NBA salary cap

The NBA salary cap is the limit to the total amount of money that National Basketball Association teams are allowed to pay their players. It is defined by the league's collective bargaining agreement (CBA). This limit is subject to a complex system of rules and exceptions and as such is considered a "soft" cap.

The actual amount of the salary cap varies on a year-to-year basis, and is calculated as a percentage of the league's revenue from the previous season; for instance, in 2007–08, the NBA's salary cap was approximately US$55.6 million per team, and for the 2008–09 season it was $58.68 million.^[1][2] Like many professional sports leagues, the NBA has a salary cap to keep teams in larger markets (with more revenue) from buying all of the top players and extending their advantage over smaller-market franchises. The 2009–10 salary cap was $57.7 million.^[3] The salary cap for the 2010–2011 season is $58.044 million. Under the league's new CBA that was ratified in December 2011, ending the 2011 lockout, the cap will remain at its 2010–11 level for the 2011–12 season (though prorated for the shortened season), and will continue to vary based on league revenues.

History

The NBA had a salary cap in the mid-1940s, but it was abolished after only one season. The League continued to play without such a cap until 1984–85, when the current incarnation of the salary cap was instituted in an attempt to level the playing field among all of the NBA's teams and ensure competitive balance for the League in the future. Before the cap was reinstated, teams could spend whatever amount of money they wanted on players, but in the first season under the new cap, they were each limited to $3.6 million in total payroll.

Soft versus hard caps

Unlike the NFL and NHL, the NBA features a so-called soft cap, meaning that there are several significant exceptions that allow teams to exceed the salary cap to sign players. This is done to allow teams to keep their own players, which, in theory, fosters fan support in each individual city. By contrast, the NFL and NHL caps are considered hard, meaning that they offer relatively few (if any) circumstances under which teams can exceed the salary cap.

Maximum individual contracts under the CBA

The maximum amount of money a player can sign for is contingent on the number of years that player has played and the total of the salary cap. The maximum salary of a player with 6 or fewer years of experience is either $9,000,000 or 25% of the total salary cap (2010–11: $14,511,000), whichever is greater. For a player with 7–9 years of experience, the maximum is $11,000,000 or 30% of the cap (2010–11: $17,413,200), and for a player with 10+ years of experience, the maximum is $14,000,000 or 35% of the cap (2010–2011: $20,315,400).^[4]

Under the 2011 CBA, maximum salaries, as expressed as a percentage of the cap, remain unchanged. However, a player coming off his rookie scale contract is eligible to sign for 30% of the cap if he appeared in two All-Star Games, was named to an All-NBA Team twice, or was named MVP. In addition, newly signed contracts now have a maximum duration of five years for players with Bird rights and four years for all other players (including sign-and-trade acquisitions).^[5]

Exceptions

Because the NBA's salary cap is a soft one, the CBA allows for several important scenarios in which a team can sign players even if their payroll exceeds the cap. The exceptions are as follows:

Mid-level exception

Once a year, teams are allowed to sign a player to a contract for a specified maximum amount; before the 2011 CBA, this amount was equal to the average NBA salary, and since then it is set to a specified level based on the team's amount of cap room and whether it paid luxury tax in the previous season. This applies even if the team is over the salary cap already, or if the signing would put them over the cap. This is known as the Mid-level exception (MLE). The MLE may be used on an individual free agent or split among multiple free agents. Before the 2011–12 season, it was available to any team that exceeded the salary cap at the beginning of the offseason; the MLE is now available to all teams. The Mid-Level Exception for the 2008–09 NBA season was $5.585 million.^[2] The MLE was $5.854 million for the 2009–10 NBA regular season.^[3]

Under the 2011 CBA, the amount of the MLE and its duration depend on the team's cap status. The MLE is now $5 million for a duration of four years for teams that are over the cap either before or after the signing, but did not pay luxury tax in the previous season. Teams without cap room that paid tax in the previous season have an MLE of $3 million with a three-year duration. Teams with cap room, previously ineligible for the MLE, have a new MLE of $2.5 million with a two-year duration. The MLE is frozen at the stated levels through the 2012–13 season, after which it increases by 3% per season.^[5]

Examples include the Toronto Raptors' acquisition of Jason Kapono during the 2007 off-season, and the Los Angeles Lakers' signing of Ron Artest in 2009.

