more ordinary players. For these, the gold standard would be adjusted real player ratings of around .800.

Now let's take a look at that stumbling, bumbling franchise, the Denver Nuggets, and introduce a new concept called "Relative Player Cost." This concept is the cost of a player relative to his production. It is the salary of the player divided by the player's Real Player Rating, preferably his Rating adjusted for defending. In other words, how many dollars did that player cost relative to his actual production as shown by adjusted RPR?

The following shows you what the Nuggets' Relative Player Costs (RPC) were for 2007-08. The RPCs are the first number, the big one, since pro basketball players make huge amounts of money. The second number, as indicated, is the adjusted real player rating itself. The players are listed in order of their adjusted real player ratings.

RELATIVE PLAYER COSTS FOR THE DENVER NUGGETS 2007-08
Carmelo Anthony 12,899,357 Adj. RPR= 1.011
Marcus Camby 11,205,179 Adj. RPR= 1.004
Kenyon Martin 14,608,600 Adj. RPR= 0.907
Allen Iverson 21,172,049 Adj. RPR= 0.898
J.R. Smith 2,403,229 Adj. RPR= 0.888
Nene Hilario 10,612,245 Adj. RPR= 0.833
Linas Kleiza 1,344,894 Adj. RPR= 0.752
Eduardo Najera 7,219,213 Adj. RPR= 0.686
Anthony Carter 1,636,832 Adj. RPR= 0.674
Bobby Jones 1,046,356 Adj. RPR= 0.657
Steven Hunter 5,440,536 Adj. RPR= 0.597
Yakhouba Diawara 1,261,387 Adj. RPR= 0.545
Taurean Green 812,097 Adj. RPR= 0.526
Chucky Atkins 6,741,573 Adj. RPR= 0.445

So what can we observe from this? First, we can be reminded of what we already know, which is that JR Smith was supposed to start for the Nuggets. As an aside, if I had a dollar for every time someone writes on the internet that the Nuggets are going to be a really good team when JR Smith starts, I would be a heck of a lot richer. But the fact is, unless George Karl goes away, JR Smith is almost certainly not going to start for the Nuggets, so anyone's dreams predicated on Smith starting are, you guessed it, Fantasy Land. People need to wake up from dreaming and understand that JR Smith is not going to start for George Karl on the Denver Nuggets. I can't be any more clear than that.

Another observation is how much of a financial boondoggle Nene has been; had Nene been an actual NBA player instead of a man with various health problems, the Nuggets, amazingly, would have been a real contender despite not having a real point guard or a center with a great post presence. Although the positions had to be juggled around a little, in effect, Anthony Carter was the replacement for Nene as the 8th man.

Now the next thing you have to understand is how important experience is to both the actual and the relative cost of a player. The more experience a player has, the higher the cost of that player. And the difference in cost relative to rating between younger stars such as JR Smith and older stars such as Marcus Camby and Carmelo Anthony is huge. As you can see, Smith cost $2.4 million relative to his rating, whereas Camby cost 11.2 million relative to his rating and Melo cost 12.9 million relative to his performance rating.

Despite all of the tricky and hard to keep track of exceptions, an NBA team is at root a salary capped enterprise, so a team must have cheap but high performing players such as JR Smith on its roster if it is going to have a chance of being a contender, because there isn't enough money in the cap, whether you are paying the luxury tax or not, to put a contending team on the court which uses only the high cost veterans. Now although the Nuggets had JR Smith on the roster, they made the mistake of not using him enough, which cost them dearly. But as you can see, the Nuggets had five super expensive veterans and superstars on its roster, each costing more than $10 million relative to performance, whereas four is most likely the maximum you can afford, with three being better, if you want to be a contender without paying a huge luxury tax every year.

Not only did the Nuggets have one or two too many high performing but very expensive veterans and superstars, they also had among their five very expensive players an ultra expensive player, Allen Iverson, whose cost of $21.2 million relative to performance was almost double the cost of the costly Marcus Camby. In the NBA, there is the luxury tax and then there are luxury players. Any player who costs more than about $15 million relative to his performance rating is a luxury player, and that player had better bring even more to his team than just his high performance to justify the massive amount of money.

Iverson could have delivered the extra value needed only if he had on his own or, obviously better, in conjunction with the coaches, provided the point guard role that the Nuggets, amazingly, lacked despite their massive payroll. How a team with an $83 million payroll could lack a real, designated point guard for the playoffs is something which is going to have real basketball people scratching their heads for many, many years. When you factor in the economics, not having Iverson as the point guard was one of the biggest coaching errors in the history of basketball. Since Iverson did not provide much if any extra value aside from his actual performance, the Nuggets were literally throwing money out the window by paying Iverson's massive contract, while having him do nothing other than take as many shots as he felt like while play 2-guard.

Another way to provide extra value is to get seats filled that would not otherwise be filled, and to get merchandise sold that would not otherwise be sold. But there is little evidence that Iverson has provided substantial benefits in Colorado in either category. Denver fans did not go to games much more after Iverson arrived. In fact, the majority of fans in Denver secretly had it in for Iverson since he arrived, and they gradually became more and more of them are out in the open hoping and praying that he is gone as soon as possible.

Yet another way for an ultra expensive, luxury player to deliver extra value to the team and to justify the big extra money paid to him is to provide leadership, and some assistance for the coaches in getting the team in sync and ready to roll every game. Chris Bosh and Kevin Garnett are good examples of these kinds of players.

