NBA Salary Cap
The NBA Salary Cap is the limit to the total amount of money that NBA teams are allowed to pay their players. While this seems simple enough in concept, the salary cap is in actuality extremely complex, and contains many obscure rules and loopholes.
The amount that is actually the "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 2004-05, the NBA's salary cap was approximately $44 million (U.S.) per team, while in 2005-06 it was $49.5 million. 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.
History
The NBA had a salary cap in the mid-1940s, but abolished it 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, teams were limited to $3.6 million in total payroll.
"Soft" vs. "Hard" Caps
Unlike the NFL, 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's cap is considered "hard," meaning that it offers very few circumstances in which teams can exceed the salary cap.
The Collective Bargaining Agreement
The Collective Bargaining Agreement, or "CBA," is the contract between the NBA (the commissioner and the 30 team owners) and the NBA Players' Association that dictates the rules of player contracts, trades, revenue distribution, the NBA Draft, and the salary cap, among other things. In June 2005, the NBA's 1999 CBA expired, meaning the League and the players' union had to negotiate a new agreement; in light of the fiasco that was the 2004-05 NHL lockout, the two sides quickly came to an agreement, and ratified a new CBA in July 2005. The new agreement will expire following the 2010-11 season, but the League has the option to extend it through the 2011-12 season if they wish. If so, the League must exercise its option to extend the agreement by December 15, 2010.
Little changed in terms of the salary cap between the 1999 and 2005 versions of the CBA. In exchange for agreeing to the controversial player age minimum, the players will receive a slightly higher percentage of the League's revenues over the course of the new agreement. Additionally, the League's maximum salary decreased slightly in comparison to the 1999 CBA.
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
A team is allowed to sign a player to a contract equal to the average NBA salary, 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, and it can be used each season, either on one player or split up between multiple players. Contracts signed under the mid-level exception can be for up to six years. The mid-level exception in 2004-05 was $4.9 million, while in 2005-06 it is $5 million under the terms of the new CBA.
An example of the mid-level exception's use would be when the Golden State Warriors signed guard Derek Fisher before the 2004-05 season.
$1 million exception
The new CBA refers to this exception as the "Bi-Annual Exception," as it has not been worth $1 million since 1999, but it is still referred to by its old name in the vernacular. The bi-annual exception may be used to sign any free agent to a contract starting at $1.672 million in 2005-06, but cannot be used two years in a row (and if the $1 million exception was used in 2004-05, the bi-annual exception cannot be used in 2005-06). Like the mid-level exception, the $1 million exception can also be split among more than one player, and can be used to sign players for up to two years, with raises limited to 8% per year.
An example of the $1 million exception was when the Los Angeles Lakers signed Karl Malone to a contract before the 2003-04 season.
Rookie exception
The CBA allows teams to sign their 1st-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 a nutshell, 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 for 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. Bird-exception contracts can be up to six years in length.
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 five seasons.
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 six years.
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: Teams can acquire more salary in a trade than they send away.
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 average salary, whichever is less. This exception requires an NBA-designated doctor to verify the extent of the injury.
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 agency
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 2 years made to a restricted free agent. The player's current club has 15 days to match the offer or loses the player to the new team. 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 less than 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 $150,000, whichever offer is higher.
Rookie "scale" salary
1st-round draft choices are assigned salaries according to their draft position. The first overall pick receives more than the second pick, the second more than the third, and so on. Each contract is for three years, with a team option for a fourth season. In 2005, the scale went like this for lottery picks:
| Overall Pick (2005) | Base Salary |
| 1st (Andrew Bogut) | $3,617,100 |
| 2nd (Marvin Williams) | $3,236,600 |
| 3rd (Deron Williams) | $2,906,200 |
| 4th (Chris Paul) | $2,606,200 |
| 5th (Raymond Felton) | $2,372,800 |
| 6th (Martell Webster) | $2,155,100 |
| 7th (Charlie Villanueva) | $1,967,400 |
| Overall Pick (2005) | Base Salary |
| 8th (Channing Frye) | $1,802,400 |
| 9th (Ike Diogu) | $1,656,800 |
| 10th (Andrew Bynum) | $1,573,900 |
| 11th (Fran Vasquez) | $1,495,200 |
| 12th (Yaroslav Korolev) | $1,420,400 |
| 13th (Sean May) | $1,349,400 |
| 14th (Rashad McCants) | $1,282,000 |
Options
Many NBA contracts are structured with "options" for either the player or the team. An "option" simply gives the party that controls it 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, obviously, 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 immediately traded away in a sign-and-trade, his new team must wait until December 15 of the calendar year in which he was signed before they can trade him again.
