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Understanding the NBA Salary Cap: It Is Rocket Science

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Understanding the NBA Salary Cap: It Is Rocket Science

Rocket science is a term often used for the astronautics branch of aerospace engineering. It is the science and technology of space flight.

Rocket scientists are considered geniuses because of the varied and complex engineering knowledge required including fluid mechanics, structural mechanics, orbital mechanics, physics, mathematics, control engineering, materials science, and avionics among others.

Rocket science is also informally used as a term to describe a task requiring great intelligence and technical ability.

Having worked on several different projects related to the Space Shuttle program, I have a fairly good grasp on what is and what is not rocket science.

Understanding the NBA salary cap is rocket science.

In this article, I am going to attempt to simplify the complicated science of the NBA cap so that the average Bleacher Report reader can understand how the cap helps or handicaps his or her favorite team.

 

Hard vs. Soft Cap

The NBA has what is known as a soft cap. A hard salary cap doesn't allow the total payroll for the team to be exceeded for any reason. The NBA's cap contains  so many exceptions that very few teams are ever under the cap for a season.

 

How Much Is The Cap?

That is a good question. Each year in July the NBA  projects Basketball Related Income (BRI) and benefits for the upcoming season. The Collective Bargaining Agreement (CBA) defines a percentage of projected BRI that goes into the cap computation.  Adjustments are made to the cap based on the accuracy of the previous season's projections.

 

What is Basketball Related Income?

Basketball Related Income (BRI)  includes any income received by the NBA, NBA Properties or NBA Media Ventures. This includes:

  • Game gate receipts
  • Broadcast rights
  • Novelty, program and concession sales
  • Game day parking receipts
  • Proceeds from team sponsorships
  • Proceeds from summer camps
  • Proceeds from mascot and dance team appearances
  • Proceeds from beverage sale rights
  • 40% of proceeds from arena signage
  • 40% of proceeds from luxury suites
  • 45% - 50% of proceeds from arena naming rights
  • Proceeds from premium seat licenses
  • Proceeds received by NBA Properties for any NBA licensed product

 

Minimum and Maximum Salaries

The CBA defines minimum and maximum salaries based on years of league experience. For the upcoming season, the minimum salary ranges from a low of $457,588 for rookies to a high of $1,306,455 for veterans with ten or more years of experience.

Maximum salaries range have a fixed dollar amount or 25 percent of the cap, whichever is greatest. 

The maximum salaries for the upcoming season ranges from a low of $13,520,500 for someone with no NBA experience to a high of $18,928,700 for a veteran of ten or more year's experience.

A player's maximum salary is never less than 105 percent of his previous salary. So even if the cap level decreases drastically, a player who previously had a maximum player contract can still receive a 5 percent increase over his previous contract.

Another wrinkle to the maximum salary restriction is that it applies only to the first year of multi-year contract. There are, however, annual salary increase restrictions in these maximum player contracts.

The salaries for first round draft picks are calculated by a completely different formula.  Contracts are slotted based on the draft position.

For the 2009-10 season, the No. 1 overall draft pick will be paid $4,152,900 the first year, $4,464,400 the second, with a third-year option of $4,775,900, a fourth year player option of a 26.1% raise over the third-year salary.

A player may sign for between 80 percent and 120 percent of the first round draft pick scale.

 

Exceptions To The Cap

There are a dizzying number of complicated exceptions to the cap. The best known is the Larry Bird Exception.

Players who qualify for this Larry Bird Exception are called "Qualifying Veteran Free Agents" in the CBA.

This exception allows teams to exceed the salary cap to re-sign their own free agents,  to the player's maximum salary. To earn "Bird rights," a player must play for the same team for at least three consecutive years. 

If a player is traded, his Bird rights are traded with him, and his new team may use the Bird exception to re-sign him.

There is a weaker form of the Larry Bird exception known as the Early Bird Exception.   . A player qualifies for the Early Bird Exception after playing two seasons without being waived or changing teams as a free agent.

Using this exception, a team is allowed to re-sign its own free agent for 175 percent of his salary the previous season or the average player salary, whichever is greater. Early Bird contracts must have a duration of between two and five seasons.

A player can receive raises up to 10.5% of the salary in the first season of the contract using this exception.

If the player is a restricted free agent with two years of service and receives an offer sheet from a new team, the player's current team may use the Early Bird exception to match the offer.

This is also a component of the Veteran Free Agent exception known as the Non-Bird Exception. Players who qualify for this exception are called "Non-Qualifying Veteran Free Agents" in the CBA.

The Non-Bird Exception allows a team to re-sign its own free agent to a salary starting at 120 percent of the player's previous salary, 120 percent of the minimum salary based on the player's experience, or if the player is a restricted free agent, the amount needed to tender a qualifying offer

The Mid-Level Exception allows a team to sign a free agent to a contract equal to the average salary. This exception may be split and given to multiple players and may be used for contracts of up to five years in length.

The Rookie Exception allows teams to sign their first-round draft picks to a rookie scale contract even if they are above the cap.

A Simultaneous Traded Player Exception allows a team to acquire up to 125 percent plus $100,000 of the salaries they are trading. 

For example, a team trading a $10 million player in a simultaneous trade can receive one or more players whose salary is no more than 125% of $10 million, plus $100,000, or $12,600,000  in return.

