Breaking Down Russell Westbrook’s Complex Situation

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Two months ago, the Oklahoma City Thunder were positioned to perhaps consider themselves the best team in the NBA. They had pushed the defending champion and all-time regular season winning percentage record-holding Golden State Warriors to brink of elimination in the Western Conference Finals, with a home game among three opportunities to close the deal. A single win in three chances, followed by a series win versus a Cleveland Cavaliers team against whom they were projected to be favored, and the Thunder would be NBA champions for just the second time in franchise history, and the first since 1979.

Things didn’t work out as planned.

The Warriors went on to eliminate the Thunder in seven games. A short time later, Kevin Durant went on to join the Warriors, leaving Russell Westbrook and the Thunder to pick up the pieces.

Westbrook is set to become an unrestricted free agent next summer. With the balance of power in the Western Conference dramatically shifted, if a return trip to the NBA Finals is a priority, he may not want to remain in Oklahoma City.

The concept has sparked a fire-storm of speculation about a potential trade, which would at least allow the Thunder to avoid losing two top five NBA players to free agency in the span of a single year without receiving back anything in return.

The ability of Westbrook to leave in free agency next summer, however, is just as problematic for a trade partner as it is for the Thunder. If Westbrook were to leave the following summer, the trade partner would not only lose him without receiving back anything in return but also sacrifice the assets it took to acquire him. To that end, if a trade partner is to risk the type of assets the Thunder will demand for him, it is likely to demand that Westbrook agree to an extension.

The Thunder, for their part, haven’t given up hope of retaining their star point guard either. In fact, it’s very much the opposite. They, too, are positioning to offer Westbrook an extension that would provide the certainty required to build the team’s future around him. And they could make it quite tempting.  

Heading into the 2016-17 NBA season, extensions for veteran players had all but vanished for several years — the result of changes to the league’s Collective Bargaining Agreement that make it more beneficial for players to finish out their existing contracts and enter free agency thereafter, even if they planned to re-sign with their prior teams.

The rapidly rising salary cap – which has reached an all-time record $94.1 million this season, a whopping 34.5 percent increase from $70 million in 2015-16 – has, however, created a short-term opportunity for teams to leverage intricate salary cap rules to offer key players extensions that, in some cases, can be too tempting to pass up.

Many teams are finding themselves with more salary cap space than quality free agents on which to spend it. For these teams, that cap space can be used to simultaneously renegotiate and extend the contracts of its own key players, giving them more up-front money in exchange for more seasons under team control.

Contract renegotiation is a concept largely attributed to various other sports. Only very rarely do they occur in the NBA. They can only occur on or after the third anniversary of the original date of signing of the contract (or extension or renegotiation), and they can only increase a player’s salary. To do so, a player’s team must have salary cap space to cover the full amount of the proposed increase.

Westbrook is set to make $17,769,374 this season, in the final year of his contract.

Though he signed a “maximum” five-year extension in January 2012 that runs through the 2016-17 season, the subsequent jump in the salary cap means that he will earn far less than what his maximum salary would otherwise be this season.

Maximum salaries are calculated based on a percentage of the salary cap. There are three levels, depending upon a player’s tenure:

  • A player with 0-6 years of experience can make up to 25 percent of the salary cap
  • A player with 7-9 years of experience can make up to 30 percent of the salary cap
  • A player with 10+ years of experience can make up to 35 percent of the salary cap

Westbrook is currently an eight-year NBA veteran, which would qualify him for 30 percent of the cap, or $26,540,100.

How big is that $26,540,100 max salary figure?

A whopping $8,770,726 bigger than what he is currently set to make.

The Thunder, as well as various potential trade partners, possess (or can create) the necessary cap space to accommodate a potential increase in salary for Westbrook that large. And with more than three years having passed since the January 2012 signing date of his extension, his contract qualifies to be renegotiated.

Westbrook would surely love to get it. And the Thunder – currently with 14 players under guaranteed contract, and still an estimated $4,563,539 below the salary floor and with as much as $14,017,475 of cap space (after accounting for the team’s unsigned first-round draft pick, Domantas Sabonis) – could certainly give it to him. But neither the Thunder nor a team to which he would be traded is likely to do so without an extension.