Bi-annual exception

The bi-annual exception was used to sign any free agent to a contract starting at $1.672 million. Like the mid-level exception, the bi-annual exception was also split among more than one player, and was used to sign players for up to two years, which raised limited to 8% per year. This exception was referred to as the "$1 million exception" in the 1999 CBA, although it was valued at $1 million for only the first year of the agreement.

An example of the bi-annual exception was the Los Angeles Lakers' signing of Karl Malone to a contract before the 2003–04 season.

The exception was eliminated following the 2011 NBA lockout as many high spending teams were using this as a tool to gain top paid players.^[5]

Rookie exception

The NBA allows teams to sign their first-round draft choices to rookie "scale" contracts even if their payroll exceeds the cap.

Larry Bird exception

Perhaps the most well-known of the NBA's salary cap exceptions, it is so named because the Boston Celtics were the first team permitted to exceed the salary cap to re-sign one of their own players (in that case, Larry Bird). Free agents who qualify for this exception are called "qualifying veteran free agents" or "Bird Free Agents" in the CBA, and this exception falls under the auspices of the Veteran Free Agent exception. In essence, the Larry Bird exception allows teams to exceed the salary cap to re-sign their own free agents, at an amount up to the maximum salary. To qualify as a Bird free agent, a player must have played three seasons without being waived or changing teams as a free agent. This means a player can obtain "Bird rights" by playing under three one-year contracts, a single contract of at least three years, or any combination thereof. It also means that when a player is traded, his Bird rights are traded with him, and his new team can use the Bird exception to re-sign him. Under the 2011 CBA, Bird-exception contracts can be up to five years in length, down from six under the 2005 CBA.^[5]

Early Bird exception

This is the lesser form of the Larry Bird Exception. Free agents who qualify for this exception are called "early qualifying veteran free agents," and qualify after playing two seasons without being waived or changing teams as a free agent. Using this exception, a team can re-sign its own free agent for either 175% of his salary the previous season, or the NBA's average salary, whichever is greater. Early Bird contracts must be for at least two seasons, but can last no longer than four seasons. If a team agrees to a trade that would make a player lose his Early Bird Rights, he has the power to veto the trade.

A much-publicized example for this was Devean George, who vetoed his inclusion into a larger trade during the 2007–08 season that would have sent him from the Dallas Mavericks to the New Jersey Nets.

Non-Bird exception

Free Agents who qualify for this exception are called "non-qualifying free agents" in the CBA, meaning they do not qualify under either the Larry Bird Exception or the Early Bird Exception. Under this exception, teams can re-sign a player to a contract beginning at either 120% of his salary for the previous season, or 120% of the league's minimum salary, whichever amount is higher. Contracts signed under the Non-Bird exception can last up to four years (down from six under the 2005 CBA).

Other exceptions

Minimum Salary Exception: Teams can sign players for the NBA's minimum salary even if they are over the cap, for up to two years in length. In the case of two-year contracts, the second-season salary is the minimum salary for that season. The contract may not contain a signing bonus. This exception also allows minimum-salary players to be acquired via trade. There is no limit to the number of players that can be signed or acquired using this exception.

Traded Player Exception: If a team trades away a player with a higher salary than the player they acquire in return (we'll call this initial deal "Trade #1"), they receive what is called a Traded Player Exception, also known colloquially as a "Trade Exception". Teams with a trade exception have up to a year in which they can acquire more salary in other trades (Trade #2, #3, etc.) than they send away, as long as the gulf in salaries for Trade #2, #3, etc. are less than or equal to the difference in salary for Trade #1. This exception is particularly useful when teams trade draft picks straight-up for a player; since draft picks have no salary value, often the only way to get salaries to match is to use a trade exception, which allows trades to be made despite unbalanced salaries. It is also useful to compensate teams for losing free agents as they can do a sign and trade of that free agent to acquire a trade exception that can be used later. Note this exception is for single player trades only, though additional cash and draft picks can be part of the trade.

Disabled Player Exception: Allows a team that is over the cap to acquire a replacement for a disabled player who will be out for either the remainder of that season (for in-season injuries/deaths) or the next season (if the disability occurs during the offseason). The maximum salary of the replacement player is either 50% of the injured player's salary, or the mid-level exception for a non-taxpaying team, whichever is less. This exception requires an NBA-designated doctor to verify the extent of the injury. Under the 2005 CBA, a team could sign a player under this exception for five years; the 2011 CBA now allows this only for one year.^[5]

Note that while teams can often use one exception to sign multiple players, they cannot use a combination of exceptions to sign a single player.

