Main Takeaway: A pick for cap space trade can definitely benefit a team if the freed-up cap space can be redeployed towards a much more productive player.
How should teams go about determining the relationship between draft picks and cap space? One possibility lies in surplus value. A measure developed by Professors Massey and Thaler in their seminal “Loser’s Curse” paper, surplus value represents “the difference between what you pay for performance and what you’d be willing to pay for performance” as Brian Burke so aptly put it.
The method I propose to assess the desirability of a pick for cap space trade would simply involve converting both assets into their surplus values and then comparing them. One half of the puzzle has already been solved, as Mr. Burke’s research has yielded surplus value figures for every pick in the draft under the new CBA. Determining the surplus value of a given amount of cap space is a much more tricky endeavour. A possible approach involves a team’s current cap structure and free agency.
A team would identify an expendable player on its current roster with a fully guaranteed salary. It would simultaneously identify a desirable free agent that could be signed for the same annual cap hit as the expendable player. Both players’ surplus values over the entirety of their respective contracts would be compared and the difference would effectively represent the surplus value of that cap space.
Below is a theoretical (read: DePodestian) example of the method proposed:
– Player Beta’s contract projects to provide Team Blue with $2M in surplus value
– Team Blue currently has $8M in cap space committed to Player Beta
– Team Blue has the option of making a trade with Team Orange: the latter would acquire Player Beta (and his $8M cap hit) and the 30th pick in the draft
– With this newly freed-up $8M, Team Blue could sign free agent Player Alpha to a contract which would be anticipated to provide a surplus value of $12M
– The 30th pick in the draft has an estimated surplus value equal to $8.5M
– Since the upgrade from Player Beta to Player Alpha gives the team an extra $10M in surplus value ($12M – $2M), Team Blue should execute the trade for any pick with a surplus value under $10M
– Therefore, Team Blue should deal the 30th Pick to Team Orange for $8M in cap space
Clearly, the proposed approach is highly simplified. Important considerations in a deeper analysis include:
- The importance of Player Beta and Player Alpha’s exact contract structure. While Player Alpha is projected to provide greater surplus value, completing the trade could be significantly less appealing to Team Blue if Player Beta only has one year left on his deal and Player Alpha would command a 5-year, $40M 70% guaranteed contract. Two measures that could certainly shed more light on the attractiveness of the deal are surplus value per contract year (Player Beta = $2M, Player Alpha = $2.4M) and surplus value per dollar of salary (Player Beta = 0.25, Player Alpha = 0.30).
- The difference in the value of a given amount of cap space based on the team’s total available cap space ($8M is a lot more important when a team has $0M left than when it has $50M at its disposal)
- The changing value of a given amount of cap space over time due to increases in the salary cap
That being said, the model does provide a foundation for an intelligent analysis and illustrate a critical reality: the value of a given amount of cap space is not constant, but entirely dependent on what can be done with it.
P.S. Thank you to the Broncos, Falcons and Seahawks for critical feedback.