The question then becomes: Would Westbrook agree to a renegotiation of his salary, if he is required to extend his contract in order to get it?

Like the Rockets recently with James Harden, the benefit of choosing such a route not only rewards the player financially but also the team. Harden, who was set to become a free agent in 2018, is now signed to a max contract that reflects the new TV money but is also making a longer commitment to the Rockets.

The dynamics of Westbrook’s situation, however, are far different from those of Harden.

Westbrook would earn significantly more money next season with a renegotiation and extension, but he would actually lose money in every subsequent year of his extension relative to what he could get as a free agent. How much he would lose in each subsequent depends upon three primary factors: (i) whether he signs that renegotiation and extension with the Thunder or with a trade partner, (ii) where maximum salaries settle out for next season, and (iii) how long of an extension he signs.

Below is a season by season breakdown:

Salary for the 2016-17 Season

Current salary (no renegotiation and extension): $17,769,374
Renegotiated and extended salary: $26,540,100

Salary for the 2017-18 Season

If Westbrook were to sign a renegotiation and extension with the Thunder, he would be eligible for a salary in the first extended year equal to 107.5 percent of his renegotiated salary for this season, or $28,530,608. If he instead signs with a trade partner, he would be eligible for a salary in the first extended year equal to just 104.5 percent of his renegotiated salary for this season, or $27,734,405(1).

If these figures ultimately prove higher than the maximum salary he could achieve as a free agent next summer, they would be amended downward accordingly. However, a player’s maximum salary in the first year of his extended term can be no lower than 105 percent of his salary in the prior season. Therefore, the lowest possible payout for an extension signed with the Thunder would be $27,867,105, and since the maximum possible payout with a trade partner is already below that figure, $27,734,405 with a potential trade partner.

If Westbrook were to play out his existing contract and sign as a free agent next summer, his maximum potential payout for the 2018-19 would be dictated by the maximum salary rules. At current salary cap projections of $102 million, Westbrook’s maximum salary would be an estimated $28,795,200. That’s higher than what he could earn in an extension, if only slightly. But things could change, and rather substantially.

The league’s current $102 million cap projection should be considered tenuous at best.

Both owners and players have the right until December 15 to opt out of the current Collective Bargaining Agreement, which would take effect following the 2016-17 NBA season.

While NBA owners love the current deal, which reduced the share of revenues allocated to players from 57 percent to the current 51 percent, players are naturally less thrilled. As a result of the shift, players have surrendered $1.5 billion over the past five years (an amount which figures to grow rapidly). They feel like they made significant sacrifices when the NBA was claiming poverty, and now that profits and franchise values are soaring, they’re likely to want some back. If they are successful in getting some back, it could increase future salary cap levels even more.

Every percentage point they get back would cause a $2 million increase in the salary cap and, in turn, a roughly $600K increase in Westbrook’s maximum salary.

On the other hand, the league’s current adjustment mechanism which has and will continue to artificially prop up salary cap levels due to owners’ inability to keep pace with rising revenues in the contracts they dole out to players, could potentially be re-worked or even eliminated, which would decrease future cap levels considerably.

The adjustment mechanism is currently propping up the 2017-18 salary cap by $6.7 million. If it is eliminated entirely, the cap could fall from $102 million to as low as $95 million and, in turn, reduce Westbrook’s maximum salary to as low as $26.8 million.

By not locking in his 2018-19 salary via extension, Westbrook would therefore be taking a risk. His maximum earning power would be tied to whatever new rules could be put in place. However, it is more likely (in my humble opinion) that maximum salaries will stay constant or increase than decrease, potentially making it a risk worth taking. Signing an extension, therefore, carries a significant amount of downside if max salaries increase with the new Collective Bargaining Agreement to come.

Salary as free agent (no renegotiation and extension): $28,795,200 (projected, but could go higher or lower)
Renegotiated and extended salary (with Thunder): $28,530,608 (and no lower than $27,867,105)
Renegotiated and extended salary (with trade partner): $27,734,405 (fixed)

Salary for the 2018-19 Season

If Westbrook were to sign an extension that lasts longer than one additional season, he’d start to lose his bigger money relative to what he could get as a free agent.