A Non-Simultaneous Trade Exception allows a team to only acquire up to 100% plus $100,000 of the salary it gives up.

Non-simultaneous trades are only allowed for single player deals, although teams can sometimes find ways to pull off multi-player trades as multiple single-player trades.

Teams cannot use a Traded Player Exception to sign a free agent.  The exception can only be used only to acquire existing contracts. These exception cannot be combined with other exceptions.

The Disabled Player Exception, which is rarely granted, allows a team to acquire a replacement for a disabled player for a maximum salary of 50% of the injured player's salary, or the average salary, whichever is less. This exception can also be used to replace a player who dies during a season.

The Reinstatement Exception allows a team to re-sign a player who was banned from the league for a drug-related offense and later reinstated for up to his previous salary. To qualify for this exception, they player must sign with his previous team.

The Bi-Annual Exception may be used to sign any free agent to a contract with a specified amount. For the upcoming season, the amount is $1,990,000.

This exception may be allocated to more than one player, and can be used to sign players for up to two years, with raises limited to 8%.

In Minimum Salary Player Exceptions, teams can offer players minimum salary contracts for up to two years in length.  These 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.

 

Restricted Versus Unrestricted Free Agents

There are two types of free agents, unrestricted and restricted. An unrestricted free agent is free to sign with any other team. The player's current team has no recourse.

Restricted free agency allows the player's current team the right to keep the player by matching an offer sheet the player signs with another team.

Restricted free agency is allowed only a a few narrow circumstances.  For former first round draft picks who signed rookie scale contracts, it is allowed following the fourth season.

A first-round draft pick becomes an unrestricted free agent following his second or third season if his team does not exercise its option to extend the player's rookie scale contract for the next season.

Restricted free agency is also allowed for all veteran free agents who have been in the league less than four seasons.  All other free agency is considered unrestricted.

In order to make their free agent a restricted free agent, teams are required to submit a qualifying offer to the player by June 30.

The qualifying offer for all other players must be for 125% of the player's previous salary, or the player's minimum salary plus $175,000, whichever is greater. The qualifying offer must be for one season.

A restricted free agent has four options:

  1. He can accept his  team's qualifying offer, play for one season, and become an unrestricted free agent at the end of the season.
  2. He can accept his current team's maximum qualifying offer and play under a new contract at the maximum salary.
  3. He can sign an offer sheet with another team, which his current team is given the opportunity to match. If the team matches an offer sheet, they cannot trade the player in a sign-and-trade arrangement
  4. He can negotiate a new contract with his current team

Known as the Gilbert Arenas provision, teams are limited in the salary they can offer in to a restricted free agent with one or two years in the league.

The first-year salary in the offer sheet cannot be greater than the average salary, thereby guaranteeing that the current  team will be able to match the offer sheet by using the Early Bird exception or Mid-Level exception.

 

How Are Exceptions Applied?

For teams with a total salary below the cap,  their Disabled Player, Bi-Annual, Mid-Level and/or Traded Player exceptions are added to their team salary, and the league treats the team as though they are over the cap.

This is done to prevent a team from acting like they're under the cap and sign free agents using cap room, and then use their Disabled Player, Bi-Annual, Mid-Level or Traded Player exceptions.

Factoring this in, being under the cap does not necessarily mean a team has room to sign free agents.

For example, let us look at a scenario with this year's salary cap of $57.7 million.  Suppose a team has $50 million committed to salaries. They also have a Mid-Level exception for $6 million and a Traded Player exception for $5.5 million.

Even though their salaries put them $7.7 million below the cap, with these exceptions added, they are at $61.5 million.  So they actually have no cap room to sign free agents, and instead must use their exceptions.

Teams have the option of renouncing their exceptions in order to claim the cap room.

The Disabled Player, Bi-Annual, Mid-Level and Traded Player exceptions may be lost entirely, or the team may never receive them to begin with.

This happens when their team salary is so low that when the exceptions are added to the team salary, the sum is still below the salary cap.

The effect is that a team may have either exceptions or cap room, but not both.

 

The Dreaded "Luxury Tax"

The luxury tax is a tool that supposedly  helps control  spending in the league. For teams with payrolls that exceed a predetermined level, for every dollar they exceed the predetermined amount, they pay a dollar tax to the league.

The tax level  is calculated by taking 61% of projected BRI, subtracting projected benefits then factoring in some adjustments. For the upcoming season, the defined luxury tax amount is $69,920,000 per team.

Any tax money collected by the league is distributed as follows:

  • Teams below the tax level receive 1/30 of the tax money
  • A portion of any remaining money may be reserved by the league for "league purposes."
  • Any remaining tax money that is distributed to teams must go to all teams in equal shares. It is feasible that a team that pays tax may get some of the money back through this distribution.

 

New Definition of Genius

This is a very abbreviated explanation of the current NBA salary cap and related issues. There are a number of other detailed requirements, exceptions, clauses and contingencies which time and space does not allow me to examine.

Understanding this all requires a varied and detailed ability in math, law, and accounting. Perhaps the phrases of "This is not rocket science" or "He is no rocket scientist" are obsolete.

After all, this is not mere rocket science, it is NBA Salary Cap Science.

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