There’s no proven formula to measure parity in the NBA, but it seems like it’s present as ever in the league. Any team can win on any given night. Well, several factors contribute to parity in the league, and one of them is the salary cap. What is a salary cap in the NBA? How is the NBA salary cap determined? If you have limited knowledge about all these, this article is an excellent place to start.
What is the NBA Salary Cap?
The NBA salary cap is a ceiling limit amount that teams can pay their players as salary. Most professional sports leagues implement a salary cap except Major League Baseball. But in the case of the NBA, it enforces what is called a soft cap.
What is a soft cap? A soft salary cap is an arrangement that allows teams to go over the cap following specific rules and exceptions. Teams that go over the cap are subjected to luxury tax determined by bracket. The luxury tax is a stiff penalty or fee that charges teams a dollar (and more) for every dollar they spend above the luxury tax.
It’s interesting to know that the NBA has only been operating with a salary cap since the 1984-85 season. The league had a salary cap in the mid-1940s but was abolished after only one season. Under the new salary cap, teams are only allowed to spend $3.6 million for the players’ payroll in the first season.
Why Does the NBA Have a Salary Cap?
The salary cap is meant to control spending and encourage parity, or equality, among NBA teams. Without a salary cap, a team could theoretically just horde star-level players leaving other competitors in the dust. The result is an uneven league without much competition.
For the people to tune in and watch their hometown or favorite teams, they must be competitive. The nuances of the salary cap and other rules pertaining to salary and other exceptions are detailed in the Collective Bargaining Agreement (CBA).
Now, how is the NBA salary cap determined? Under the new CBA in 2017, the cap continues to change based on the projected revenue of the league. In 2019-20, the cap was at $109.14 million. This season, it increased to $112.414 million, and teams will pay luxury taxes if their payroll is at $136 million and above.
Aside from the salary cap, there is also a minimum salary that teams should spend. In 2019-20, the minimum payroll was $98.226 million, or 90% of the cap. In the current 2021-22 season, the minimum payroll is $101.173 million.
How is the NBA salary cap calculated? Apparently, it’s just simple mathematics. It is calculated by multiplying the estimated Basketball-Related Income (or “BRI”) by 44.74 percent, minus projected player benefits (such as health and welfare benefits) and then dividing the result by 30, which is presently the total number of NBA teams.
Because teams can construct a player’s salary compensation in various ways, the CBA contains detailed guidelines for determining when and what portion of a player’s salary is included in a team’s Team Salary and thus counts towards the Salary Cap for a given salary cap year.
How Does NBA Salary Cap Work?
For sure, the NBA salary cap involves many moving parts including exceptions, maximum and minimum salaries, and so forth. Because the NBA salary cap is “soft,” the limit is workable for teams, and they can navigate and go over the cap. That could entail penalties known as the luxury tax.
Here are the exceptions that a team can use to go over the cap:
- “Bird” Exception– If a free agent has played for a team for at least three seasons in a row (or part of it), the team may re-sign him to a contract with a first-year salary of the maximum player salary.
- “Early Bird” Exception– If the “Bird” exception is three years, then the “Early Bird” is two years. Suppose a free agent has played for a team for some or all of the previous two seasons. In that case, the team may re-sign him with a first-year salary of up to 175 percent of the player’s salary of his previous season’s contract, or 105 percent of the average salary in the prior season.
- “Non-Bird” Exception- If a team neither has the “Bird” or “Non-Bird” rights, they can go over the cap and resign the player 120 percent of the player’s previous season’s salary, or 120 percent of the player’s minimum salary for the given season, or, the Qualifying Offer amount if the player is a Restricted Free Agent.
- Bi-Annual Exception- This exception is available to teams that want to sign one or more players to contracts with first-year salaries of up to $3.382 million and teams that want to re-sign their own free agents without acquiring a player by assignment. These contracts cannot cover more than two seasons or be used in subsequent years.
- Non-Taxpayer Mid-Level Salary Exception- Teams that want to sign one or more players to contracts with first-year salaries of up to $8.641 million and re-sign their own free agents without acquiring a player through assignment. This exemption is valid for up to four NBA seasons.
- Taxpayer Mid-Level Salary Exception- The salary involved in this exception is smaller than that of Non-taxpaying teams for obvious reasons. Teams may sign one or more players to contracts with first-year salaries of up to $5.337 million, re-sign their own free agents, and not acquire a player through assignment. This exception is valid for a maximum of three NBA seasons.
- Mid-level Exception for Room Teams. This exception applies if a team has not used the Bi-annual Exception, Non-Taxpayer Mid-Level Salary, or Taxpayer Mid-Level Salary Exceptions in the same Salary Cap Year. Correspondingly, teams that used this exception can sign one or more players to contracts with first-year salaries of up to $4.449 million, re-sign their own free agents, and not acquire a player through assignment. This exemption is valid for up to two NBA seasons.
- Rookie Exception. Each season, before the start of the Moratorium Period, a new Rookie Salary Scale is released, reflecting the previous year’s Salary Cap. Teams can sign their first-round draft pick for up to 120 percent of the Rookie Salary Scale.
