Breaking down the trade bonus

Well, I didn’t get many readers yesterday. So today I will offer this somewhat less stimulating post on the impact of trade bonuses for the technically savvy few who happen to care. After all, in my heart I enjoy helping to explain the intricacies of the salary cap most.

There seems to be a common perception floating around that Turkoglu, after a forgetful season in Toronto, is washed up. The perception is that he is an aging malcontent, whose inflated salary will be a boon the Raptors for the next four seasons. For a man over thirty years of age with just one solid regular season under his belt, it’s reasonable to understand why. But perhaps it’s just a little harsh for man who produced such a wonderful 2009 NBA Finals.

When Turkoglu arrived in Toronto, having turned away the Trail Blazers in his wake, he received a hero’s welcome. And for good reason. He had just completed an NBA Finals run during which he averaged 15.8 points, 4.5 rebounds, 4.8 assists, not to mention his crunch-time leadership, game-winning shot-making and one impressive block from behind on Kobe Bryant. He even the Heat’s own Dwyane Wade pushing to grab him for mid-level money.

Things soured quickly. Turkoglu showed up to training camp overweight and out of shape, and never seemed eager to do much of anything. By the end of the season, he finished with just 11.3 points per game, far and away his fewest over the past six seasons, on just 41% shooting. Turkoglu was unhappy, the fans were booing him, and management was left with the shame at having grossly overvalued him on the free agent market.

The end result wasn’t necessarily an indication of what Turkoglu may be able provide a team next season, if he were to be put in the right situation. But for any of us holding out any lingering hope of acquiring the 6’10” point-forward, I would have you consider his contract.

Turkoglu has 4 years and $43.8 million remaining on his current deal:

2010/11: $9,800,000
2011/12: $10,600,000
2012/13: $11,400,000
2013/14: $12,000,000 (Early Termination Option)

That seems awfully rich considering his (lack of) production. But Raptors general manager Bryan Colangelo made it worse by adding a 15% trade bonus.

A trade bonus is paid to a player when he is traded, but only upon his first trade and not upon any subsequent trades. The trade bonus can be defined as a specific dollar amount, a specific percentage of the remaining value of the contract, or some combination of the two. In any case, the actual amount paid can never exceed 15% of the remaining value of a player’s contract. Most commonly, such bonuses are based upon a specific percentage.

Trade bonuses are intuitively simple to calculate. One need only take all the remaining payments left to be paid on a player’s contract and multiply it by the trade bonus percentage. Note, however, that only base compensation is included in such calculation; any bonuses are ignored. Base compensation in option years are ignored as well.

The effect of a trade bonus on a team’s salary cap position is a bit trickier. The value of a trade bonus is applied to team salary among the remaining years of the contract – excluding non-guaranteed years and years following an Option or ETO – in proportion to the percentage of salary in each of those seasons that is guaranteed.

Trade bonuses are both important and difficult to accommodate when formulating trade scenarios. When a team trades for a player with a trade bonus, it must count the portion of the bonus that applies to team salary in that season as incoming salary. But the team trading away a player with a trade bonus uses the player’s pre-trade salary (without the bonus), when comparing salaries for trade.

Trade bonuses can not be waived, even voluntarily, in almost any circumstance. A player cannot waive a trade bonus just to make his contract look more desirable. A trade bonus can only be waived if necessary to allow a trade to fit within the rules of the Traded Player Exception, and even then only to the extent necessary to make the trade permissible. Such a waiver is at the sole discretion of the player, which essentially gives him veto rights.

Precedent does exist for players agreeing to waive trade bonuses in order to allow trades to meet the rules of trade finance. Kevin Garnett willingly, albeit reluctantly, sacrificed $5.0 million of his $6.75 million trade bonus in agreeing to be traded from Minnesota to Boston in July of 2007. In fact, in Thursday’s trade of Samuel Dalembert from Philadelphia to Sacramento in exchange for Andres Nocioni and Spencer Hawes, Dalembert sacrificed $1.2 million of his $1.9 million trade bonus. Such examples, however, are rare.

If traded, Hedo’s contract will look like this (after applying the rules described above):

2010/11: $11,990,000
2011/12: $12,790,000
2012/13: $13,590,000
2013/14: $12,000,000

As you can see, trade bonuses can be extremely bothersome to teams and can emphatically benefit a player. As such, they’re far from commonplace. Only 34 player contracts in league today contain unexercised trade bonuses.

Despite the contract, rumor has it that Colangelo may have already worked out a trade with an unnamed team to trade Turkoglu on draft day.

By the way…

If I haven’t done enough already to convince you that James Jones will not be traded, consider this. In addition to being the worst and most inexplicable contract offered by Pat Riley over the past three seasons, Jones’ contract also contains a 15% trade bonus.

Incorporating the impact of the trade bonus, if Jones were traded prior to June 30, his cap hit would go from…

2010/11: $4,650,000
2011/12: $4,970,000
2012/13: $5,290,000

to…

2010/11: $5,147,000
2011/12: $5,467,000
2012/13: $5,290,000

While the same buyout amounts ($1.856 million, $1.984 million and $2.112 million over the next three seasons) would apply, the $2.24 million bonus would still need to be immediately paid.The cap hit gets significantly worse after June 30 and, at that point, the buyout option would no longer be available.

Just add the trade bonus to the list of complications that surround Mr. Jones.