Salary Cap 101

  • How do you calculate a team's salary during a given season?
  • Salary Cap Definitions

  • The NBA's salary cap is a very complicated concept. In this article, we will give you an overview of the salary cap and the basic terminology. This is what we call: Salary Cap 101. Hopefully, this primer will help you not be overwhelmed by such terms as collective bargaining agreement, mid-level exception and Larry Bird Rights.

    What is a salary cap?
    The salary cap is simply a limit on the amount of money that NBA teams are allowed to pay their players. The salary cap varies from year-to-year as it is calculated as a percentage of the League's revenue from the previous season. If the League did not have a salary cap, the teams in larger markets with more revenue streams would have an even larger advantage over the smaller market clubs.

    Has there always been a salary cap?
    The League had a cap in the mid-1940s, but the modern NBA instituted a salary cap prior to the 1984-85 season, striving to level the playing field for all teams and to maintain competitive balance throughout the League. Prior to the salary cap, teams were allowed to spend whatever they desired on players. The salary cap that first year was $3.6 million. The 2004-05 salary cap was the highest in history, $43.87 million.

    Does the NBA have a "soft" cap or a "hard" cap and what is the difference?
    The NBA has a soft cap meaning there are certain significant exceptions that allow teams to exceed the salary cap in order to sign players. Having a soft cap also helps teams keep their current players. A hard cap would not allow teams to exceed the salary cap in any circumstance. The NFL has a hard cap with very limited exceptions.

    What is the Collective Bargaining Agreement (CBA)?
    The CBA is a contract between the NBA and the Players Association that dictates the rules by which they operate. The current CBA, which is up at the end of this month, has been in effect since 1999. Both parties have been working on a new agreement since last year.

    Are there exceptions to the salary cap and what are they?
    Yes, there are several exceptions to the salary cap. These exceptions allow teams to sign players even if a team is over the cap. The exceptions are listed below:

    Mid-Level Exception
    A team is allowed to sign a player to a contract equal to the NBA average, even though the team is over the salary cap. The mid-level exception, which can be used each season, can be used on one player or split between many players. Contracts can be signed for up to six years. The mid-level exception last season was $4.9 million.
    Example: The Golden State Warriors signed guard Derek Fisher to a multi-year contract using the entire mid-level exception prior to the 2004-05 season.

    $1 Million Exception
    This exception, which was actually worth $1.6 million last season, cannot be used in consecutive seasons. The $1 million exception can also be split among more than one player.
    Example: The L.A. Lakers signed forward Karl Malone using the $1 million exception prior to the 2003-04 season.

    Rookie Exception
    Teams are allowed to sign their first round draft selections to rookie "scale" contracts even if the club is over the salary cap.
    Example: Even though the Trail Blazers were over the salary cap prior to the 2004-05 season, the team was allowed to sign both Sebastian Telfair and Viktor Khryapa to rookie contracts.

    Larry Bird Exception
    Free agents who qualify for this exception are called "qualifying veteran free agents" or "Bird Free Agents" and must have played under one or more contracts covering all of part of the three preceding seasons without changing teams as a free agent or being waived. If such a player is traded, his "Bird" rights transfer to his new team. The team holding the Bird rights can use this exception to sign him to a contract up to seven years in length with annual raises of up to 12.5%.

    If a first round draft pick finishes his three-year rookie scale contract (or four-year contract if the team exercises its option for a fourth season) the team will have full Bird rights.

    This exception is known as the Larry Bird Exception because the Boston Celtics were one of the first teams permitted to exceed the salary cap to re-sign their own free agent. That free agent was Larry Bird.
    Example: Damon Stoudamire and Shareef Abdur-Rahim both qualify as Bird players.

    Early Bird Exception
    Free agents who qualify for this exception are called "early qualifying veteran free agents" after playing only two seasons without changing teams as a free agent or being waived. A team may use this exception to resign a player for 175% of his salary the previous season or the average player salary whichever is higher. Contracts using this exception can be between two and seven years with annual raises of up to 12.5%.
    Example: Joel Przybilla will qualify for this exception after the 2005-06 season. He signed a two-year deal with the Trail Blazers after completing his rookie scale contract, which he originally signed with Milwaukee and was later traded to the Atlanta Hawks.

    Non-Bird Exception
    Free Agents who qualify for this exception are called "non-qualifying free agents" meaning they do not qualify under either the Larry Bird Exception or the Early Bird Exception. Under this exception, teams can resign a player to a contract beginning at 120% of his salary the season before or 120% of the minimum salary whichever is higher. Contracts can be signed for up to six years with annual raises of up to 10%.

    Can a team use more than one exception to sign a player?
    No. Teams can specify which exception they would like to use, but teams cannot combine exceptions in order to sign a player.

    What types of free agency does the CBA allow?
    There are two types of free agents in the NBA; unrestricted and restricted. An unrestricted free agent is free to sign with any team while a restricted free agent is subject to his current team's Right of First Refusal. This means that the player can be signed to an offer sheet by another team, but his current club can match the offer and keep the player. For a first round draft pick, 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 all other players to be a restricted free agent, he must be in his first three years in the NBA and his team must have made a Qualifying Offer for 125% of his previous season's salary, or the minimum salary plus $150,000, whichever is higher.

    What is an offer sheet?
    An offer sheet is at least a two-year contract offer to a restricted free agent. The original club has 15 days to match the offer or loses the player to the new team.
    Example: Prior to last season, the Trail Blazers signed Minnesota Timberwolves guard Trenton Hassell to an offer sheet. The T-wolves matched the offer and kept Hassell.

    Does a team get compensated when they lose a free agent to another club?
    No, the team just loses the player.

    What is a rookie "scale" contract?
    First round draft picks are slotted in salaries according to their draft position. The first 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. For a fourth season, the team must exercise the option by October 31st following the second season.

    What is a sign-and-trade?
    Simply put, it is when a team signs one of its free agents and immediately trades that player to another team. A sign-and-trade is beneficial to both players and teams; the player receives more money than they might ordinarily get from a team they would like to play for while the trading club gets something in return for a free agent.

    What are player and team options?
    Player options give the player the right to invoke an option year while a team option allows the team that right. NBA contracts only allow for one option year and the option year salary cannot be lower than the previous year.

    Are there salary restrictions for players?
    Players have minimum and maximum salaries, based upon the amount of seasons a player has been in the NBA. The more years a player has played, the higher the salary.

    How does the salary cap affect trades?
    The total salaries of the players being traded must end up within 115% of each other plus $100,000.

    The NBA's salary cap is an amazingly complex piece of work that requires a ton of homework, and in some cases, a law degree. It's easy to understand why so few major trades actually take place.

    The cap restricts player movement, and is designed to give some measure of equality from the teams in the large markets to the teams in the smaller cities. Obviously, it has been successful, but challenges remain.

    If you've ever wondered why certain players, or teams, make the moves they do, or don't make any moves, it's helpful to educate yourself. If this were offered as course in college it would easily take more than one term to master the cap.

    Most fans don't have the time, the means, or the drive to full understand the inner workings of the legalities of everything in the NBA's salary structure. But, hopefully this has helped answer some of the basic questions.

  • How do you calculate a team's salary during a given season?
  • Salary Cap Definitions