Getting Creative With Hassan Whiteside

I have a request. I try to write posts which I believe are unique, in depth and insightful. I hope you agree. I therefore ask that you please not simply copy my work without providing proper credit. It feels rather awful to see my work being exploited. If just you ask, I am more than willing to help out anyone and everyone in any way I can.

A lot of teams talk about how they are a family. Aspire to it. But very few actually live it the way the Miami Heat organization does.

In the sports world of today, the Heat culture is rare. Heat players are nurtured. They are supported. They are disciplined. They remain family members for life (even if, eventually, they move on).

And, sometimes, they are asked to sacrifice personal successes for the greater good — be it with playing time, money, ego, or whatever else is necessary. Heat players have often sacrificed for the benefit of the organization, in ways that few other organizations can claim.

Hassan Whiteside will become an unrestricted free agent this summer. He will undoubtedly be asked to make a sacrifice, a financial one, this summer.

He certainly doesn’t need to comply. After all, he’s about to turn 27 years old. He’s made just $3.3 million thus far during his NBA career. And at least one team, if not multiple teams, will surely dangle maximum money at him. That temptation can be hard to resist.

Nobody could reasonably fault Whiteside for acquiescing. Nobody can reasonably fault any player for seeking out as much earning power as he possibly can. NBA careers are short, and can end in a flash.

But the Heat will face a challenge this summer. Even though the salary cap is projected to rise to $92 million, and even though the Heat will start the summer with just $48 million in guaranteed contracts, finding enough room to allocate to Whiteside as well as Dwyane Wade, Luol Deng and Joe Johnson will be difficult, let alone finding the room to allocate to any potential upgrades on the open market.

The Heat will have more than enough cap space with which to dole out whatever contract Whiteside demands. But with only around $40 million of free cap space, allocation decisions will be both critical and limited. Paying more money to one player could potentially mean sacrificing another.

The question therefore needs to be asked: How can the Heat balance Whiteside’s desire to maximize his earning power with its need to maintain maximum flexibility?

Can the Heat build a contract that accomplishes both needs? Is it even possible? 

At a $92 million salary cap, Whiteside’s max salary for next season would be $21.6 million.

He will be eligible to sign a contract of up to four years in length, no matter where he signs. But league rules provide the Heat a financial advantage over all other teams. It can offer Whiteside higher annual raises than can any other NBA team – up to 7.5 percent of his first-year salary, vs. 4.5 percent for all others.

With a starting salary of $21.6 million, that translates to an estimated total contract value of $96.1 million from the Heat, vs. $92.2 million from every other NBA team.

The Heat could, however, ask Whiteside to take less than the max. It likely will, perhaps pointing to such things as that the team plays in Florida, a state with no income taxes, which provides millions of dollars in tax savings relative to offers made by most other potential Whiteside suitors (approaching $2 million per year on an equivalent $23 million average salary, as compared to the L.A. Lakers). But while such a strategy would clearly help Miami maintain maximum flexibility, it doesn’t necessarily maximize Whiteside’s earning power.

The Heat could, alternatively, ask Whiteside to forgo a max contract this summer and instead sign a two-year contract at a below-market salary, with an opt out after one year which would establish his full Bird rights as a free agent in the summer of 2017. Miami could then sign him to a long-term contract in 2017, when the cap is expected to explode higher from $92 million to a record $107 million. At that point, he’d be eligible for a five-year contract with the Heat, with an estimated starting salary of $25.3 million and a total value of $145 million.

Rather than shoot for his $96.1 million right now, would Whiteside accept, say, $XX million [replace the “XX” with whatever number you want] this summer in exchange for a (technically illegal) promise of a full five-year, $145 million deal next summer?

There are inherent risks to Whiteside in accepting such an arrangement.

If he gets seriously injured next season, he could wind up getting none of that $145 million (beyond the limits of the second-year salary to which he would then opt in). And spanning the time from now until that $145 million could be secured is a potential lockout, during which the projected $107 million 2017-18 salary cap (and, with it, maximum salary figures) could increase or decrease, and rather substantially at that.

The safe bet for Whiteside would be to eliminate all risk by locking in his long-term deal this summer.

If that’s his choice, the Heat may need to get creative in its attempt to maximize Whiteside’s earning power while still maintaining a certain degree of flexibility.

How can the Heat do that? Let’s take a look.

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With a starting salary of $21.6 million, Whiteside could earn as much as $96.1 million over four years from the Heat, vs. $92.2 million over four years from every other NBA team.

The $3.9 million difference, nearly $1 million per season, represents a substantial financial benefit for the Heat organization.

Therefore, if Whiteside ultimately bases his free agency decision on pure economics, the Heat could simply outbid all other NBA teams if it so chooses.

But what if, in the spirit of sacrifice, Whiteside would instead be willing to pass on the extra $3.9 million? What if, instead of pursuing the absolute maximum of $96.1 million which the Heat could potentially offer, he instead took the equivalent of the $92.2 million maximum all other NBA team can offer?

