The NBA Salary Cap and You: An Overview, Part I

If you’re an NBA fan, you’re probably sick of hearing about the salary cap, the luxury tax and other salary-related matters. The NBA’s system is easily the most complicated of any other salary system, and it’s for that reason that financial-based transactions that make little to no basketball sense take place so often.

Major League Baseball has no salary cap. That’s pretty simple. Teams like the Red Sox, Mets and Yankees can (and do) spend as much as they want, limited only by their profit-and-loss statements and/or their owner’s discretion.

The National Football League is the exact opposite. It has a hard salary cap, which means that going over the cap will result in penalties such as lost draft picks. As a result, teams usually don’t get close to passing the cap, because they don’t want to lose their picks. The cap is currently $128 million for 2009, which is about a $12 million raise from the previous season.

The NBA is somewhere in the middle. It has a soft cap, which basically amounts to no cap, since so many exceptions to passing the cap exist, such as a team re-signing its own player. I’ll get more into those exceptions later in the piece.

In fact, the NBA cap is so irrelevant that it’s a historical rarity for a team to be under it.

Put a Cap On It

For the 2009-10 season, the salary cap is set at $57.7 million. As I said earlier, this isn’t particularly relevant as a figure by itself, what’s relevant is that it’s a drop of about a million dollars.

This is particularly relevant when it comes to the vaunted Summer of 2010, where there are many high-quality free agents that could be available, and several (such as Chris Bosh, LeBron James and Dwyane Wade) are expecting to sign max contracts.

What is a ‘max contract?’ Like everything else involving NBA salaries, it’s complicated.

For players with fewer than six years of experience, a max contract can be 25 percent of the cap. So, for 2009-10, it will be $14,472,500. It’s pretty rare that a player with so little experience would get a max contract, but Brandon Roy (who just locked up a max extension locked with the Blazers) and probably Kevin Durant are exceptions.

For players with seven to nine years of experience, it is 30% of the cap, or $17,310,000. This is where the Summer of 2010 comes into play. LeBron, D-Wade and Bosh, all of whom were drafted in 2003, will be finishing their seventh seasons in the league (I know, where does the time go?) in June 2010. (Their other draftmate, Carmelo Anthony, elected to sign a five-year extension in the summer of 2006, while the other three signed three-year deals.)

So, with a reduction in cap, you’re looking at a reduction in the max contract. Basically, it means the vaunted Free Agent Summer of 2010 could literally be the worst season possible for players to seek max deals. Sort of ironic, don’t you think?

But There’s a Tax on That Luxury

Now let’s get into the luxury tax, which is something that certain teams live and die by. The luxury tax is a figure, calculated each year by the league through some complicated formula, using individual team and overall income from the past year, as well as projected income for the upcoming year.

If you are under the tax, you get a few million from the league. If you’re over the tax, you have to pay one dollar to the league for each dollar you are over.

Headed into the 2009-09 season, eight teams were into the tax, topped off by the New York Knicks and Dallas Mavericks who both paid about $19 million. The Cleveland Cavaliers paid $14 million, the Denver Nuggets $13 million and the rest between $3 and $8 million.

If you’re a Knicks fan, this is the part where you smash your head into the wall. Of all the teams paying the tax, only the Knicks and the Phoenix Suns didn’t make the playoffs, and the Suns were only $3 million over.

See Appendix A at the end of this article for a complete list of 2008-2009 team salaries, and the resulting record and playoff performance. It’s really quite enlightening.

The Exceptions Are the Rule

Now let’s look into some of these salary cap exceptions, most of which make a surprising amount of sense.

The rookie exception allows teams to sign first-round picks even if they are over the cap. Makes sense.

Speaking of the rookie scale in the NBA, there is a set salary number for each pick in the first round (the only ones that are guaranteed).

Blake Griffin (first round, first overall) is guaranteed $4.1 million this season, then $4.4, then $4.7, then an option in the fourth and fifth year that increases by 26.1% and 30% respectively. That ensures that rookies are handsomely paid, yet not overpaid, and they must work for that big second contract.

