Salary Cap

The NBA salary cap is the limit to the total amount of money that National Basketball Association teams are allowed to pay their players. Like many professional sports leagues, the NBA has a salary cap to control costs and benefit parity, defined by the league’s collective bargaining agreement (CBA). This limit is subject to a complex system of rules and exceptions and is calculated as a percentage of the league’s revenue from the previous season.

Soft and hard caps

Unlike the NFL and NHL, 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 and NHL salary caps are considered hard, meaning that they offer relatively few (if any) circumstances under which teams can exceed the salary cap. The NBA and MLS version of the “soft” cap does, however, offer less leeway to teams than that of Major League Baseball. MLB allows teams to spend as much as they want on salary, but it penalizes them a percentage of the amount by which they exceed the soft cap. The percentage increases as the number of consecutive years a team exceeds the cap grows, resetting only when a team falls under the cap. Other penalties related to the MLB draft can also apply effective with the 2018 team payrolls.

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, 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 complicated formula, and teams exceeding it are punished by being forced to pay bracket-based amounts for each dollar by which their payroll exceeds the tax level.

While most NBA teams hold contracts valued in excess of the salary cap, few teams have payrolls at luxury tax levels. Tax revenues are normally redistributed evenly among non-tax-paying teams, so there is often a several-million-dollar incentive to owners not to pay the luxury tax.

Under the system, tax is assessed at different levels based on the amount that a team is over the luxury tax threshold. The scheme is not cumulative — each level of tax applies only to amounts over that level’s threshold.

“Repeat offenders”, subject to additional penalties, are defined as teams that paid tax in previous seasons. Teams paying taxes in three out of four years are subject to the higher repeater rate.

The tax revenue is divided among teams with lower payrolls. However, no more than 50% of the total tax revenue can go exclusively to teams that did not go over the cap. The remaining 50% would be used to fund revenue sharing for the season during which tax was paid.

Larry Bird exception

Perhaps the most well-known of the NBA’s salary cap exceptions is the Larry Bird exception, 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 terms of the Veteran Free Agent exception. In essence, 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 three seasons without being waived or changing teams as a free agent. Players claimed after being amnestied have their Bird rights transferred to their new team. Other players claimed off waivers are not eligible for the full Bird exception, but may qualify for the early Bird exception. 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, their Bird rights are traded with them, and their new team can use the Bird exception to re-sign them. Bird-exception contracts can be up to five years in length.

Early Bird exception

The lesser form of the Larry Bird exception is the “early Bird” exception. Free agents who qualify for this exception are called “early qualifying veteran free agents”, and qualify after playing two seasons with the same team. Players that are traded or claimed off waivers have their Bird rights transferred to their new team.

Using this exception, a team can re-sign its own free agent for either 175% of their 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 four seasons. If a team agrees to a trade that would make a player lose their Early Bird Rights, they have the power to veto the trade.

Non-Bird exception

“Non-qualifying free agents” (those who do not qualify under either the Larry Bird exception or the early Bird exception) are subject to the non-Bird exception. Under this exception, teams can re-sign a player to a contract beginning at either 120% of their 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 four years.

The NCAA does not pay their players a salary, so there is no need for a salary cap.

WNBA players can only make up to 20% of an NBA player’s minimum salary. This number caps off a WNBA player’s salary at $110,000. Median salaries in the WNBA are approximately $71,000.