The Sixers Should Be Creative When Negotiating Contracts With Their Second Rounders

UPDATE:

Commenter hart ford correctly pointed out the following passage in the CBA FAQ which I had previously overlooked. This relates to annual raises and guaranteed money. Emphasis is mine:

The percentage (4.5% or 7.5%) applies to regular salary, i.e., the player's base salary, not including signing bonuses or anything treated like a signing bonus, and not including incentives. The maximum amount (determined from the base salary in the first season) applies to both the base salary and the total salary (which includes signing bonuses and anything treated like a signing bonus). Because of this rule, certain combinations of signing bonuses and non-guaranteed salary are incompatible.

Because the annual raises in the contract structure must fit even after the signing bonus is included, and because of this a contract with a max signing bonus must almost automatically be guaranteed for its entire term, the contract structure must have a smaller guarantee. The Sixers can still offer a signing bonus, and can structure the contract with rising salaries so that the bonus is as large as possible with 4.5% annual raises (the max allowed when using cap space to sign a player) and still have only the first year guarantee. Because of the rule, the signing bonus max is significantly less than the previous amount noted.

I adjusted the math below to show the updated totals for the example and sincerely apologize for the mistake.

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The 76ers have not announced the signings of second round picks K.J. McDaniels, Jerami Grant, and Jordan McRae. After two very positive performances during the summer, and also after Jerami Grant played too (though I see the potential long-term project there), the Sixers now have to negotiate contracts with the trio.

K.J. McDaniels and Jordan McRae performed admirably during summer league play. McDaniels looked like a potential starter both now and down the line. The athleticism that helped him record more than 2 blocks per game at Clemson showed up time and time again in both Orlando and Las Vegas. His three point shot appeared to translate from the college line to the NBA line, and he showed some ball skills as well. McRae did little else but use his wingspan and height on both ends of the floor to great effect, but his efficiency in a gunner's league showed that he deserves an NBA look as well.

The Sixers will eventually negotiate contracts with all their drafted players. On one hand, Joel Embiid's contract is practically set in stone. The NBA values the contracts of first round picks based on a salary scale - he will sign for 120% of the scale figure in his first year, the maximum allowed by the NBA for a first round pick. The contract term will be for two years with two team options. That negotiation will be pretty straightforward. Meanwhile, Dario Saric will sign a written agreement saying he will not enter the NBA during this season. Those agreements will finish with little effort by anyone.

On the other hand, the three second round selections will have more complicated negotiations. Second round picks do not sign based on a salary scale. Here are some of the most important provisions regarding the signings of second round picks and undrafted free agents:

• Second round picks and undrafted free agents can only be signed with cap space or an exception. Exceptions include the well-known midlevel exception, the bi-annual exception, and the minimum salary exception.
• Minimum contracts signed using the minimum salary exception can only be two years in length or fewer.
• Second rounders who hit restricted free agency after one or two years in the league cannot be signed except for with cap space or an exception. This ultimately leads to poison pill contracts like those offered to Jeremy Lin and Omer Asik two years ago by the Houston Rockets.
• Second round picks and undrafted free agents who hit free agency after 1-3 years of service time are considered restricted free agents. Second round picks who hit free agency after 4 years of service time are considered unrestricted free agents. This was the conundrum that the Rockets faced with Chandler Parsons this summer. Ultimately, they declined a team option to keep him for a fourth year and subsequently failed to match his salary in restricted free agency offered by the Dallas Mavericks.

Since the Sixers have cap space available, they shouldn't be restricted by the rules that govern exceptions. Second round picks that had solid rookie years have taken advantage of that position before, demanding one-year contracts and hitting free agency after just a year. They assumed the risk of a one-year deal and were rewarded in free agency sooner than most players. Lavoy Allen hit free agency after one solid postseason and got a $3 million per year deal. Ryan Kelly got a multi-year contract this summer for being a shooter in Mike D'Antoni's system.

