'Poison Pill' Contract

NBA teams use the strategy to lure promising players

Basketball in a pile of cash
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NBA general managers have begun to use "poison pill" contracts as a way to exploit strict salary cap and luxury tax rules in the league's collective bargaining agreement approved in late 2016. The contract strategy makes it difficult for a player's current team to retain him if another team makes a poison pill offer. 

'Gilbert Arenas' Provision

The poison pill strategy goes back to a long-retired NBA star, Gilbert Arenas. "The NBA introduced the Gilbert Arenas provision in the 2005 collective bargaining agreement as a way to help teams to keep their young restricted free agents who were not coming off rookie scale contracts," according to Hoops Rumors.

In 2003, Arenas was a free agent with the Golden State Warriors. The Washington Wizards offered Arenas a starting salary of about $8.5 million. But, because Golden State could only offer Arenas a first-year salary of about $4.9 million under league rules at the time, the Warriors were unable to match the offer sheet and lost Arenas to Washington. Hoops Rumors adds: "The Arenas provision limits the first-year salary that teams can offer restricted free agents who have only been in the league for one or two years."

In response, teams seeking to snatch talented players began back-loading contracts--paying lower salaries for the first two years with huge increases for the years after that. This is the "poison pill" provision.

How the Poison Pill Contract Works

The poison pill is designed to make it difficult for a player's team to match a contract offer from another team.

Suppose, team X wants to sign a restricted free agent away from team Y. Team Y has the right to match any contract offer.

Team X structures the contract offer to maximize the potential luxury tax penalties if team Y chooses to match the contract offer. The total value of the contract might be $40 million, but the pay schedule might be $5 million in each of the first two years and $15 million in the second two--designed to put the original team over the luxury tax threshold in years three and four.

How the Poison Pill Contract Fails

The strategy does not always work. The Brooklyn Nets offered rising star Tyler Johnson a four-year, $50 million "poison pill" contract in 2016, according to James Herbert writing on CBS Sports. The contract would have allowed "Johnson to make $5.6 million and $5.8 million in the first two years of the deal, but salaries of $18 million-plus and $19 million-plus in 2018-19 and 2019-20." 

Nevertheless, Johnson's team, the Miami the Heat, seeing a lot of potential in him, matched the offer so that it could "move forward with the development of a player they landed as an undrafted free agent out of Fresno State in 2014-15," noted Ira Winderman in the " Florida Sun-Sentinel." Regardless of tricky contract maneuvers, like the poison pill, Johnson's case shows that if a team wants to retain a player badly enough, it will find a way to put up the money to do so.