Episode 427: LeBron James Is Underpaid

Jan 4, 2013
Originally published on January 7, 2013 4:10 pm

LeBron James, the best basketball player in the NBA, makes $17.5 million a year. He is the most underpaid professional athlete in the world today.

On today's show, we explain why LeBron is getting hosed — and why that's probably a good thing for NBA fans, team owners, other pro players, and even LeBron himself.

Music: Jay-Z's "Gotta Have It" and G. Love & Special Sauce's "Shooting Hoops." Find us: Twitter/ Facebook/ Spotify/ Tumblr. Download the Planet Money iPhone App.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.


Hey, Taylor, check this out. You remember this?



Yeah. It's LeBron James, and it's the 2012 NBA finals.

BLUMBERG: Right. And I should say, Taylor, you're our intern here at PLANET MONEY. And we have teamed up on today's podcast about the NBA - oh, wait. Here's the moment.


MIKE BREEN: James drives on the ramp, falls down. Fisher picks it up.

TEPPER: So LeBron James - he slips and twists his ankle. This is Game 4 of The Finals, the fourth quarter. And he has to leave the game. He's just - he's out of the game.

BLUMBERG: And then with just 3 minutes left, the score is tied.

TEPPER: He's limps back on the court.


BREEN: Tries a three - bang. LeBron James from downtown.


BLUMBERG: (Laughter) That was such an amazing moment.

TEPPER: It's unbelievable.

BLUMBERG: He was so good that series. I mean, he was just unbelievable. He had like, he averaged, like, 30 points a game. He had all these assists. It was just an incredibly dominant performance. And, of course, they went on to win the entire series. He was the MVP.

TEPPER: Right. And even if you're not a sports fan, you probably know about LeBron James. He's the best basketball player today. He's arguably one of the best ever. You see him on TV, and you see him on billboards. You see him everywhere.

BLUMBERG: But what you may not know - and what we're talking about today - is LeBron James might also be the most underpaid professional athlete in the world today.

VICTOR MATHESON: Yes. LeBron James almost certainly has been extremely underpaid for his entire career.

BLUMBERG: Victor Matheson is an economist at Holy Cross University. Another economist, Kevin Grier from the University of Oklahoma, puts it even more bluntly.

KEVIN GRIER: He's getting hosed.


KANYE WEST: (Singing) Hello, hello, hello, hello...

TEPPER: Hello, and welcome to PLANET MONEY. Today, how LeBron James - a man making what most of us would consider a pretty good salary, $17.5 million a year - how he is getting hosed, and why the NBA team owners, the players, the fans and even LeBron James himself want to keep it that way.


WEST: (Singing) Ain't that like LeBron James? Ain't that just like D. Wade? Wait.

BLUMBERG: OK. So, Taylor, let's lay out the case for how a multimillionaire like LeBron James is getting hosed. And to do that, let's imagine a job description - something you might see on monster.com or a newspaper. Wanted - once-in-a-generation NBA superstar.

TEPPER: Skills required - must be able to soar through the air in order to execute thunderous dunks.




UNIDENTIFIED COMMENTATOR #1: You can see that coming...

BLUMBERG: Must be a team player who works well in small groups of five, who can facilitate performance by executing impossible-seeming crosscourt passes to barely-open teammates.

TEPPER: Check.


UNIDENTIFIED COMMENTATOR #2: Beautiful pass to Wade.

TEPPER: Must thrive under pressure. Preference given to tall-strong-and-extremely-agile candidates. And ability to play suffocating lock-down defense is a plus.



BREEN: Oh, there's the fake - blocked by James.

BLUMBERG: Again, economist Victor Matheson.

MATHESON: By lots and lots of measures, LeBron James is the best player in the NBA. If he keeps playing at this pace that he has for the last 10 years and has a lengthy career that is not interrupted by injuries, he may go down as the best player in the history of the game.

BLUMBERG: All right. So say you work at an imaginary human resources department. LeBron James's resume with - I've got to figure a highlight reel - lands on your desk, and you've got to figure out, how much do we pay this guy? What is he worth? How do you figure that out?

If only there was a way to determine just how much value he adds to a team - like, say, this job candidate somewhere in his employment history, say he'd switched teams and you were able to compare the economic impact of that switch.

TEPPER: Yeah, if only.


JIM GRAY: The answer to the question everybody wants to know. LeBron, what's your decision?

TEPPER: So to anyone with even a passing interest in sports, you'll remember this. It's when the LeBron James decided to leave his old team, the Cleveland Cavaliers, and go to his new team, the Miami Heat.