Raises in subsequent seasons of an extension would be limited to 7.5 percent of Westbrook’s 2017-18 salary, or $2,139,796 per season, if he renegotiates and extends with the Thunder, and just 4.5 percent of his 2018-19 salary, or $1,248,048 per season, if he renegotiates and extends with a team to which he is traded(1). That, in turn, produces projected payouts of $30,670,403 in an extension signed with the Thunder, and $28,982,453(1) otherwise.

If Westbrook were to play out his existing contract and sign a one-year deal similar to that of Kevin Durant as a free agent next summer, he would again become a free agent in the summer of 2018. At that point, he would be a 10-year veteran, eligible for a far higher maximum salary equal to 35 percent of the then-current salary cap. At current cap projections of $108 million, that equates to roughly $35,482,650.

At this point, most of the financial benefit from having signed the extension would be gone.

Of course, nothing prevents Westbrook from attempting to negotiate for just a single-year extension. Doing so, would cause him to become a free agent prior to the 2018-19 season.

As a free agent, Westbrook would likely lock in a long-term contract with that $35,482,650 salary. He would have full Bird rights (max annual raises and contract length) if he remains with the Thunder, Early Bird rights (max annual raises but shorter contract length) if he plays with the same non-Thunder team for the prior two seasons, and either Non-Bird rights or no Bird rights (shorter annual raises and contract length) otherwise.

The implication?

If Westbrook signs a renegotiation and extension, wither with the Thunder or to a team to which he is traded, it will likely include just one additional extended season (with a player option for a second extended season he will almost certainly ultimately decline). At that point, he’d be an unrestricted free agent in the summer of 2018, with full Bird rights ensuring he can get his full 35 percent maximum salary (a projected $35,482,650).

If Westbrook plays out his existing contract, he will likely sign a one-year deal next summer (with a player option for a second season he will almost certainly ultimately decline). If that one-year deal should be with the Thunder, he’ll have full Bird rights at the end of it to guarantee he will be eligible to get his full 35 percent maximum salary. But if that one-year deal should be with another team, and he wants nothing short of the highest possible payout in the years to come, he needs to choose a team which will have cap space not only to accommodate his maximum salary for next season (a projected $28,795,200) but also for the 2018-19 season (a projected $35,482,650). Otherwise, his team could still exceed the salary cap to re-sign him, but only to a contract with a starting salary that is 20 percent larger than his salary in the prior season. Instead of getting his projected $35,382,650, he’d only be able to get as much as $34,554,240 with that same team (versus the full max he could get with a team that does have the necessary room). Of course, that’s not a hugely substantial difference ($828,410), which in turn could mean that he could evaluate the 30 NBA teams in free agency next summer and sign a one-year contract (with a player option for a second) with the team of his choosing, without having to worry too much about the subsequent contract.

Salary as free agent (no renegotiation and extension): $35,482,650 (projected)
Renegotiated and extended salary (with Thunder): 30,670,403 (and no lower than $29,957,138)
Renegotiated and extended salary (with trade partner): $28,982,453 (fixed)

Salary for the 2019-20 Season

If Westbrook signs a renegotiation and extension with a trade partner, the amount of years added to the contract cannot exceed three, including what is currently left on the contract(1). Therefore, by rule, the extension would be over by this season (if not before).  If the extension lasted the full two additional years, he would be a 30-year-old unrestricted free agent with Bird rights, free to pursue the long-term contract of his choosing at the highest maximum salary tier. At current cap projections of $109 million, that equates to roughly $35,752,850. He would likely seek to lock in a long-term contract at that starting point. If he remains with his prior team, he would have full Bird rights. If not, he’d have no Bird rights.

If Westbrook signs a renegotiation and extension with the Thunder, the amount of years added to the contract cannot exceed four, including what is currently left on the contract. The extension could therefore extend through the 2019-20 season. If so, the contract would qualify for a $2,139,796 raise, to as much as $32,810,199.