Types of free agents

There are two types of free agency under the NBA's Collective Bargaining Agreement: Unrestricted and Restricted. An unrestricted free agent is free to sign with any team, but a restricted free agent is subject to his current team's Right of First Refusal, meaning that the player can be signed to an offer sheet by another team, but his current club reserves the right to match the offer and keep the player. An offer sheet is a contract offer of at least 1 year made to a restricted free agent. The player's current club has three days to match the offer or loses the player to the new team; the CBA prior to 2011 allowed seven days.^[6] For 1st-round draft picks, restricted free agency is only allowed after a team exercises its option for a fourth year, and the team makes a Qualifying Offer at the Rookie-scale amount after the fourth year is completed. For any other player to be a restricted free agent, he must be at most a three-year NBA veteran, and his team must have made a Qualifying Offer for either 125% of his previous season's salary or the minimum salary plus $175,000, whichever offer is higher.

Rookie scale salary

Options

Many NBA contracts are structured with options for either the player or the team. An option simply gives the party that controls the option the right to extend their contract for one more season at a salary no less than the prior year's amount.

Sign and trade agreements

When a team is willing to sign an upcoming free agent, but the player's current team wants something in return, it might be in the best interest of both clubs to execute a sign-and-trade deal. This occurs when one team signs one of its free agents and immediately trades that player to another team. A sign-and-trade is beneficial to both the player and the teams; the player receives a bigger contract than he might ordinarily get from a team that he would like to play for, while the trading club gets something in return for a free agent, and the recipient of the trade gets the player they desire. Sign-and-trades are a reality in the NBA because of the CBA's rules: unlike baseball, where teams losing free agents are compensated with draft picks or cash, NBA teams that lose free agents receive no compensation.

When a team initiates a sign-and-trade agreement, it must trade the signed player immediately; teams cannot renege on the arrangement and keep the player for themselves, using the other team's financial situation to leverage the signee into a more favorable deal for themselves. Also, the contract signed before the trade must be for at least 3 years, with the first year guaranteed.

If a newly-signed player is not part of a sign-and-trade, his new team cannot trade him until December 15 of the calendar year in which he was signed or three months after the date on which he signed, whichever arrives later.

Trading and the salary cap

• Teams below the salary cap may trade without regard to salary, as long as they don't end up more than $100,000 above the cap following a trade.
• Teams above the cap (or teams below the cap but would end up more than $100,000 over the cap following a trade) cannot acquire more than 125% plus $100,000 of the salary they trade away. Under the 2011 CBA, teams that remain below the cap even after the trade can acquire the lesser of 150% plus $100,000, or 100% plus $5 million, of the salary they trade away.^[5] There is no lower limit—teams may divest themselves of as much salary as they wish in a trade.
• No free agent signed in the offseason can be traded until December 15 of that year or until three months have passed (whichever comes later), a rule that prevents teams from signing free agents with the intent of using them strictly as trade fodder. For draft picks this moratorium lasts 30 days.
• If a team acquires a player in a trade, they are allowed to trade that player straight-up for another individual player immediately. However, if they wish to package that player with another and make a trade, the team must wait 60 days before doing so.

The tight salary-matching rules of the 2005 CBA often required what NBA cap analyst Larry Coon called "trade ballast"—extra players added to a deal solely for salary matching, who would typically be waived by their new teams. Under that CBA, such players were restricted from rejoining their original teams for 30 days during the season or 20 days in the offseason. This led to what Coon called "wink-wink deals where players are traded with the full expectation of returning later." A notable example of such a deal occurred in the 2009–10 season, in which the Cleveland Cavaliers included Žydrūnas Ilgauskas in their trade with the Washington Wizards for Antawn Jamison. The Wizards waived Ilgauskas a week later, and he re-signed with the Cavs after the 30-day waiting period passed. Under the 2011 CBA, a player acquired in a trade and waived by his new team cannot re-sign with his original team until one year after the trade or July 1 after the expiration of his contract, whichever is sooner.^[5]

Base year compensation

Certain players in the first few months of a new contract are subject to base year compensation (BYC). The intent of BYC is to prevent teams from re-signing players to salaries specifically targeted to match other salaries in a trade (in other words, salary should be based on basketball value, not trade value). A BYC player's trade value as outgoing salary is 50% of his new salary, or his previous salary, whichever is greater. BYC applies only to players who re-sign with their previous team and receive a raise greater than 20%. It also applies only when (and as long as) the team is over the salary cap. Under the 2011 CBA, players subject to BYC cannot be traded before January 15 except in a sign-and-trade, and BYC is only applied to outgoing salary in sign-and-trade deals.^[5]

Waivers

NBA teams can release a player to the waiver wire, where he can stay for 48 hours (during the regular season). While he is on waivers, other teams may claim him, for his existing salary. If he is not claimed, he is said to have "cleared waivers", and is treated like any free agent, able to sign with any team (with the special restriction noted above for players who were traded and then waived).