- Veteran’s Minimum- This exception can be used to acquire a player who had a signed one or two-year minimum contract by assignment. Teams can sign the player to a one- or two-year deal at the minimum player salary.
- Disabled Player Exception- When a player is unable to play due to illness or injury, teams can replace him with a single player on a contract that pays either 50% of the disabled player’s current salary OR the season’s amount of the Non-Taxpayer Mid-Level Salary Exception.
- Traded Player Exception- The traded player exception is a rather complicated transaction, but it essentially allows teams to go over the cap to make trades. To understand the traded player exception clearly, here is an example.
Back in 2020, then Celtics GM Danny Ainge learned about Gordon Hayward’s decision to opt-out of his contract and become an unrestricted free agent. Ainge immediately talked to the Pacers about a potential sign-and-trade deal, but it eventually fizzled.
The Hornets swooped in with an offer of four years and $120 million. At this point, Ainge knew that he could get nothing out of Hayward, so he immediately arranged to trade two second-round picks in exchange. The salaries don’t exactly match, and the Celtics did not take anything back in salary. However, Ainge created a trade exception with $28.5 million based on that lopsided deal which he can then use for later trades.
What does that mean? Well, if later, Ainge traded for Player A, who has a $20 million salary in exchange for his Player B, who makes $8 million a year, the trade will be allowed because he has a trade exception to close that gap. Be reminded that this exception may only be used for trades and not for signing free agents.
How Much Can NBA Teams Go Over the Salary Cap?
Since the salary cap varies year by year, the luxury tax territory is also different. Teams can actually go as deep into the territory as they want, provided it is within the rules. The rules allow teams to sign their own free agents (or those they own the Bird rights), and if a team chooses to give their players as much salary as the rules allow, the payroll could get pretty massive.
For example, look at the Golden State Warriors. Their total cap is over $184 million, the biggest in the NBA. This year alone, they owe Steph Curry nearly $46 million, almost $38 million to Klay Thompson, $31.6 million to Andrew Wiggins, and $24 million to Draymond Green. The Warriors own the Bird rights to all of these players; therefore, the team can pay them as much as the CBA allows.
(Golden State acquired Wiggins through trade, so they now own his Bird rights. That means they can offer more money to Wiggins than any other team could.)
This season, the luxury tax territory is $136.6 million. Teams that exceed the league’s cap will be taxed based on their tier. The tiers are determined by how much money the team has spent above the cap, and the funds will be distributed equally among non-taxpaying teams. Next year, the salary cap is set at around $121 million, increasing the luxury tax territory to $147 million.
How Do NBA Buyouts Affect Salary Cap?
In a perfect world, buyout candidates choose teams with the most cap space, but that’s not always the case. Players who are bought out almost often sign with championship contenders.
Therefore, the majority of buyout contracts are worth the minimum salary. From a cap standpoint, this means that most buyout contracts are worth the same amount, which is a pro-rated portion of a second-year player’s minimum salary.
That would be around $1.62 million for the entire season, but the actual amount paid to a player and counted against the cap depends on when the contract is signed. This regular season lasts 146 days. The deadline for trades is on the 93rd day of the season. As a result, if a player signed with a new team on Monday, he would receive approximately 36.3 percent of that minimum figure and even less each passing day.
Are Coaches Included in the NBA Salary Cap?
No, a coach’s salary is not counted or included in the NBA salary cap. Teams can pay coaches as little or as big as they want. Most coaches in the NBA make $3 million a season, with the top individuals earning seven to 11 million.
Wrapping Things Up: What is a Salary Cap in the NBA?
There won’t be any fun in a league where only a few franchises can afford the best players. In the NBA, the league implements a salary cap to encourage parity and prevent other teams from simply outbidding the others.
Here is the NBA salary cap explained: It is basically a limit in the total amount an NBA team can pay their players. However, the NBA’s salary cap is called a “soft cap” since it allows exceptions and other malleabilities that see teams going over the cap. Nevertheless, the CBA ensures that the teams that own a player’s Bird rights can offer him more money than other squads.
On top of that, the NBA penalizes teams that go over the salary cap, called the luxury tax. Teams in the luxury tax territory pay it in tiers. The tiers are determined by the amount of money spent above the cap by the team, and the funds will be equally shared among non-taxpaying teams.
Now, how is the NBA salary cap determined? It is simply determined by multiplying the estimated Basketball-Related Income by 44.74 percent, minus projected player benefits, and then dividing the result by 30, the current total number of NBA teams. Based on these calculations, salary may increase and decrease based on the BRI. This year, the salary cap is $101.173 million, and the luxury tax territory is $136.6 million. Next year, an increase is imminent, putting the cap at $121 million and the luxury tax at $147 million.
Do all of these numbers interest you? Well, if you want to dig deeper into front office moves and signings, you must be able to understand the answer to the question, “What is a salary cap in the NBA?” You may not be able to grasp everything all at once, but hopefully, this article assisted you in understanding the basic concepts of the NBA salary cap.