Mark Cuban had an interesting post last week on his website about how to keep so many young players from entering the NBA early. In a sentence he suggests that the NBA should do away with guaranteed contracts for first round draft picks. Currently, first-rounders are guaranteed a payday while those players taken in the second round are guaranteed nothing.
As it is right now, if a player is drafted in the first round, their salary is set by their draft position, we are REQUIRED to guarantee that salary for at least 4 years. Given that the last pick in the draft makes more than 600k per year, for 4 years, the money to tempt the high school or underclassmen is there.This got me to thinking about the risks these high school players are taking by coming out early, especially when you consider than there are only 30 players that can go in the first round and currently there are 94 early entrants into the 2004 NBA draft.
Get rid of guaranteed rookie contracts and all that changes. Then all of a sudden the odds come into play. So few players drafted in the 20s actually play in the NBA past their rookie contracts. They go from prospects to trade fodder to out of the league. Instead of hearing about busts on the bench collecting millions of dollars, with just anecdotal Lenny Cooke and Kenny Satterfield, expect to be 1st round picks and weren't stories, the stories would be about how the majority of players drafted in the first round don't make it through their rookie contracts.
In thinking about this, there seem to be two main components to the stay-in-school or come-out-early decision process. First, there's the probability a player is drafted in the first round. Second, there is the net present value of a professional contract -- can a player make more money immediately by coming out, or can a player make more in the long run by first going to college, gaining experience and going through the draft process in a year or two?
To make this clearer, I'll look at two high school players who are considering skipping college and going straight to the NBA, Shaun Livingston and J.R. Smith. Livingston is projected to go as high as 4th in the draft and will most assuredly be a lottery pick. Smith is slotted to bet taken anywhere from 15th to 25th with some guarantees of being taken in the first round, but nothing definite.
Considering the two main components I mentioned above (the probability of being drafted in the first round -- and getting a guaranteed contract, and the net present value of coming out early), we can create various scenarios and determine what's in the best long-term interest of the two hypothetical players.
For computational ease, let's say that in 2004, rookies can be paid no more than $1 million a year and contracts are three years in length. Also, assume interest rates are 5 percent. Let's also say that if a player is a lottery pick, he will be paid the maximum: $1 million per year for three years. If a player is taken in the first round (but is not a lottery pick) he will be paid $750,000 per year for three years.
Looking at Livingston the first thing you notice is that if his probability of getting drafted is the same after college as it is after high school, he'll make more in the long-run by coming out early (after high school). But it's rarely the case that a player doesn't improve his draft position by honing his skills in college for a year or two. That said, given that Livingston is likely to be a top-4 pick, it would be very difficult for him to improve his draft position by going to college. Speaking frfinancialtly finaincial viewpoint, it makes sense to come out early.
Player Prob(drafted) HS-NBA Payoff Coll-NBA Payoff Livingston 100% 2,723,248 2,470,066 85% 2,314,761 2,099,556 75% 2,042,436 1,852,550
On the other hand, a player like J.R. Smith might be wise to go to college -- at least for a year -- and try to improve his skills.
Let's say that Smith has a 33% chance of being taken in the first round. Assuming that he's not a lottery pick, that means he'll get a $750K contract for three years -- or a total contract worth $2.25 million. Given that he only has a 1 in 3 chance of being a first round pick and calculating the present value of his entire contract (at 5% interest), the net present value of his 3-year, $2.25 million contract is worth $674,000 (this is calculated by taking the net present value of $2.25 million and multiplying it by 0.33 -- the probability of being drafted in the first round).
Player Prob(drafted) HS-NBA Payoff Prob(drafted) Coll-NBA Payoff Smith 33% 674,004 50% 926,275 50% 1,021,218 60% 1,111,530 50% 1,021,218 75% 1,389,412
His payout increases as the probability of him being taken in the first round increases. A 75% chance of being drafted compared to a 50% chance of being drafted increases Smith's payout by over $350,000. If we were talking about real rookie contracts with big-time dollars, the difference would be in the millions -- and this doesnÂ’t even include endorsements.
If by going to college for a year, Smith is able to increase his probability of being drafted from 33% to 50% -- and given that his contract remains the same, he's effectively increased his worth by over $250,000. And this is a conservative estimate -- I'm assuming that rookie contracts remain constant -- which of course isn't true. What's most important however, is a player increasing his probability of being drafted in the first round. And this may be the hardest thing to measure.
Outside of those players taken in the first few picks, seemingly anything can happen when talking about draft order and as a result it's hard to put a probability on being taken in the first 30 picks. But it's also undeniable that going to college can only increase a player's attractiveness to NBA teams (barring injuries).
It's pretty obvious this post is geared at UNC recruit J.R. Smith, who has declared himself eligible for the NBA draft. He's most assured to make more money in the long-term by going to college for a year or two, but at present, he feels he's ready for the NBA. That, and if he's taken in the first round, he'll be financially set for (probably) the rest of his life. It's hard to quibble over the few 'extra' hundreds of thousands of dollars Smith could make by going to college and increasing his stock when he's faced with making millions immediately. But he's yet to sign an agent so he still retains his college eligibility, and I'm sure Roy Williams will be very interested in how this unfolds.
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