Released players

Released/waived players with guaranteed contracts continue to be included in their former team's payroll. Players whose contracts are not guaranteed are included in team salary in the amount they made while they were with the team. Players on non-guaranteed "summer contracts" are not included in team salary unless they make the regular season roster.

If another team signs a released player who had a guaranteed contract (as long as the player has cleared waivers), the player's original team is allowed to reduce the amount of money they still owe the player (and lower their team payroll) by the right of set-off. This is true if the player signs with any professional team—it does not even have to be an NBA team. The amount the original team gets to set off is limited to one-half the difference between the player's new salary and a pro-rated share of the minimum salary for a one-year veteran (if the player is a rookie, then the rookie minimum is used instead).

Amnesty clause

Each team is allowed to waive a player without having their salary count toward the salary cap or luxury tax. One player can be waived prior to the start of any season through 2015–16, but each team is restricted to one "amnestied" player during that time. Only players signed prior to 2011–12 are eligible.^[7] Teams can claim an amnestied player at a reduced rate, with the waiving team responsible for paying the balance of the contract. The team with the highest bid acquires the player. If unclaimed, the player becomes a free agent.^[5] Teams over the salary cap can only acquire an amnestied player if he becomes a free agent, and the offer would be limited to the veteran's minimum contract.^[8]

Under the 2005 CBA, one player could be waived prior to the start of the 2005–06 season and not count toward the luxury tax. Unlike the 2011 CBA, the player still counted under the salary cap.^[5] The 2005 amnesty provision was derisively named the "Allan Houston Rule", but his team, the New York Knicks, used the exception on Jerome Williams.^[9]

Luxury tax

While the soft cap allows teams to exceed the salary cap indefinitely by re-signing their own players using the "Larry Bird" family of exceptions, there are consequences for exceeding the cap by large amounts. A luxury tax payment is required of teams whose payroll exceeds a certain "tax level," determined by a complicated formula, and teams exceeding it are punished by being forced to pay one dollar to the League for each dollar by which their payroll exceeds the tax level.

While most NBA teams hold contracts valued in excess of the salary cap, few teams have payrolls at luxury tax levels. The tax threshold in 2005–06 was $61.7 million dollars. In 2005–06, the New York Knicks' payroll was $124 million, putting them $74.5 million above the salary cap, and $62.3 million above the tax line, which Knicks owner James Dolan paid to the league. Tax revenues are normally redistributed evenly among non-tax-paying teams, so there is often a several-million-dollar incentive to owners not to pay the luxury tax.

The luxury tax level for the 2008–09 season was $71.15 millon.^[2] For the 2009–10 season, the luxury tax level was set at $69.92 million.^[3] The luxury tax level for the 2010–11 NBA season was $70,307,000.

The 2011 CBA instituted major changes to the luxury tax regime. The dollar-for-dollar tax provisions of the previous CBA remain in effect through the 2012–13 season. Starting in 2013–14, the tax changes to an incremental system. Tax will be assessed at different levels based on the amount that a team is over the luxury tax threshold. The scheme is not cumulative—each level of tax applies only to amounts over that level's threshold. For example, a team that is $8 million over the tax threshold will pay $1.50 for each of its first $5 million over the tax threshold, and $1.75 per dollar for the remaining $3 million. In addition, "repeat offenders", subject to additional penalties, are defined as teams that paid tax in four of the five previous seasons. As in the previous CBA, the tax revenue is divided among teams with lower payrolls.^[10] However, under the new scheme, no more than 50% of the total tax revenue can go exclusively to teams that did not go over the cap; the use of the remaining 50% has not been specified in the new agreement.^[5]

Tax levels from 2013–14

NBA salary cap history

NBA Salary Cap and average player salary since the introduction of the cap in 1984.^[11]

See also

• Salary cap

References

External links

• NBA Salary Cap 101
• NBA Players' Association CBA page
• NBA Salary Cap FAQ by Larry Coon