SM 630: Contract negotiations Page 1 of 5 Introduction The purpose of the exercise is to simulate a salary negotiation between management and a free agent's player rep. Your goals are 1) To successfully negotiate a 10-year contract with the other party 2) Within that agreement, to get the best possible financial terms for your side While, in reality, there may be many aspects to a negotiation, this exercise focuses solely on the financial aspect. This exercise requires that you evaluate the financial terms of what is being offered by the other party, and, correspondingly, the financial terms that you are offering the other party. This is a 10-year contract, and thus you will primarily be calculating present values of various contract offers using the time value of money techniques. Throughout this document you'll notice that I'm saying "negotiate with" and not "negotiate against." I loathe the phrase "negotiate against." The language frames negotiations as adversarial and zero-sum, yet in any negotiation, both sides want to come to an agreement (otherwise they wouldn't be at the table in the first place). General rules and assumptions You're motivated to make a deal… Each side wants to reach an agreement with the other side. That is, the player does want to sign with the team, and the team does want to sign the player. The challenge for each side is to find the common financial ground that will allow an agreement to be reached. …with certain restrictions… Each side will have a set of constraints within which their negotiations take place. Management will have limits as to the maximum they can pay in any given year and/or limits as to the total maximum (present) value of the contract. Similarly, the player rep will have limits as to the minimum they will accept in any given year and/or limits as to the minimum total (present) value of the contract. These restrictions will not be known until shortly before the negotiation begins. Each side will use the same discount rate for calculating the present value of the offers. …that are unknown to the other side. The management team will know its own constraints, and the player representative team will know its own constraints, but neither side will know the other party's constraints. Specific assumptions League rules state that the total nominal value of a contract of this length cannot exceed $60m; i.e., a $60m deal would be the "league maximum." In addition, there are specific rules around other aspects of the contract: Signing bonuses • Signing bonuses are allowed, but not required. They are paid when the contract is signed. That is, they are paid today (T=0). Annual salary • Salaries for each of the 10 years are paid at the end of the year. I.e., salary for year 1 is paid at T=1, salary for year 2 is paid at T=2, …, salary for year 10 is paid at T=10. SM 630: Contract negotiations Page 2 of 5 • The player must rec.

1. SM 630: Contract negotiations
Page 1 of 5
Introduction
The purpose of the exercise is to simulate a salary negotiation
between management and a free agent's player rep.
Your goals are
1) To successfully negotiate a 10-year contract with the other
party
2) Within that agreement, to get the best possible financial
terms for your side
While, in reality, there may be many aspects to a negotiation,
this exercise focuses solely on the financial aspect.
This exercise requires that you evaluate the financial terms of
what is being offered by the other party, and,
correspondingly, the financial terms that you are offering the
other party. This is a 10-year contract, and thus you
will primarily be calculating present values of various contract
offers using the time value of money techniques.
Throughout this document you'll notice that I'm saying
"negotiate with" and not "negotiate against." I loathe the

2. phrase "negotiate against." The language frames negotiations as
adversarial and zero-sum, yet in any negotiation,
both sides want to come to an agreement (otherwise they
wouldn't be at the table in the first place).
General rules and assumptions
You're motivated to make a deal…
Each side wants to reach an agreement with the other side. That
is, the player does want to sign with the team,
and the team does want to sign the player. The challenge for
each side is to find the common financial ground that
will allow an agreement to be reached.
…with certain restrictions…
Each side will have a set of constraints within which their
negotiations take place. Management will have limits as
to the maximum they can pay in any given year and/or limits as
to the total maximum (present) value of the
contract. Similarly, the player rep will have limits as to the
minimum they will accept in any given year and/or limits
as to the minimum total (present) value of the contract. These
restrictions will not be known until shortly before
the negotiation begins.
Each side will use the same discount rate for calculating the

3. present value of the offers.
…that are unknown to the other side.
The management team will know its own constraints, and the
player representative team will know its own
constraints, but neither side will know the other party's
constraints.
Specific assumptions
League rules state that the total nominal value of a contract of
this length cannot exceed $60m; i.e., a $60m deal
would be the "league maximum." In addition, there are specific
rules around other aspects of the contract:
Signing bonuses
• Signing bonuses are allowed, but not required. They are paid
when the contract is signed. That is, they are
paid today (T=0).
Annual salary
• Salaries for each of the 10 years are paid at the end of the
year. I.e., salary for year 1 is paid at T=1, salary
for year 2 is paid at T=2, …, salary for year 10 is paid at T=10.
SM 630: Contract negotiations

