Stretching Eric Gordon Part Two: The Michael Beasley Model
Yesterday, I took a look at the basics of the stretch provision and how the Pelicans could use this CBA loophole on Eric Gordon next summer if they can not trade him. But what if they want to take that step this year? Is there a way they could part with Gordon sooner and take even less of a cap hit? Well, if you look to how the Suns used this provision on Michael Beasley, they just might.
The Beasley Contract
When the Suns decided that they wanted to part ways with Michael Beasley, he had two years on his contract, each worth $6 million. The second year, however, was only partially guaranteed ($3 mil was guaranteed). So, in total, they owed him $9 million. They negotiated a buyout with Beasley for $7 million, and when you prorate that savings, the first year now became worth $4.67 million and the second year became worth $2.33 million. The Suns left that entire first year cap hit on their books and chose to just stretch the $2.33 million dollar cap hit. Since you are able to stretch one year remaining over three years, the Suns will experience just a $776K cap hit over these next three seasons.
The Right of Set-Off
The Pelicans could benefit from something that the Suns could not in the Beasley buyout – something called the ‘right of set-off’. This clause reads as follows
If another team signs a player who has cleared waivers, the player’s original team is allowed to reduce the amount of money it still owes the player (and lower their team salary) by a commensurate amount. This is called the right of set-off. This is true if the player signs with any professional team — it does not have to be an NBA team. The amount the original team gets to set off is limited to one-half the difference between the player’s new salary and the minimum salary for a one-year veteran (if the player is a rookie, then the rookie minimum is used instead).
Basically, if another team were to sign Gordon after he was waived for more than the vet minimum, some money would come off the cap hit. Let’s say the Pelicans agree to a buyout and another team signs him for 2 years and $12 million. It would reduce his cap hit by 2.45 million each of the next two years. [Quick math: $6 million (his new salary) – $1.1 million (the vet minimum) divided by 2 = $2.45 million]
A Game of Hypotheticals
Let’s say that the Pelicans go to Eric Gordon this summer and say they will buy him out of his final two years for $20 million. Might he bite? Heck, he might consider opting out after this season, and he would only get $14.9 mil from the Pelicans in that scenario. Let’s assume he takes the $20 million and gets his freedom. Five million would come off each year, meaning he would be a $10.4 million hit this year and $10.9 million next year. Now, let’s assume, he finds that two-year, $12 million contract elsewhere. The cap hit goes down to $7.5 million this year and $8.1 million next year.
They can keep the entire first year on the books, and then stretch the final year over three years, meaning his cap hits would be reduced to about $2.7 million over those next three years. You save about $7.5 million in cap room this year, $12.5 million the following year, and just have to add $2.7 million over the following two years in order to do that.
When people first learn about sunk cost, their instinct is to fight against it’s extremely logical principles. Without getting too Economics 101, a sunk cost is a cost that has already been incurred and cannot be recovered. Therefore, you don’t factor it in to your decision moving forward. As an example: You reserve a hotel room in a city for $100 a night, with half of that being non-refundable. The day before you travel to that city, a friend calls and says he will be out of town in that city, and you can use his house for free.
The sunk cost here is $50 – you are going to pay that regardless of whether you stay at the hotel or not. Many people say, “I’ve already spent $50, I might as well spend the other $50 and I can use the house or the hotel room when I get there.” Instead, a person should ask themselves, “If my plan all along was to stay at the friends’ house, and then I had the opportunity to get a hotel room for $50, would I do it?”
When you frame it that way, almost nobody would choose to also get the hotel room, but when people factor in that they already spent money, they seek a way to get that value back. You can’t, it’s gone. That should not factor into the decision at all. The question should always be framed the second way. Forget what is behind you; move forward.
Putting It All Together
Let’s say that the hypothetical scenario is a viable option. Now, let’s think about sunk cost. Imagine this roster without Eric Gordon. Now, you have two choices:
A) You can sign Eric Gordon to your team for two years and you will pay him $7.5 million dollars this year and $12.5 million next year
B) You choose not to sign Gordon, and in 2016-17 season you will have a $2.7 million dollar cap hit, and the same will happen in 2017-18
Which would you choose?
Is it even a debate? Anybody want to make an argument for Option A?
At some point, you have to stare your sunk costs in the face and swallow hard. You got to look at it a different way. If this team didn’t have Eric Gordon and he was a free agent this summer, they would not offer him a 2 year/$16 million contract, would they? So why do it now just because he is on your roster?
Demps has to admit this mistake. It was a terrible decision, and that’s fine. The immortal Sam Presti traded for Kendrick Perkins and then extended him a terrible contract, let Harden go over $6 million spread out over four years, and drafted Cole Aldrich with a lotto pick. Every GM makes mistakes, but you kill yourself when you continue to let that mistake haunt you. This is the chance for Dell to climb out from under this mistake and give this franchise the flexibility it so desperately needs. They could attack free agency this year or next year, and find the right guy to complete the puzzle. They can define roles, putting Tyreke at shooting guard permanently, while securing a second unit backcourt of Rivers and Morrow. If Gordon comes back, they have to give him 25-30 minutes, even if that is off the bench and those minutes would come from somewhere.
Be done with it, Dell. Hone up to your mistake and move on. Do whatever it takes to get this contract off your books. Follow the Suns’ Beasley model. Worked out pretty well for them, didn’t it?
Awesome article that clearly points out a light at the end of the tunnel. My question is if the pelicans buy Gordon out/stretch the second year do you think Gordon would just sign with another team for vet minimum? If the amount he makes with another team would just offset the cost to the pels, I'm not sure what the incentive for him to go out and sign the largest contract possible would be.
So, would you still wait until 2015 to make a splash in FA market for a SF, and just spend this off season shoring up the bench and other maneuvers to clear cap space for future use?
I think there is a math error in the example: $6.0M - $1.1M= $4.9M $4.9M/2= $2.45M. But the overall point still works the same. Michael please feel free delete this comment and just fix it the article.
This speaks about Benson as much as it does about Demps. Will he want to pay a max player for nothing? This is the kind of things the better owners do. If Benson is ok and we can get from under Gordon's contract we need to do so this year. Somebody will pick Eric up so that wouldn't be a problem.
The "set off" amount is only 1/2 the difference between his old and new salary. So Gordon keeps half of every dollar he earns in the first two years of the new contract if we "Beasley" him. That seems like a pretty good motivator to me.
Yeah, I would sign a couple guys for a year. Maybe trade for a guy with a year left. Then, if those guys perform well you can choose between keeping them or going after a big fish or some combination of both
Depending on how much cap space you get back in 2014-15 from Gordon signing elsewhere. Also, you get 2014-15 season minutes that Gordon would have take to use to help develop other players.
@daThRONe Agree 100%. Benson has to sign off on this and accept a sunk cost on a deal made before he got there. In football, dead money is commonplace, so maybe that will make it more palatable for him and Loomis.