With the trade deadline approaching, now is a good time to ask ourselves how much money should teams pay per win? According to Hoophype, the average NBA team payroll is $63.6mm. Analysis from our NBA Chemistry paper shows that a team of “replacement level” players will win around ten games per season. That means that the average NBA team will win 41-10 = 31 games more than a team with all replacement players. The minimum salary in the NBA is roughly $1mm per player (depending on years in the league). Since there are 15 roster slots per team, that means that the average available payroll per team is roughly $63.6mm-15*$1mm = $48.6mm. Therefore, on average, teams should pay on average $48.6mm/31 = $1.6mm per WARP (“win above replacement player”).
There are (at least) two inefficiencies in the NBA labor market:
* Players whose contracts are dictated by the rookie scale. Blake Griffin, for example, is making $5.7mm this year, even though he is expected to generate 9-10 wins. That’s bargain!
* Players making the maximum contract. LeBron James is making “only” $16.0mm, even though he has been averaging nearly 20 wins per season.
If you take away these two pools of underpaid players, there are more dollars left over for the remaining players. So in equilibrium, teams will pay more than $1.6mm per win for the remaining players. Do they? Using the SPM player projections, I regressed salary versus expected wins for players no longer under the rookie scale, and found a slope coefficient of $1.4mm.
To optimize payroll efficiency, general managers should therefore maximize the number of players under the rookie scale and players who deserve maximum contracts. For other players, teams should limit the annual salaries to the minimum plus $1.4mm-$1.6mm per expected win. If they follow these guidelines, they will sure to build a winning roster.