4. Page 2 of 5
• The player must receive a salary during each of the 10 playing
years of at least $0.5 million per year.
That's the league minimum as negotiated in the Collective
Bargaining Agreement with the Players Union.
• The salary amounts can change during each year of the playing
contract.
Deferred compensation
• Contracts can include deferred money, but it is not required.
• Deferred money must start in the first year after the playing
contract ends (T=11).
• Deferred money must be in the form of a constant annuity.
That is, the player must receive the same
amount in each year of the annuity.
• The deferred annuity must have a minimum of 5 payments and
a maximum of 10 payments. That means
that if deferred compensation is offered, it will start in T=11
and end at T=15, T=16, T=17, T=18, T=19, or
T=20.
• No more than 30% of the contract's nominal value can be in
the form of deferred compensation. For
example, if the overall nominal value of the deal were $100m,

5. and the contract included 5 years of
deferred money, those annuity payments could not exceed $6m
each ($6m per year * 5 years = $30m,
which is 30% of $100m).
Overall contract
In summary, an agreement will look this way:
Example using a three-year contract
Using a simplified 3-year contract situation, the example here
shows the kind of information that might be given to
both sides.
Information given to management
• Signing bonus (i.e., at T=0): $4m maximum
• Nominal salary in year 1 (i.e., at T=1): $6m maximum
• Present value of entire contract: $25m
• Discount rate is 9%, which is the same rate for both sides.
You also have knowledge that, given the market for this player,
the player would be unlikely to accept any contract
whose present value is less than $20 million. However, you do
not actually know for certain that this is the
minimum they would accept.

6. Information given to player rep
• Signing bonus (i.e., at T=0): $2m minimum
• Nominal salary in year 3 (i.e., at T=3): $11m minimum
• No more than $4m (in today's dollars) in deferred
compensation
• Present value of entire contract: $19m minimum
• Discount rate is 9%, which is the same rate for both sides.
You also have knowledge that, given the market for this player,
the team would be unlikely to accept any contract
whose present value is greater than $28 million. However, you
do not know for certain that this is the maximum
they would accept.
SM 630: Contract negotiations
Page 3 of 5
Some hints
Pre-preparation (before negotiations begin)
Set up your Excel spreadsheet so you can quickly calculate the
present value of various contract offers. That is, set

7. up the spreadsheet so you just have to plug in the salary
numbers for each year, and the present value is then
automatically calculated. At a minimum, the Excel sheet should
show you…
• The PV of each year's payment
• The PV of the deferred compensation portion (if applicable)
• The PV of the overall contract
• The nominal value of the overall contract
• The nominal value of the deferred compensation portion (if
applicable)
During negotiations
Once you receive your constraints, you must develop an initial
offer to be presented simultaneously to the other
party. The initial (and subsequent) offers only need to include
the nominal values of payments within each year.
This will serve as the starting point for negotiations.
This is a collaborative process in that you do want to reach an
agreement with the other party. However, it is also a
competitive process – you want to negotiate the best possible
contract for your side. Therefore, while you want to
explore areas of mutual agreement, you never want to disclose
your constraints (i.e., your "bottom line" figures) to

8. the other party. Doing so would cause you to lose all your
negotiating power and will ensure that the other party
gets the best possible contract.
At the end of negotiations (what to submit)
Each side will submit the following deliverables via
Blackboard:
1. Its initial offer
2. The final version of the Excel file used during negotiations.
3. The salary terms of the final agreement. Or, if you fail to
reach an agreement, each side will input its final
offer and a summary (no more than 1 page) of why the
negotiations failed.
Evaluation
I will be looking for (in order of importance):
• The ability to reach an agreement that satisfies all constraints.
• The present value of the final agreement. For management,
lower present value is better. For the player
rep, a higher present value is better.
o In addition to your team grades, I will combine the results for
the two teams within each group.
The group with the best results overall (across both of its teams'
negotiations) will earn bonus

9. points. However, remember that teams cannot communicate with
other group members once
the negotiation period begins.
• The quality of your Excel tool used in negotiations. It
should…
o Be accurate
o Clearly show all pertinent contract information & calculations
o Be flexible enough (i.e., use cell references) to calculate
contract offers quickly
SM 630: Contract negotiations
Page 4 of 5
Mechanics (How will this work within Sport Finance?)
Dividing our course groups into teams
In order to ensure that everyone is involved, each course group
will divide itself into two teams (e.g., Group 3 will
turn into Team 3-1 and Team 3-2). That will put 2 people on
each team. Since groups 5 & 6 already have only 3
people each, they will stay whole and negotiate with each other.