LEBRON JAMES: And this fall, I'm going to take my talents to South Beach and join the Miami Heat.

GRAY: Miami Heat - that was the conclusion you woke up with this morning?

JAMES: That was the conclusion I woke up with this morning.

BLUMBERG: This decision - it was actually called "The Decision," it was broadcast on primetime around the world - this was huge sports news for everyone. His old team, the Cleveland Cavaliers - they felt betrayed. Fans there burned his jersey. LeBron James was reviled on sports talk radio for weeks and months and basically a whole year to come. But...

TEPPER: That's not why we're talking about this moment.

BLUMBERG: No, it's not.

TEPPER: No. We're talking about it because it gives us a pretty clear picture of how valuable LeBron James is. When he left the Cavaliers, the value of the team...

BLUMBERG: That is, how much it would have been worth if the team's owner had tried to sell the team.

TEPPER: Exactly. That value dropped by about 25 percent. And the value of the team that he went to - the Miami Heat - went up 30 percent.

BLUMBERG: This is all according to calculations done by Forbes Magazine. And when you take all this into account - how much ticket sales would go up, how much TV revenue would go up - the people who study this will tell you that LeBron James should be making around $40 million a year - more than double his current salary.

TEPPER: And there we have it - the mathematically precise amount by which LeBron James is getting hosed. He's getting hosed out of over $20 million a year.

BLUMBERG: All right. So if that's the case, let's say I am the general manager of my beloved Brooklyn Nets. We're not that good. We're stuck in the middle of the pack.

TEPPER: I'm sorry.

BLUMBERG: That's all right. What's to stop me from saying - we'll get to your team in a minute - what's to stop me from saying, hey, LeBron James. I will pay you your full value - I'll pay you $40 million a year if you come on over and play for my team.

TEPPER: Well, as you know, Alex, you're not allowed to do that.

BLUMBERG: No, I'm not. No.

TEPPER: There is a salary cap in the NBA. There's a limit on how much owners can pay their players.

BLUMBERG: Yeah. There's a limit on how much they can pay in salaries overall, and there's a limit on how much an owner can pay any individual. Literally, it's called a maximum contract, and you're not really allowed to go over that without incurring some very hefty fines.

TEPPER: So no matter how rich a basketball team owner is...

BLUMBERG: And there are some really rich ones.

TEPPER: Yeah, including the Brooklyn Nets owner. They're not really able to pay LeBron James what he's actually worth to them. And that's one way LeBron James is getting hosed - the salary cap.

BLUMBERG: That is just the beginning of the long saga of how LeBron James gets hosed. There is another feature of the NBA's rules that is arguably even worse for LeBron James, and that is the draft. Now, for sports fans, this system, the draft system - it's so ingrained it seems pretty normal. But when you actually describe it out loud to people, as we've had to do going through the edit of this podcast - when you describe it out loud to people who don't know that much about sports, it all of a sudden seems really bizarre.

So the system is this. When players want to go to the NBA, they don't do what happens in almost any other field in the world - send their resumes or highlight reels to the teams they want to play for. And then, if the team makes an offer, they negotiate over that offer. And then both parties come to a final decision about where they will play and for what salary.

TEPPER: No, no, no. In the NBA, it's way weirder than that. So potential job applicants...

BLUMBERG: That is, the best young basketball players in the world today.

TEPPER: Right, right. So those applicants - they put their names into this big pool. And then there's a lottery, literally with ping pong balls and those crazy plastic tubes. And the 14 worst teams in the league all have to draw a number. And whoever draws the winning number gets the right to pick first from that big pool of talent out there.

BLUMBERG: And this is the weird part. Whatever player that team picks - he can't say no. He has no choice. And not only that - he can't negotiate his salary. His player's union has already negotiated an upper limit to how much rookies can get paid. And this is the way it works, even if you are a once-in-a-lifetime talent like LeBron James.


DAVID STERN: With the first pick in the 2003 NBA draft, the Cleveland Cavaliers select LeBron James.


TEPPER: Players are drafted, just like soldiers are drafted during a war. In this case, Cleveland drafted LeBron James. He couldn't go work for the Los Angeles Lakers, the New York Knicks or the Boston Celtics. No. He was going to go to Cleveland whether he liked it or not.

BLUMBERG: And just imagine if other fields were set up this way. Like, let's say you're the best young software engineer at MIT.

Instead of going out to Silicon Valley and getting hired for an insane starting salary by Google, you had to put your name into a pool with other engineers, and then the worst companies in America got to draw random numbers. And then one day, you would get a letter saying - I don't know, you've been hired to work in the IT department at Best Buy.