That could still be perceived as essentially the equivalent of a full maximum contract, couldn’t it? But since the Heat has the ability to offer higher annual raises, it could nonetheless start with a lower than maximum first-year salary.

The lowest possible first-year salary would be calculated as: $92.2 million / (4 + 0.075 x 6) = $20.7 million.

The Heat, therefore, could potentially offer Whiteside the same $92.2 million “maximum” salary that can any other NBA team, but with a reduced $20.7 million starting salary. In doing so, Miami could save itself $874K in cap space for the 2016-17 season.

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Perhaps that seems like a reasonable concession, if not an altogether material one for the Heat organization.

By leveraging an intricate salary cap loophole, however, the Heat could potentially increase its cap savings even further. Only this time, it could be substantially bigger. And it could come at essentially no cost to Whiteside!

How is that possible? By offering Whiteside the same $92.2 million, but with a portion of it subject to a performance bonus.

Performance bonuses are classified by the NBA as either “likely to be achieved” or “not likely to be achieved.” The distinction is critical because likely bonuses are included in the player’s salary (and thus count toward a team’s maximum available cap space), but unlikely bonuses are not.

With a bit of creativity, the Heat could therefore effectively increase its total cap space beyond the limits of the $92 million salary cap by offering Whiteside a contract that contains a bonus which is deemed by the NBA as “unlikely to be achieved.” In such a case, the bonus portion of the contract would not count against the salary cap (but still be paid out if it is ultimately earned), freeing up that cap space to be spent elsewhere!

The NBA determines whether a bonus is deemed likely or unlikely to be achieved based on whether the criterion was achieved in the previous season. For example, if a player had seven assists per game in 2015-16, then a performance bonus for 2016-17 based on seven assists per game would be classified as “likely to be achieved” (and included in the player’s salary), but a bonus based on eight assists per game would be classified as “unlikely to be achieved” (and not included in the player’s salary).

It should be noted, however, that the CBA also gives both the NBA and players association the right, if either party feels that the performance of the player and/or his team during the immediately preceding season does not fairly predict the likelihood of the player earnings his performance bonus in any year of his new contract, to request that a jointly selected basketball expert determine whether the bonus should be treated as likely or unlikely to be received. The expert, after hearing the facts, would then make a final ruling.

Historically speaking, the NBA rarely exercises its right to challenge the manner in which a bonus is treated, instead choosing to allow the standard methodology (i.e., the player’s or team’s prior season performance dictating the treatment for the coming season) to make the determination as to whether it will be considered likely or unlikely to be achieved.

There is, however, one very notable exception.

Former Commissioner David Stern, in one of the most heated and controversial decisions ever made by an NBA commissioner, in perpetrating what some would say was a personal vendetta against a team (the Miami Heat), an owner (Micky Arison) and a general manager (Pat Riley) he did not very much like, in 1996 challenged the manner in which $2.5 million in performance bonuses to be allocated to PJ Brown and Tim Hardaway were to be treated.

The bonuses in question were to be granted by the Heat if Miami were to win either 27 or more home games or 43 or more total games in the 1996-97 season, a level the team did not achieve in the season prior (nor, for that matter, had it ever achieved in its entire existence as an NBA franchise). Stern, however, decided that the Heat would be a better team in 1996-97 than in the previous season, and thus asserted that the $2.5 million in bonus money should be re-classified as likely to be achieved.

It was a stunning decision that shocked the Heat to its core, a decision which was made a full two weeks after the contracts of Brown and Hardaway as well as the subsequent contract of free agent Juwan Howard had all already been officially executed, and despite the Heat organization having checked with the league office to confirm how these $2.5 million in bonuses would be viewed by Stern prior to the execution of any of the three contracts. The league office, apparently, simply changed its mind. And it had enormous consequences. The bonus reclassification effectively reduced the Heat’s available cap space by $2.5 million, which in turn caused Howard’s contract, in the NBA’s determination, to exceed the team’s available cap space. On that basis, the NBA voided Howard’s contract.

That decision set off a firestorm of reaction on both sides, including legal action by Riley — who petitioned the courts for an injunction, which was granted — and CBA-altering rule changes by Stern — who came to agreement with the players association before the issue could be heard by a jointly-selected expert that if a player signs a second contract after his first deal has been disapproved by the league office, the second contract is the valid one.

Howard leveraged Stern’s new agreement to sign a second contract, this time with the Washington Bullets, which, in turn, effectively made any arbitration hearing moot. Stern essentially bullied the Heat organization into losing Howard without ever even allowing the case to be heard by an independent arbitrator in accordance with league rules.

The controversy serves as a clear indication to Riley that for any bonus he might choose to allocate to Whiteside, it will need to be considered as unlikely to be achieved, so much so in fact that Commissioner Adam Silver will have no reason to object.

But that, in turn, creates a problem for Whiteside: Why would Hassan ever agree to replace what would otherwise be guaranteed salary with a bonus that would be considered by Commissioner Silver as unlikely to be achieved?