In situations where the team has cap space, especially after strong summer league showings, the player can demand more money, more than a late first rounder's scale would be, especially if his prospects appear to be strong. The value of the contract, the amount of guaranteed money, and the length of the contract are up for negotiation when the team has cap space.

Because of these rules, the Sixers should structure the contract to avoid having issues with the second round restrictions, while McDaniels' side should strive to sign a contract which gives him the greatest potential to make money as soon as possible. And because the Sixers have the salary cap room now to make a large offer without much consequence, there may be an opportunity for both sides to benefit.

While the Rockets ultimately lost Parsons, the contract he had was among the biggest team bargains in the league. It was a shame for Parsons, who was woefully underpaid for so long before Daryl Morey made what I believe was the wrong decision for his team to let Parsons enter restricted free agency. The ability to make that decision, however, is very valuable. And in order to build a team in any league, especially one where there's a salary cap, the team's ultimate goal is to procure the most talent with the least amount of money possible.

For the Sixers, being so far under the cap and without intentions of winning in the short-term, that isn't as meaningful in the current year. But two or three years down the line, that can and should be important.

Following the logic here, the Sixers should try and structure the contracts for second round picks, and really anybody they may sign, to increase flexibility and salary cap space down the line. The draft pick or signee should try to maximize earnings, or maybe get a large downside guarantee. These goals aren't exactly converging.

But there are some ways to come together in the negotiation to make both sides happy. A larger base contract is one the Sixers can afford, and one the player and his agent will push for. But another, more complicated and mostly unknown to the NBA method to use is a signing bonus. Signing bonuses aren't usually discussed in detail in the NBA because large contracts are mostly guaranteed, and bonuses for the purposes of the salary cap are distributed in proportion to that guaranteed money across the guaranteed years of the contract. From Larry Coon's always excellent CBA FAQ:

"Teams are allowed to offer the players they sign a bonus worth as much as 15% of the total compensation. The total compensation includes the signing bonus itself, but excludes any incentive compensation. It also includes seasons following an option or ETO. A signing bonus is paid up-front, but it is charged to the salary cap across the guaranteed seasons in the contract (not including option years or years following an ETO), in proportion to the percentage of salary in each of those seasons that is guaranteed."

Hey, now that seems interesting. The Sixers can pay out a signing bonus in year one and make the rest of the contract non-guaranteed, meaning the entire cap hit for the bonus happens in year one. Year one is this coming season, where the Sixers sit $27 million under the cap. The player can get a decent upfront guarantee and be set for a while if he manages his money well. And if the player performs above expectations, the team can reap the rewards.

So let's stage this contract. Based on what I talked about above, the Sixers should structure the contracts for McRae and McDaniels (and to a lesser extent Grant) so they have:

1. Flexibility after the first year - i.e. no more than a year guaranteed
2. Maximum signing bonus allowed when only one year is guaranteed
3. Three years in standard length
4. Fourth year team option

Now, it's time to do some salary math. And here's where the update comes in and makes the impact much smaller.

In the case of McDaniels, who was at one point projected as a mid-round pick, the Sixers can theoretically offer a contract in the mid-first round salary scale, in the $1.5M range to start. Assuming maximum salary increases to maximize the value of the bonus a total compensation of $4.7025M over three years can be offered with a signing bonus all allocated to the first year.

Due to the bonus rules noted in the update, the maximum amount that a salary can change between years is 4.5% of the base salary of the contract. The base salary is the first year salary with no signing bonus included. Because of this, if the Sixers offered a signing bonus, the most it could be would be the amount that is twice the maximum increase between years one and two of the contract.

The contract would then be structured as such:

Note that the signing bonus is much smaller than in the initial calculation.

The Sixers' salary cap situation still creates a scenario here where the Sixers can pay players more than elsewhere and get creative with how they structure the deals to create upside, which is much harder to do when over the cap. While being comically below the cap isn't necessarily the best thing, the team can make use of that status and better their long-term cap prospects.