Trading and the Salary Cap
- When two teams trade players, the total salaries of the players being traded must be within 125% of each other, plus or minus $100,000. (This rule is in addition to the obvious fact that teams cannot exceed the salary cap through trades.)
- No player signed in the offseason (including free agents and rookies) can be traded until December 15 of that year, a rule that prevents teams from signing free agents with the intent of using them strictly as trade fodder.
- If a team acquires a player in a trade, they are allowed 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.
Base year compensation
Players who are in their first year of a new contract extended with the Bird exception are called BYC players. Salaries of these players only count as half for the purpose of matching salaries in a trade. This makes it extremely difficult to trade a player that has recently been extended.
Waivers
NBA teams can release players 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.
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". Note that this is true if the player signs with any professional team — it doesn't 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 the minimum salary for a one-year veteran (if the player is a rookie, then the rookie minimum is used instead).
The 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 (for instance, the 2005-06 New York Knicks' payroll was a massive $124 million, putting them almost $75 million above the salary cap), 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 rather complicated formula. The tax threshold in 2005-06 is $61.7 million dollars, 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. To use the above example, the Knicks will owe the NBA over $60 million in luxury tax for 2005-06 alone.
In the summer of 2005, the new CBA provided an "amnesty clause": a one-time opportunity for teams to waive one, and only one, player and avoid having him count against the team's luxury tax calculation. The amnesty provision only affected the team's luxury tax status, though. The waiving team must continue to pay the player, his salary continues to count against their salary cap, and all other salary calculations are unaffected. However, the team may not re-sign or re-acquire the player for the length of the terminated contract. In all other respects, the player is treated just like any other waived player.
The amnesty provision was derisively named the "Allan Houston Rule," but, ironically, the Knicks chose not to waive Houston under its terms, instead releasing Jerome Williams.
Escrows
An escrow system is built into the CBA, to ensure that salaries stay under a certain percentage of league revenues. This does not mean that players who are owed money that exceeds the designated percentage are never paid, but rather that their extra salary is deposited in an escrow account, for withdrawal at a later date.
The Salary Cap through the years
NBA Salary Cap and average player salary since the introduction of the cap in 1984:[1]
| Year | Cap | Avg. Player Salary |
|---|---|---|
| 1984-85 | $3.6 million | $330,000 |
| 1985-86 | $4.2 million | $382,000 |
| 1986-87 | $4.9 million | $431,000 |
| 1987-88 | $6.2 million | $502,000 |
| 1988-89 | $7.2 million | $575,000 |
| 1989-90 | $9.8 million | $717,000 |
| 1990-91 | $11.9 million | $927,000 |
| 1991-92 | $12.5 million | $1.1 million |
| 1992-93 | $14.0 million | $1.3 million |
| 1993-94 | $15.1 million | $1.5 million |
| 1994-95 | $15.9 million | $1.8 million |
| 1995-96 | $23.0 million | $2.0 million |
| 1996-97 | $24.4 million | $2.3 million |
| 1997-98 | $26.9 million | $2.6 million |
| 1998-99 | $30.0 million | $3.0 million |
| 1999-00 | $34.0 million | $3.6 million |
| 2000-01 | $35.5 million | $4.2 million |
| 2001-02 | $42.5 million | $4.5 million |
| 2002-03 | $40.3 million | $4.5 million |
| 2003-04 | $43.8 million | $4.9 million |
| 2004-05 | $43.9 million | $4.9 million |
| 2005-06 | $49.5 million | $5.0 million |
| 2006-07 | $53.1 million | $5.2 million |
See also
External links
