Day #65: Contract Negotiations

(WSJ) The National Basketball Federation is in an uproar today after the financial collapse of the Vegas Texans. The NBF had distinguished from other professional sports leagues due to its unique compensation structure. Seeking to alleviate union-owner contract disputes, the NBF was formed with teams as Limited Liability Corporations.

Players, instead of earning straight salaries, could also earn ownership positions through share grants that would vest based on a flexible variety of conditions. For example, a marque player might be drawn in with a strong ownership position and kept with long-term vesting rights based on key performance metrics. As a member of a successful team, such a player would naturally be enriched by the team’s success. Long-term, due to their ownership stakes, players had an interest in teams and their communities even after retirement.

To blunt the market limitations faced by small-market teams, all teams would share 50% of its profit (or loss) with the league . That profit or loss was then distributed evenly to all teams.

“It changed the entire equation,” explains sports finance guru Ned Callahan, “Instead of head-to-head combat between players and owners – and instead of one-size-fits-all contract types that were incapable of adjusting for circumstance, players themselves became the team owners.”

Initial public reaction to the plan was position. As Callahan explains, “Many only saw benefits. Players wouldn’t sit on their heels once they had their fat contracts and they wouldn’t jump ship for the next dollar. Fans could cheer for players and teams knowing they were the exact same thing.”

Players themselves greeted the change positively. Among other benefits, Forward Brendan Jones shared an unexpected side benefit, “Suddenly, if I’d always wanted to play alongside my best friends, I could.”

Teams developed unique cultures as players learned to balance earnings with a spirit of partnership. For the most coaches, GMs and team presidents remained in their prior roles. But they reporting changed. All reported to boards staffed by player’s representatives. To maintain effectiveness, their activities were not micromanaged. Instead, the boards could elect only to hire or fire them – not to direct their individual decisions. This has left coaches with remarkable, consensually accepted, authority.

Of all the positions, the role of GMs has changed the most. Rather than seeking to draft and trade players, GMs worked to attract talents and with with players and other GMs to find mutually attractive swaps for board approval. Players who agreed to be traded could often swap ownership positions and vesting plans and interests. This sort of setup reduced trade volumes, but created trades where every party felt they could benefit.

Despite the promise of the new model, cracks soon appeared. Players sought to pad stats for reward rather than play for wins. It proved remarkably difficult to align player and team incentives. And despite league profit sharing, some teams had better owner-players than others. They recognized the value of continuity, they had civil and productive board discussions, they hired officers intelligently, and they were committed to their teams standing in the communities they represented. Because of this, the value of the franchise and its ownership stakes, rose. Top-tier players, interested in a winner, more readily came aboard. Other teams were less successful. Their disputes became public and fans turned away. They sunk and tried to bring in talent with heavy cash rewards – but the talent lacked the drive they might have had on better teams.

Now, after six years, the first team is going bankrupt. The Las Vegas Texans (named after the poker game) displayer extremely poor management – leveraging their league revenue stream, they spent heavily to attract coaches and players to revitalize the franchise. But those players used the team only to showcase their individual talents. The best took their money and quickly moved on.

And the fan base turned away.

The failure has pundits of all stripes weighing in. Some decry the model, suggesting players aren’t smart enough to govern themselves. Others call for a league rescue and takeover – as the loss of a team, and the revenues due to that team, could threaten the league itself. Still others praise the outcome, claiming the market has correctly culled a team that was terribly mismanaged.

For their part, fans are enraged. As fan union representative Andy Burns explains, “The greed and short-sided setup of the league has threatened all lovers of basketball, depressed children and adults alike and undermined hope itself. There has to be another way. Perhaps fans can own the teams.”

At the moment, the league, governed by representatives of the various teams, is debating what to do.

For the players, fans and staff, nothing is certain.