10. I will let you all determine the most effective way
to divide your groups. For example, perhaps you want to divide
such that each team has someone with strong
Excel skills and someone with strong communication skills.
Groups 1, 2, and 5 will represent Management, and Groups 3, 4,
and 6 will represent Players.
Groups can work together before negotiations start. That is, the
two teams (e.g., 1-1 and 2-1) can discuss strategy
with their groupmates, work together to develop your Excel
workbook, etc. However, once negotiations start (i.e.,
once the constraints are distributed to each team), there can be
no communication with any other group members
or teams other than the team with whom you are negotiating.
Negotiation Management Players
A Team 1-1 with Team 3-1
B Team 1-2 with Team 3-2
C Team 2-1 with Team 4-1
D Team 2-2 with Team 4-2
E Team 5 With Team 6
Conducting the negotiations

11. There will be dedicated groups for each negotiation, accessible
via the link titled "Group pages for conducting
salary negotiations." In there you will see the board for your
particular negotiation; for example,
"SalaryNeg_1-1with3-1" is the board for Team 1-1 with Team
3-1, the first row in the table above.
These discussion boards are where the negotiation will take
place between the two sides. Any communication with
the other side should go through this board, including your
official offers.
Note that communication with your teammate(s) should not
occur on this board since you don't want the other
side seeing your planning. Likewise, teammate discussion
cannot occur on your Group's board since you cannot
discuss the negotiation with other group members (e.g., Team 1-
1 cannot talk with Team 1-2). Therefore,
communication with your team member(s) will occur outside of
the Blackboard environment.
Schedule
Now (-ish)
You can begin to construct your Excel files as soon as you're
ready. Anything you need to do so is covered in the
Excel lessons, and of course, I am very happy to review your
files and give you feedback (but only before the

12. negotiations start – i.e., before the salary constraints are
released).
Before Wednesday, September 27, 2017, 11:59 AM – Decide on
team members
There is a discussion board forum titled "Team members for
salary negotiations." Post a thread in there with the
members of each team for your group.
Thursday, September 28, 2017, 8:00 AM – The negotiation
period begins
The salary negotiation constraints will be made available on
Blackboard. Your group will only be able to see the
constraints for your side – e.g., if you are representing the team,
you'll only see Management's constraints.
SM 630: Contract negotiations
Page 5 of 5
Saturday, September 30, 2017, 11:59 AM – Initial offers due
Post your initial offer to the other side on the discussion board
sometime before noon on the negotiation start
date. Even though you hit submit, the post will not appear right
away. The setting on the discussion board requires

13. moderation of posts, which means they will not appear until I
release them. Thus, I will get on the board and
release the initial offers precisely at noon. At that point, I
switch off the post moderation so you can go back and
forth with the other side as normal.
Before Wednesday, October 4, 2017, 11:59 PM – submit final
materials
Your salary negotiation deliverables (initial offers, final
agreement, and Excel tool) must be submitted via
Blackboard. You can submit these earlier, if you like,
depending on when you finish your negotiations.
IntroductionGeneral rules and assumptionsYou're motivated to
make a deal……with certain restrictions……that are unknown
to the other side.Specific assumptionsSigning bonusesAnnual
salaryDeferred compensationOverall contractExample using a
three-year contractInformation given to managementInformation
given to player repSome hintsPre-preparation (before
negotiations begin)During negotiationsAt the end of
negotiations (what to submit)EvaluationMechanics (How will
this work within Sport Finance?)Dividing our course groups
into teamsConducting the negotiationsScheduleNow (-
ish)Before Wednesday, September 27, 2017, 11:59 AM – Decide
on team membersThursday, September 28, 2017, 8:00 AM – The
negotiation period beginsSaturday, September 30, 2017, 11:59
AM – Initial offers dueBefore Wednesday, October 4, 2017,
11:59 PM – submit final materials
SM630OfferSheetYearNominal Value0Signing bonus
(optional)1min: 0.5m2min: 0.5m3min: 0.5m4min: 0.5m5min:
0.5m6min: 0.5m7min: 0.5m8min: 0.5m9min: 0.5m10min:
0.5m11Deferred annuity

14. (optional)12Deferred annuity
(optional)13Deferred annuity
(optional)14Deferred annuity
(optional)15Deferred annuity
(optional)16Deferred annuity
(optional)17Deferred annuity
(optional)18Deferred annuity
(optional)19Deferred annuity
(optional)20Deferred annuity
(optional)