So it was not just Nuggets owner Stanley Kroenke cutting and running from paying the luxury tax that self-destructed the Nuggets for the long term, their fast 2008-09 start notwithstanding. Although any owner should be willing to pay a small luxury tax (up to about $5 million) if circumstances warrant, no owner should be obligated to pay the kind of 8 figure luxury tax that Mr. Kroenke was paying before he bailed just to be able to be a contending NBA team. If you manage the team correctly, you do not have to pay a large luxury tax to become a real contender in the NBA; though as I said small luxury tax payments are probably going to be ocassionally necessary.

So aside from Kroenke cutting and running, the Nuggets self-destructed because they failed to acquire enough younger, low cost but high performing players, to go along with JR Smith and Linas Kleiza, who was even more of a bargain than was Smith. The George Karl fiasco rears its ugly head here, as you might suspect, because Karl is notorious for being biased against younger players, especially any younger player who has a raw, unrefined, or "new school" style. Players such as JR Smith, Bobby Jones, and Taurean Green were sitting ducks to be trashed and/or marginalized by Karl. If there was no salary cap at all, Karl's refusal to develop or give the benefit of the doubt to star players in the making could be offset by a massive team salary. But since there is a salary cap, Karl's bias against the bargains is a real franchise killer.

How do you get younger, talented players, who will break through and get that .750 or .850 or even .900 rating? First, you absolutely can not have a coach biased against those players like George Karl, which needs no further explanation. Second, you absolutely must get your share of players who reach that level from the NBA draft. Aside from drafting them in the first place, you must not trade in a short few years almost all of your acquisitions away (and the Nuggets are as guilty as sin on that).

Rather, you have to know, for each of your draft picks, after a year of NBA experience, whether the pick that you made is or will soon be a high performing player, and then you need to make darn sure that that high performing player is worked into your offensive and defensive schemes. If you keep few if any drafted players on your team, there is something very wrong with your franchise, and you will never be a real contender until you get the financial and basketball double advantage that you can get from drafted players if you manage things correctly.

Third, since so many players who are drafted never reach the high performance level, you have to always be in the market for players such as JR Smith through free agency. This can be thwarted by the restricted free agency matching rule, however. Fourth, you should always be trying to see if you can bring in a younger, bargain, high performing player via a trade. Trying to get such a player via trade is difficult but not anywhere near impossible. Often, when there is a major trade, it is the younger player(s) involved in the trade, that hardly anyone is talking about, that are the real secrets behind how a team is setting itself up to succeed with that trade.

So how have the Nuggets been doing with respect to getting their share of high performing, bargain players? They have been doing about as badly as you can do, quite honestly! They have Karl as the Coach, which is strike one. Not only have they traded away many of their draft picks before they made them, but every one of the players they did draft in recent years except for Carmelo Anthony and Nene have been traded away as well! So that's strike two. (It really is strike three, because the draft thing is worth two strikes, and the Nuggets have totally blown it with respect to drafting.)

JR Smith was picked up by accident when the Chicago Bulls offloaded him. That's right, Smith fell into the Nuggets lap; they didn't do much of anything to get him. Linas Kleiza was acquired via a draft day trade with the Trail Blazers. And that is it for high performing bargains acquired by the Nuggets via free agency or via trading in recent years. It's not enough, so that's strike four.

In between the bargain young stars and the very expensive veterans, you have mid-level players, who can be mid-age or older veterans, such as, on the Nuggets, Eduardo Najera, Steven Hunter, and Chucky Atkins. These players can frequently be weak spots for secondary franchises, because these players may not be totally qualified performance wise, while still costing a lot of money. For the Nuggets, Atkins was a bust due to health, and Hunter did not play much, so only Najera worked out for them to any extent in this expense range in 2007-08.

Often, these mid-level players are nothing more than expensive, seldom-played standbys for the starting five. But they won't sit on the bench as starter fill-ins unless you pay them roughly five million dollars, which obviously is a financial drain for any team. The solution is to keep the number of these players fewer than the number of young bargains you have, which the Nuggets failed to do. They had only Smith and Kleiza as young bargains, while they had Najera, Hunter, and Atkins as mid-level expense players.

The better managed franchises would have at least 8 high performing players (starters and top reserves, with ratings as discussed above). Among these eight, there needs to be three or four very expensive veterans, three or possibly even four young bargains, and one or more likely two mid-level, high but not super high performing veterans. Quite honestly, no matter how good your general manager and coach are, you are not often going to achieve four high performing young bargains, three though is very doable for franchises such as the Lakers, the Jazz, and the Pistons.

The Nuggets, for their highest performing eight players, featured five very expensive veterans and superstars, just two young bargains, and one mid-level veteran, Najera. They were one one very expensive veteran over the limit and they were one young bargain short.

It seems like such a small, innocent thing, doesn't it: just one player of one type too many and one type of another type too few. But when you make a mistake like this, you are dead meat in the NBA. And now the Nuggets are in danger of becoming a 25-57 type team within a year or two as they go about unraveling their overload of very and ultra expensive (that's you AI, you are the ultra expensive one!) veteran high performers.

In a simple, easy to remember phrase, the economics of managing a NBA team is all about maintaining balance: the balance between expensive and cheap, between older and younger, and between relying on the draft and relying on wheeling and dealing. The less you are balanced in those ways, the worse off you are. The more you are balanced in those ways, the better off you are. You have no choice but to strive for all these balances, due to the cap rules, the salary rules, and the actual player salaries that exist.

What I have done with this article is to combine basketball and economics: salary cap and player salary economics to be exact, and you can bet I will be working on this some more.