NBA Salary Cap Explained

The NBA Salary Cap is one of the most misunderstood parts of the NBA due to its complexity. This is the easy to understand version that should help you get a better grasp of your teams financial situation.

The NBA Salary Cap is the limit of total money that teams can spend on their players salaries. This limit is dependent on the NBA’s total income as a league. This salary cap is very flexible however as there are a number of exceptions that allow teams to go over it. It is therefore considered a ‘soft cap’, compared to the ‘hard cap’ of the NFL which can very rarely be exceeded. The salary cap is in place to keep the league balanced and allow teams to keep hold of their own players for longer.

Designated Player Rule

Every team in the NBA has the right to nominate one rookie to receive a designated player extension. This allows teams to offer this player a 5-year extension, compared to the usual limit of 4. Teams can only have one designated player on a roster at one time. However teams are allowed to sign a designated player from another team, meaning they can have two, this is the final limit and no more can be signed except this.

The “Derrick Rose Rule” as it was coined means that a designated player can earn 30% of a teams salary cap instead of the usual limit of 25%. To do this the player must fulfill certain criteria; they must have either been voted to start in the All-Star game at least twice, be named to an All-NBA team at least twice, or have won MVP. The only players to sign such a contract are Derrick Rose (Chicago Bulls), Blake Griffin (LA Clippers) and Paul George (Indiana Pacers).

Derrick Rose 2010-11 MVP
Derrick Rose 2010-2011 MVP

Exceptions

As previously mentioned the NBA’s salary cap is a soft one, this means there are a number of exceptions that allow a team to sign a player even if it takes them over the cap.

Mid-Level Exception

Once every season each team can use the MLE to sign a player. The contract amount and duration depend on the teams status in the Cap. To put it simply (figures for this season) teams without cap room but are below the tax apron (not in luxury tax) can sign a player for $5.3million; a team over the luxury tax can sign a player for $3.2million and a team with cap room can sign a player to an MLE for $2.5million (teams under the cap were previously unable to sign players on an MLE).

Bi-Annual Exception

The Bi-Annual exception allows teams to sign players for contracts starting at $1.6million for the first year, with a maximum of an 8% raise for the following year. Teams already in the luxury tax are not allowed to sign players through this exception as many were using it to sign top paid players.

Rookie Exception

The Rookie Exception allows players to sign their draft choices to rookie scale contracts even if it means they would push them over the cap limit.

Bird Exception

Named so because Larry Bird was the first player to be re-signed by these means, the Bird Exception allows to re-sign their own players even if they exceed the cap limit by doing so. To qualify for this a player must have played three consecutive seasons without being waived or moving teams through free agency. Players who are traded or are amnestied have their bird rights transferred to their new team. Players who qualify for bird rights can be signed for any amount up to the maximum salary. Players claimed off waivers are not eligible for full bird rights but may qualify for the early-bird exception.

Larry Bird who after which the Bird Rule is named
Larry Bird after which the Bird Rule is named

Early-Bird Exception

The Early-Bird Exception is the lesser form of the full Bird Exception and free agents qualify for this after playing only two years with their team. With this exception teams can sign their free agents for either 175% of their previous season salary or for the league’s average salary, whichever is more.

Non-Bird Exception

Non-Qualifying free agents who do not qualify for Bird Rights can sign under the Non-Bird Exception. This allows teams to re-sign players for either 120% of their previous years salary or 120% of the leagues minimum salary, whichever is greater.

Minimum Salary Exception

The Minimum Salary Exception allows teams to sign players for the leagues minimum salary even if they are already over the cap limit for up to two years (the second year of the contract is for the leagues minimum salary that year). This exception also allows minimum salary players to be acquired by trade.

Traded Player Exception

With the Traded-Player Exception if a team trades a player with a higher salary away than the one they get in return then they qualify for a trade exception. This means that teams with this exception have up to a year in which they can acquire more salary in other trades than they send away, as long as the difference is the same.

Disabled Player Exception

The Disabled Player Exception allows a team to sign a replacement for a player who will be out for the rest of the season (through death or injury) even if they are over the cap. This also can be used for the next season if an injury occurs during the offseason. Teams can sign players for 50% of the disabled players contract or the MLE for a non luxury tax team, whichever is less. This player can only be signed for one season.

Reinstatement 

A player who was banned from the league for a drug related issue can be reinstated and re-sign for their team under the same contract.

Waivers

NBA teams can release players on waivers. The player is put on the ‘waiver-wire’ and can be claimed for 48 for his existing salary. If they are not claimed then they become treated as normal free agents and can be signed by any team. Released players with guaranteed contracts continue to be on their previous teams payroll. If the released player signs for another team then the amount their previous team pays them can be reduced by the right of set-off.

Amnesty Clause

Every NBA team is allowed to amnesty one player each year (between 2010-11 through 2015-16) during the week that follows the July Moratorium. Only players that signed before the 2010-11 season are eligible. This means that the team can waive the player but not have their contract contribute towards the salary cap or luxury tax. Teams can claim the amnestied player at a reduced price, with the players old team paying the difference. If the player is unclaimed they become a free agent.

Carlos Boozer the only player amnestied prior to the 2014-15 season
Carlos Boozer the only player amnestied prior to the 2014-15 season

Luxury Tax

Although teams can re-sign their own players indefinitely through the numerous Bird Rules their are financial consequences for those who do. A luxury tax payment is required to be paid by teams who exceed a certain tax level. This is determined by a complicated formula and teams exceeding it must pay bracket-based amounts for each dollar they are over the tax level.

Hopefully this post clears up some of the confusion surrounding the NBA Salary Cap, but if you have any further questions feel free to reach me at the links found oN the contacts page.

Next: TBD.

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