The last pick of the first round in this year’s draft, Christian Eyenga, is guaranteed $824,200 this year, $886,000 next season and $947,800 next year. The fourth and fifth years are optioned, but they increase by 80.5% and 50%, respectively.

All in all, a much fairer rookie wage system than the NFL, where Matthew Stafford is guaranteed more money than Phillip Rivers is with his freshly-inked deal, and Rivers has brought his team to three straight playoff appearances and an AFC Championship game. Stafford hasn’t played a down. Go figure.

Back to the exceptions, one that was much publicized in February 2008 was the Bird rights. It allows teams to re-sign their current players up to a maximum contract, and it allows them to go over the cap to do so. This could prove to be huge in the upcoming summer, as the Heat, Raptors and Cavaliers are in the best position to re-sign their stars and have the cap space to put talent around them.

Early Bird rights allow a team to re-sign a veteran for 175% of his previous season’s salary, or the NBA’s minimum salary, whichever is higher. The player in question must not have changed teams in two years, and his new deal has to be for more than two years, but not more than five.

The other salary exception of note is a trade exception. If a team trades away a player for a player who makes less salary, they are able to acquire more players to equal that salary, even if they are going over the cap.

This came into play this summer, when the Mavericks acquired Shawn Marion from Toronto, and the Magic were let in on the trade, so technically Turkoglu was a sign and trade to Toronto. The Magic received cash from the Mavericks and Toronto, as well as a trade exception for losing Turkoglu.

The trade exception also comes into play when picks are dealt, since picks don’t count as salary. They sweeten the deal for the team receiving the picks, since they get an exception which helps them fill the gap until the draft pick is made.

Other salary exceptions are for signing veterans to the minimum, as well as signing players to replace another player who in injured for the rest of the season. In the case of injury, the incoming player can be paid up to 50% of the injured player’s salary.

The Rockets applied for and were granted an injury exception for Yao Ming, due to the fact that he will likely miss the entire 2009-10 season.

With all of this NBA salary mumbo-jumbo, you might be wondering how this all affects the game on a day-to-day basis. In part two of this article, I’ll examine some teams that are famous for letting the cap dictate their personnel moves, as well as the teams that are able to ignore it completely, to varying degrees of success.

Part II is here: The NBA Salary Cap and You, Part II: The Deep, the Cheap and the Stupid

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Appendix A: 2008-2009 Team Salaries, and Resulting Performance

Salary	Team	Record	Playoffs
$94,743,434	Dallas Mavericks	50-32	2nd round
$93,496,409	New York Knicks	32-50
$93,908,697	Cleveland Cavaliers	66-16	Conf. Finals
$79,509,212	Boston Celtics	62-20	2nd Round
$78,220,092	L.A. Lakers	65-17	NBA Champions
$76,517,042	Portland Trailblazers	54-28	1st Round
$74,180,632	Phoenix Suns	46-36
$73,970,842	Orlando Magic	59-23	NBA Finals
$71,355,245	Houston Rockets	53-29	2nd Round
$71,214,669	Detroit Pistons	39-43	1st Round
$71,150,000	2008-09 Luxury Tax threshold
$70,999,864	San Antonio Spurs	54-28	1st Round
$70,491,939	Miami Heat	43-39	1st Round
$70,311,816	Denver Nuggets	54-28	Conf. Finals
$70,072,137	Minnesota Timberwolves	24-58
$70,006,546	Washington Wizards	19-63
$69,318,491	Milwaukee Bucks	34-48
$69,284,373	Chicago Bulls	41-41	1st Round
$69,018,855	Indiana Pacers	36-46
$68,979,341	Atlanta Hawks	47-35	1st Round
$68,503,055	Sacramento Kings	17-65
$68,387,001	Philadelphia 76ers	41-41	1st Round
$67,212,898	Oklahoma City Thunder	23-59
$66,842,294	New Orleans Hornets	48-34	1st Round
$66,337,162	Golden State Warriors	29-53
$65,841,407	Utah Jazz	48-34
$63,572,117	Charlotte Bobcats	35-47
$61,884,186	L.A. Clippers	19-63
$58,853,741	New Jersey Nets	34-48
$58,580,000	2008-09 Salary Cap
$55,415,707	Memphis Grizzlies	24-58