TEPPER: That would just be amazingly frustrating.

BLUMBERG: (Laughter).

TEPPER: But this is basically what happened to LeBron James. I mean, everyone knew he was going to be great, even in high school. In a free market, there would have been a huge bidding war for him, with some of the best teams in the league trying to woo them.

But instead, the woeful Cleveland Cavaliers happened to win the lottery. They got to select him. He had no say. And they were able to pay him far less than he was worth.

BLUMBERG: So that brings us to an obvious question at this point. Why is it set up this way? Why is there a limit on how much teams can spend? Why is there a draft system? And who is getting all those extra million dollars that should be going to LeBron James?

TEPPER: Well, again, here is Victor Matheson from Holy Cross.

MATHESON: There's certainly one big winner in the salary-cap system - is the owners themselves. By reducing the amount that they have to pay for their labor - and, you know, to provide their product - they certainly generate significantly higher profits.

And we see sports teams in the United States be far more profitable than sports teams in Europe, which typically don't have salary caps.

BLUMBERG: All right. So I guess you can see why owners would want to arrange things so that they had to pay their superstars way less than the market value. They want to keep some of that money that they'd otherwise pay to LeBron. They want to keep that for themselves. And in fact, it's actually illegal under anti-trust laws for owners of other businesses to collude about salaries the way that owners of NBA teams do. But the NBA, like other sports leagues, got itself exempted from these anti-trust laws.

But it's not just colluding owners who are the ones hosing LeBron James. His less talented teammates are hosing him out of his money as well.

So remember, these salary cap rules - they came about as part of the collective bargaining agreement between the owners and the NBA players' union itself. Here is our other economist, Kevin Grier.

GRIER: Well, the union is - union votes on contracts by majority rule. All right? So we would think if it's, like, majority rule that it would be the guy in the middle who would be the crucial voter, right?

If you could line - if you pick a thing like salary cap and line everybody up for who wants it the most versus who wants it the least, it would be the guy right in the middle of that distribution of players - the median player. What are their interests?

BLUMBERG: And the answer is, the median player - the non-superstar - they don't want all the money to go to LeBron James, either.


BLUMBERG: They want some of that money for themselves.

TEPPER: So when I think about this, I think of Mike Miller - like, one of LeBron James's teammates. Chances are, even a casual fan knows about LeBron James. Probably you've heard of LeBron's superstar teammate, Dwyane Wade. But Mike Miller?

BLUMBERG: No one outside of a hardcore basketball fan really knows who Mike Miller is. And he's a good player. He's an excellent shooter. He plays pretty good defense. But in a non-salary cap world, he probably wouldn't be making nearly $6 million a year, which is what he's making now. In a non-salary cap world, teams would probably want to pay LeBron James a bit more and Mike Miller a bit less.

TEPPER: So perhaps an even bigger reason that LeBron James's teammates really like this crazy system of the salary cap and the draft is that it expands the total number of jobs. And here, it might be instructive to talk about my Washington Wizards.

BLUMBERG: Do we have to?

TEPPER: Unfortunately, I think we do.


TEPPER: OK. Because it's possible that without this system in place, almost none of the players on my team would even have a job.


UNIDENTIFIED COMMENTATOR #3: This for the tie from Jannero Pargo...

BLUMBERG: So we should explain - we're watching a sad highlight from a Washington Wizards game, and it's sort of the opposite of the LeBron James highlight. Final seconds of the game, the score is tied. The Wizards player, Jannero Pargo, takes the shot for the win, and...


UNIDENTIFIED COMMENTATOR #3: And it gets nothing. No iron, no rim, no backboard, no nothing.

TEPPER: He misses it.

BLUMBERG: Air ball.

TEPPER: Air ball.

BLUMBERG: (Laughter) Right.

TEPPER: So the Wizards are a terrible basketball team. Their record this year is the worst in the league. I mean, you can buy a Wizards ticket from a scalper for a dollar, maybe even less. If the Wizards existed in the real economy, they'd be like Studebaker or the Saturday Evening Post - out of business.

BLUMBERG: But because the Wizards are a team in the NBA, they don't go out of business because they can always rise again through the draft. If they stay one of the worst teams in the league, they are guaranteed a really high draft pick, which means they get a good shot at maybe getting the next LeBron - a great player who could get them winning again.

TEPPER: And because of the salary cap system, they'll be able to keep that player and keep him from getting poached by, like, a richer team in a bigger market.