However, given the wide disparity between the payout under an extension and the payout as a potential free agent, it is almost impossible to believe that Westbrook would agree to an extension that lasts this long. If the extension lasted two additional years, also unlikely (as noted above), it would leave him as the same 30-year-old unrestricted free agent with full Bird rights trying to pursue a maximum contract with a starting salary of $35,752,850 as above.

If Westbrook will have locked in his long-term contract as a free agent in 2017-18 (whether by pursing a renegotiation plus single-season extension or by playing out his existing contract and signing a follow-up one-year deal), he would be eligible for a raise between 4.5 percent and 7.5 percent depending upon whether or not he has Bird/Early Bird rights, which equates to $37,079,369 and $38,143,849, respectively.

***

On the surface of things, the entire concept of Westbrook signing a renegotiation and extension would appear to be about him receiving an extra $8,770,726 in salary this season. If he doesn’t care about that money, choosing instead his freedom, then an extension may not make sense.

But it’s could potentially be about more than just that.

It could be about protecting his Bird rights as well, and that could have a substantial benefit when he signs his subsequent contract down the road. If he wants to protect his Bird rights, he either has to re-sign with the Thunder next summer or he has to be traded (as Bird rights transfer in potential trade scenarios) this season. And if that potential trade partner, in exchange for the substantial assets it will sacrifice to acquire him, conditions the trade on Westbrook’s willingness to sign a renegotiation and extension, the concept of him signing and extension could make increasing sense.

It could also be about timing. In two years, Westbrook becomes a 10-year veteran capable of extracting the highest maximum salary tier. If he waits any longer than that to sign his long-term contract, he will at that point be at least 30 years old — for a player who has historically been injury prone, and whose game is predicated on his supernatural athleticism.

***

So… Should Westbrook ultimately agree to a renegotiation and extension?

Well… It depends upon whether he knows now where he would like to play in the future.

Play with the Thunder

If Westbrook wants to remain with the Thunder for two more seasons, it would make a lot of sense to sign a renegotiation that included an extension, in order to collect that $8,7790,726 additional payout this season.

Westbrook would look to sign an extension that adds only one additional year (with a player option for a second as protection against injury), and sets himself up to become a free agent as a 29-year-old, 10-year veteran in the summer of 2018.

If he can’t get a renegotiation that increases his current year salary to the max and adds just one additional year to his deal, he may be better served simply playing out his existing contract and re-signing with the Thunder on a one-year deal next summer than locking in two additional years in an extension. While he might still achieve a slightly higher payout with the extension, the latter alternative would provide him more flexibility with which to evaluate his rebuilt team.

Westbrook would almost surely not sign an extension that locks in three additional years, no matter what the circumstance. While he wouldn’t necessarily be losing too much money relative to the free agency option, it would make him a 31-year-old by the time he could lock in his final, long-term contract. That’s a huge risk he’s unlikely to be willing to accept.

Play Elsewhere

If Westbrook knows where he wants to be long-term and that team isn’t the Thunder, matters get more complicated.

That team is likely to demand Westbrook sign an extension, in order to justify sacrificing assets in trade for him.

That team would also need to have at least the $8,770,726 in cap space necessary to renegotiate his current salary up to the maximum – a group that, as of now, includes the Boston Celtics, Brooklyn Nets, Denver Nuggets, Los Angeles Lakers, Minnesota Timberwolves, Philadelphia 76ers, Phoenix Suns and Utah Jazz.

The first question then becomes: Is the team for which Westbrook knows he wants to play for multiple years on that list?

If not, Westbrook would need to sign his renegotiation and extension with the Thunder, and then be subsequently traded to the team to which he wants to play. That, in turn, would increase the number of potential suitors for Westbrook which, in turn, would mean that the Thunder could negotiate the parameters of a potential trade with all 29 other teams.

If even Westbrook would ultimately agree to a renegotiation and extension, whether he would do so with the Thunder prior to being traded to the team for which he ultimately wants to play remains to be seen. By rule, the two transactions could not be connected.