This is where Whiteside’s situation is somewhat unique.

There is one potential avenue off of which a bonus can be based which the NBA would seemingly determine is unlikely to be achieved, and still be likely to be achieved in practical reality: minutes per game played.

Whiteside averaged 29.1 minutes per game this past regular season, the most ever in his four-year career.

What if the Heat, as part of its $92.2 million “maximum” contract offer, designed a bonus to be paid if Whiteside were to average, say, 30 minutes per game (over a course of at least, say, 50 games played)?(1)

Whiteside did not reach that level during the 2015-16 regular season. The standard rule would therefore dictate that such a bonus would be unlikely to be achieved, and the NBA would seemingly have no basis upon which to overturn it. This is particularly true in consideration of the playoffs, during which teams naturally choose to play their best players abnormally large minutes, while Whiteside averaged the same 29.1 minutes per game played (impacted, to a degree, by multiple overtime periods as well as an early-game injury).

And yet, it nonetheless feels as if Whiteside will surely average at least 30 minutes per game in future seasons, with the Heat now perhaps finally beginning to realize that it can build its team around its budding star.

All performance bonuses are re-evaluated at the start of each season to determine whether they should be classified as likely or not likely to be achieved. So, if he gets his 30 minute average next season, such a strategy would have no impact on cap space scenarios beyond next season. But it would have a very real, and potentially very large, impact on the Heat’s available cap space for the 2016-17 season.

How much of an impact?

Unlikely bonuses in any season are limited to 15 percent of the player’s total salary in that season. A $92.2 million contract could therefore contain up to $13.8 million in unlikely bonuses.

So: $92.2 million total contract value – $13.8 million in unlikely bonuses = $78.4 million in base salary.

A contract that pays out $78.4 million in base salary could start with a first-year base salary of just $17.6 million.

By utilizing this approach, then, the Heat could lower the first-year cap hit of a $92.2 million “maximum” contract from $20.7 million to $17.6 million, a cap savings of savings of $3.1 million!

This type of maneuverability seems too good to be true, as if the Heat would be perpetrating a scheme that would effectively be bending (if not outright breaking) the salary cap rules. But would it be?

Absolutely not!

Despite the fact that this is almost never done in NBA circles, it is all perfectly legal, thanks to an intricate loophole in the cap rules related to bonus payouts.

The CBA contains detailed and explicit rules specifically designed to reduce the likelihood of this very thing. But the rules only reduce the possibility, not eliminate it. It is this weakness that the Heat (and all NBA teams, if only they have the creativity and vision to do so) could exploit.

Follow the following explanation closely: NBA rules state that the base salary, any likely bonus, and any unlikely bonus in the first season of any new contract – and not only the contract in question, but all new contracts – must all fit within the confines of the team’s salary cap (or exception) for the contract in question to be legal. Which, seemingly, eliminates the possibility.

But here’s the thing: the rule only applies at the point the incentive-laden contract is signed.

As long as the first-year salary  in any new contract(s) fits within the confines of the salary cap when including any unlikely bonuses at the point the contract is officially executed, the contract would be legal. The first-year salary would thereafter exclude the unlikely bonus for purposes of the salary cap. In short, any unlikely bonuses in any new contract to Whiteside would not reduce the team’s total available cap space, as long as the official execution of all of the Heat’s new contracts for this summer are ordered correctly.

Therefore, if the Heat were to order the official signing of its contracts correctly – an easy task, to be sure – it could effectively increase its available cap space by $3.1 million!

What would be a $92 million salary cap for all other NBA teams would effectively be a $95.1 million salary cap for the Heat!

And it’s all legal!

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Combine both strategies together and you get: $874K in cap savings + $3.1 million in cap savings = $4.0 million in total cap space saved.

With a bit of creativity, and a bit of a concession from Whiteside, the Heat, then, can save itself as much as $4.0 million of cap space in doling out a potential “maximum” contract with a base salary starting at $17.6 million and annual unlikely bonuses starting at $3.1 million.

Here is how Whiteside’s salary payout would break down under each potential scenario:

Is all of this likely? No.

Is it possible? Yes.

Would Whiteside be willing to accept? While the strategy would pay out up to the full max $23.0 million per season average ($92 million total) that all other NBA could offer, it would guarantee Whiteside as little as $19.6 million per season ($78 million total), with the remaining $3.4 million per season ($13.8 million total) to be obtained only if he hits his 30-minutes-played-per-game benchmark each season. That’s a lot to ask of any man.f

The Heat, however, has been known to ask, and get, such things from its family members.

Notes:

Neither of the two scenarios enclosed herein are all or nothing propositions. The Heat and Whiteside could agree to either (or both) approach but with a lesser salary drop/re-allocation. 

(1) It doesn’t need to be 30 minutes per game. Perhaps you like the approach but feel 31 or 32 minutes per game would be less controversial. The goal is to find the smallest number for which the league office would not have an issue considering unlikely to be achieved, thus making it more easily obtainable for Whiteside.