Business Game Time

The first round of the NBA playoffs ended last week with some quite surprising results, notably in the Western Conference, where two of the top four seeded teams dropped out already. The top seeded team, the L.A. Lakers, made it to the second round, as usual lead by their biggest star Kobe Bryant, who score 23.5 points on average in the six matches against Oklahoma City.

Kobe is not only one of the best players in the game, he is also the active NBA player who has been with his team for the longest time, in his case 14 seasons. One month ago, the Lakers extended his contract for another three years.

What is interesting about the contracts in the NBA is that they have a maximum duration of five years (in some exceptional cases six years), so after a maximum five years a player will be a free agent. If the team wants to keep him and if he wants to stay, a contract extension has to be negotiated and signed.

Just a few weeks ago I was discussing contract durations with a colleague during our lunch break and found the discussion quite interesting which is why I would like to share it with you and invite you to give your opinions.

Just imagine: What if we had comparable systems in our companies? What if each contract would have a maximum duration of five years?

First, let’s think about what would happen if a company would implement this on it’s own. Well, certainly it would keep a few people from making an application, as for them job security is very important. But if you are looking for people that are ready to take some risks and that really believe they are good enough to convince you to extend their contract after five years, this may be a good approach.

And how many people do you know that are happy with their salary? If someone is doing a good job, the company will be required to renegotiate the contract after five years. Letting go a colleague who is doing a good job just to replace her with someone on a lower salary level means accepting transaction cost and you can’t guarantee to find someone in time or to always pick great performers. There’s a shift in bargaining power going on. If the market for talented workers is really getting shorter (“War For Talent“), a limitation of contract durations might even harm the companies. In any case it would make the market more transparent. And in transparent markets, those with the best performance will profit disproportionally high.

Secondly, what would happen if the whole market (the whole country or a group of countries) would limit contracts to e.g. five years?

I believe it would make the labour market a lot more dynamic. From a company standpoint it would be easier to get rid of under-performers, from a job seekers perspective it would open up a lot more options as more jobs would be open. The fight for recruiting top performer would be way more intense than today while the market could show some of the symptoms of a “Market for Lemons” as described by George Akerlof is his classic article.

When Lakers general manger Mitch Kupchak comments on the Kobe contract extension by saying “We are extremely pleased that we were able to reach an agreement and come to terms on the extension” we know that he is not just trying to be polite. He’s simply telling the truth.

So should we all try to convince the companies we work for to limit the duration of our contracts?

No, not necessarily.

Like I already mentioned before, the top performers would profit disproportionally high. Kobe alone earns more than a quarter of the total salaries paid by the Lakers for their complete roster. But how many Kobe Bryants are there? And are you really sure you’re one of them?

Also just like in many markets, the system is highly dependant on who is on the long and who is on the short side of it. The general tendency towards a short labor market, especially in positions requiring a high level of qualification (e.g. in management), is quite obvious, but the development is not linear. Any disruption like the economical crisis we are currently trying to exit may significantly change the balance of power. Companies try to reduce cost and expiring contracts are an easy option to do so. That would lead to more job seekers that face companies that hire less.

Given the irrational behavior many companies did show in this regard during the crisis, even high performers would not be safe, as only very few companies tend to understand the market and the opportunities it offers and augment hiring high performers during times of an economic slowdown.

All you have to do is to find a company that understands. And once you start negotiating with them: Don’t be afraid to give in on contract duration. After all, there’s a little bit of Kobe in all of us, isn’t it?

Related posts:

1. The Heat is on!
2. Warriors’ four elements of a great customer value offering

Filed under: basketball by Johannes Musseleck
on May 3, 2010 at 8:00 am CET
Tagged with: application • balance of power • contract • disproportional • disruption • economic slowdown • economical crisis • expiring contracts • extension • free agent • general manger • george akerlof • high performers • irrational behavior • kobe bryant • l.a. lakers • labor market • limit • long • los angeles lakers • market for lemons • maximum duration • mitch kupchak • nba • oklahoma city • performance • performer • playoffs • reduce cost • renegotiate • risk taker • salary • short • transaction cost • transparency • transparent • war for talent • western conference