Recently, some of the biggest and brightest young stars of the NBA — LeBron James, Dwyane Wade, Carmelo Anthony and Chris Bosh — were offered maximum contracts that would have paid them $80 million over five years, guaranteed. Much to the astonishment of many observers, none of them accepted the offer. In even the most elite circles, that is a lot of money to turn down.
Why would someone refuse a guaranteed $80 million? Well, the answer is obvious when you examine the situation closely. First, it’s not like they declined the offers outright. Each player, except Carmelo, signed three-year deals for approximately $60 million, with a player option for the fourth year. Anthony signed for five years with an option to become a free agent after the fourth year. All are guaranteed to remain rich young men.
By signing a shorter contract, each player is in a position to evaluate the progress of his team. If he continues to play at a high level and the team isn’t improving, he can leave after the three years to sign with another team for even more money, along with the opportunity to switch to a team with a better chance of winning a championship. If his current team is progressing in a manner to his liking, he can choose to remain with it and sign another contract for even more money.
The reality of their decision is that LeBron, Dwyane and Chris are giving up guaranteed money in the $17 million to $20 million range, with the prospect of making up that amount and earning even more should they remain elite players for the next three years. The only real risk is injury and a player can protect himself in that area with a disability policy. Carmelo gets more guaranteed money, but has to wait one additional season before he can sign a new deal. But he also gets protection if he plays poorly or gets injured because his fifth year is guaranteed unless he opts out.
There is precedent for this type of decision making. A few years ago, superstar Tim Duncan was being courted heavily by the Orlando Magic. He chose to sign a three-year deal with the San Antonio Spurs and when he saw the improvement of the team, he decided to remain with San Antonio, signing an even more lucrative contract. Another reason to sign for only three years is because the current collective bargaining agreement with the NBA will expire and you can rest assured that the players’ association will ask for an even bigger piece of the multi-billion dollar pie.
Looking at the contracts from a risk/reward standpoint, these young men can’t lose.