Capital Ideas Blog

Renegotiating? Timing is everything

By Robin Mordfin
September 17, 2014

From: Blog


CBS’s hit series the Big Bang Theory returns to prime time with the premiere of its eighth season next Monday. Over the summer, the show made the news on a nearly daily basis for almost a month as renegotiations of the actors’ contracts played out. Ultimately, producers gave in to nearly every demand of the three actors who play the show’s leads. But when it came to the two secondary players, the story was different. Those actors asked for a large increase in salary and were told that while they would receive a raise, they were not necessary to the show and would be fired if they asked for too much. Ultimately, the secondary cast took what was offered and didn’t make a fuss.

Perhaps the issue was the timing of the renegotiations, which took place just as production on the new season was about to begin and the chance of securing another role was practically non-existent. Timing is an important influence in how renegotiations play out, we learned in a new paper from Chicago Booth’s Gregor Matvos. In the past, renegotiation has been difficult to study empirically because complete, transparent sets of renegotiation documents for any particular industry are hard to come by. Fortunately, Matvos found a way to overcome that difficulty by approaching a unique entity: the National Football League. Because it is governed by a collective bargaining agreement in which all negotiation is formal, side payments and informal agreements cannot take place—meaning researchers have access to virtually all transactions.

When looking at the NFL, it is essential to understand that its contracts are non-guaranteed, which means that they bind the player to the team, but the team can drop the player at any time. Consequently, veteran players negotiate to get paid in full before the season starts, so that if they do get cut, they already have the cash in hand.

If team management begins renegotiations at the beginning of the off-season, right after the Super Bowl, they can threaten to fire the player if they want to bargain down his price. But, since it is early, rosters on other teams are not full—making it possible for the player to get a better deal elsewhere. On the other hand, if management waits until late in the off-season, that same player is going to have a much harder time finding a new job. Obviously, delaying tactics are good for team owners on a budget.

To balance things out, players have begun to negotiate contracts that include roster bonuses, which are part of the salary that is paid at the beginning of the off-season, so that the team is forced to cough up money early and makes any later threat to cut the player costly. Unfortunately for players, Matvos discovered that teams regularly pay approximately $260,000 less for a contract with a roster bonus than they would have for a nearly identical contract in which all payments are paid as salary.

Which means, if Raj and Wolowitz had renegotiated in May, they may have gotten a better deal.

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