If so, he would also need to take caution in the extension he does sign. If the first year of the extended term calls for a salary higher than 104.5 percent of his renegotiated season, or if the raises in the subsequent season are greater than 4.5 percent of the first year of the extended term, or if the total extended term exceeds two seasons, he would need to wait six months to be subsequently traded. With the trade deadline set for February 23rd, he would need to sign his renegotiation and extension with the Thunder by August 23rd.

If the team to which he wants to be traded can be persuaded to trade for him, the second question becomes: Can he negotiate an extension he wants?

Westbrook will be incentivized to push for just one extended season – setting himself up to become a free agent with full Bird rights as a 29-year-old, 10-year veteran in the summer of 2018.

If he agrees to an extension that adds the maximum two additional years(1), most if not all of the benefit from having signed the extension will be gone (and, if future salary cap levels increase, he could actually wind up losing money relative to not having signed an extension), and he would hit free agency as a 30-year-old, 10-year veteran in the summer of 2019.

But what if a trade partner would only be willing to acquire him if he agree to extend for two additional years?

The next question for Westbrook would then become: Does he think he – a player whose game is predicated on his supernatural athleticism, and who has been injury prone – will be able to maintain health, and extract a full maximum contract then?

It’d be a stakes gamble with a potential massive payoff.

If he feels he could, despite having surrendered nearly all of the benefit of the renegotiation due to the long length of the extension, it  could still be a worthwhile decision just so that he maintains his Bird rights with his new team. That could add an additional season to his subsequent long-term contract, at a rate which figures to be, at current projections, upward of $46 million. But it’d be a substantial risk.

Therefore, as was the case if he were to do so with the Thunder, Westbrook would be incentivized to sign a renegotiation only if it included a single-year extension (with a player option for a second as protection against injury).

Undecided

If Westbrook is unsure where he wants to play over the longer term, an extension makes limited sense. Tying himself for multiple years to a team for which he is not absolutely sure he wants to play, despite the potential loss of $8,7790,726 for this season and Bird rights for a subsequent contract, may not be in his best interest from a personal perspective. Life, such as it is, is not entirely about maximizing one’s financial outcome.

***

So… What does it all mean?

If Westbrook is not committed to staying with the Thunder beyond this season, a renegotiation and extension may not make sense (if for no other reason than because there are no teams to which he likely knows know that he wants to commit for multiple seasons). That, in turn, would be good news for a wide range of teams, including the Miami Heat, who still hold out hope he will take a meeting with them in free agency next summer.

If Westbrook is willing to entertain the notion of a renegotiation and extension, it will likely only be with the Thunder, and he will surely push to sign one that includes an extension of just one additional season (with a player option for a second season as protection against injury). His payouts would look as follows:

2016-17: $26,540,100 (an $8,770,726 increase)
2017-18: $28,530,608 (estimated, but no lower than $27,867,105)
2018-19: $30,670,403 (estimated, but no lower than $29,957,138, and subject to a player option)
Total: $85,741,111 (estimated, but no lower than $84,364,343)

Notes:

(1) If Russell Westbrook were to sign a renegotiation and extension to a team to which he is traded, he could extend the contract for up to two additional years, with annual raises in the first extended season of up to 104.5 percent of his salary in his renegotiated season, and annual raises thereafter of up to 4.5 percent of the first year of the extended term, as opposed to the three-additional years and increases in each case of up to 7.5 percent with the Thunder. If, however, the team were to wait six months from the date of the trade to sign the renegotiation and extension, however, it could provide the higher annual raises and longer term. In that case, all of the extension payouts described herein for a potential trade partner would be equivalent to those of the Thunder.

But there would be several issues with so doing: 

First, it would need to hurry. Six months already puts the team to the end of January. Renegotiations can’t be signed after the last day in February. So Westbrook would have a one-month window from now to be traded.

Second, a team would need to roll the dice that Westbrook would sign the extension in sixth months time. During that six months, Westbrook would be evaluating whether or not he wants to be locked in. 

Third, all parties would need to swear, under penalty of perjury, that the future renegotiation and extension was not agreed to at the time of the trade. 

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