BLUMBERG: So the draft system and the salary cap system keeps bad teams from going out of business and gives them a chance to become competitive.

TEPPER: Which means there are more jobs for people like Martell Webster.

BLUMBERG: Ah, Martell Webster.

TEPPER: Yes, the famous Martell Webster. He's one of the worst players on my Washington Wizards - the worst team in basketball.

And players like Martell love this system that hoses LeBron James. Because without it, there'd be fewer NBA teams, which means fewer NBA players, which would almost certainly mean there'd be no one around to pay $1.6 million a year to Martell Webster.

BLUMBERG: OK, so you've got this crazy system that rewards failure, encourages collusion by business owners, sets up essentially a system of conscription as a method of recruiting and distributing talent. It's a system that free market economists like Kevin Grier, the one that we talked to at the University of Oklahoma, would seem to hate, right?

TEPPER: Well, that's wrong, as it turns out.

GRIER: You know, I think it's not a horrible overall system in terms of maximizing the viability, revenue, profitability of the league.

TEPPER: So Kevin Grier may be an economist, but he's also a basketball fan - a basketball fan in a very small market that has benefited enormously from this crazy system.

BLUMBERG: And the argument he's making is that by making the economics of the NBA as anti-competitive as possible, you make the league as competitive as possible. So even a fan like Kevin Grier, who lives in a small-market town like Oklahoma City, can root for a really great competitive team - a team that was able to draft great players like Kevin Durant and Russell Westbrook and pay them far less than they're actually worth.

His team, the Oklahoma City Thunder, in fact, went to the finals last year, and they could do it again this year, which would be very unlikely without this system in place.

TEPPER: Exactly. And Kevin Grier is not the only one out there. There are lots more fans now in towns all across the country that wouldn't have competitive teams to root for if not for this crazy system. And more fans all across the country - that's good for the NBA.

BLUMBERG: Again, Victor Matheson.

MATHESON: So generally, players' unions have agreed to restrictions in order to try to increase competitive balance in the league, which the players believe is going to increase the overall size of the pie.

So again, if the average sports fan nationwide is kind of like me, saying we want every team to have a chance at least every once in a while to be a contender - if you think that's the sort of thing that most sports fans care about, then that's going to generate more revenue for the league as a whole.

And so the players want that pie to be as big as possible, so when they get their slice, it's as much as they can get.

BLUMBERG: And this brings us to the final answer in our mystery. There's one group who really doesn't seem to get much out of this arrangement. That is the basketball one percent - LeBron James and his superstar colleagues.

Why don't he and Kobe Bryant and Kevin Grant - why don't they all band together and say we're going on strike? That would be the most elite labor action in history.

TEPPER: It's fun to imagine.

BLUMBERG: Yeah, it would be great - just this velvet everywhere. That's why I'm picturing. So - but the problem is that they kind of benefit from this, too.

If the league overall is bigger and more popular and generating fans in all these towns that otherwise wouldn't have fans, then that's great for LeBron because most of his money doesn't come from his salary. It comes from endorsements.

And the bigger the league is, the bigger his platform is, the more money he'll get for those endorsements.

GRIER: So the NBA is a relatively minor-ish component of his overall compensation. But if he wasn't in the NBA, that outside compensation wouldn't be there, probably - or wouldn't be there nearly as much.

I mean, if he was the world's - if he was like the three-time Olympic decathlon champ, right? - he would in no way be making near the amount of endorsement money that he's making.

BLUMBERG: LeBron James isn't getting paid his full market value. But it's not like he has another option that would pay him more than he makes now getting hosed by the NBA. The NBA creates the market for his talents.

TEPPER: Right. And LeBron James is a basketball player, and there's only one National Basketball Association. It was around before LeBron was drafted and will still be around after he retires.

The only thing rarer than LeBron James's basketball talent is a basketball league that will only pay him $17.5 million a year for that talent.


BLUMBERG: As always, we want to hear what you thought about today's program. Also on our blog, npr.org/money, we have some awesome LeBron James highlights for you to check out. You can find us there or on Twitter or on Spotify.

TEPPER: Or you can write to us at planetmoney@npr.org. I'm Taylor Tepper.

BLUMBERG: And I'm Alex Blumberg. Thanks for listening.


GARRETT DUTTON: (Singing) Yeah, yeah, yeah, they playing basketball. I learned at Old Pine, see I'm the school yard hustler, I had my hard knocks, now I'm the backboard buster. I could fake to the left... Transcript provided by NPR, Copyright NPR.