NBA

Understanding the Salary Cap as NBA Trade Deadline Approaches

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The NBA trade deadline is just weeks away. Teams across the league have until February 6th to finalize deals to improve their chances for a deep playoff run, stockpile assets for off-season moves, add draft picks and dump salaries to make room for future free agents.

You might remember huge deadline deals being announced throughout the years. These sometimes last-minute deals can turn contenders into even more dominant forces or restructure the future for less competitive teams across the league. Bucks fans will remember — many have chosen to forget — a dreadful deadline day decision to trade Ray Allen to the Seattle Supersonics, along with Ronald ‘Flip’ Murray, Kevin Ollie and a first-round pick in that year’s draft for veteran guard Gary Payton and super-athlete Desmond Mason. This deal sadly ended the “Big 3” era; however, we won’t get into the details about why this deal was terrible for Milwaukee. Why, you ask? Well, we’d like to avoid the nightmares that will come from rehashing that trade.

Other deadline deals that you might remember include Pau Gasol going to the Lakers in 2008, Carmelo Anthony forcing his way to the Knicks in 2011, Rasheed Wallace heading to Detroit in 2004 and many others listed here.

Every year, fans of true contenders pray for their team to add a superstar or an impactful piece to help them push toward a deep playoff run. With the Bucks looking primed for a title run this summer and many fans urging the team to make a move at the deadline (as you can see below), we thought we’d share an overview of key terminology NBA salary cap and how general managers and owners navigate the trade deadline by manipulating different types of both trade exceptions and contracts.

This way, NBA fans can approach the deadline with an accurate and reasonable mindset about potential trade options.

WHAT IS THE NBA SALARY CAP?

The NBA salary cap exists mainly to level the competitive playing field. Teams have very different resources available to them based on ownership groups, market size, television deals, location-based factors and more. The salary cap is in place in order to set spending constraints for teams with more resources and to provide teams with fewer resources an opportunity to compete. A cap on spending, in theory, should create an equal and level playing field across the league, which affords all teams the opportunity to sign and keep the players they desire.

However, the NBA’s salary cap has not fully created a level playing field. The NBA didn’t implement a standard salary cap — this would be called a hard cap. A hard cap is the player payroll amount that teams cannot exceed. Instead, the league created a soft cap system. The soft cap allows teams to exceed the cap in specific circumstances called exceptions. This soft cap makes the salary cap extremely complex and difficult to manage. Because teams are allowed teams to exceed the soft cap, exploitation has and will continue to occur.

The NBA implemented additional rules and procedures to limit exploitation which makes things even more difficult for casual fans to understand. On top of that, a salary cap floor also exists, which is the minimum salary threshold teams are supposed to meet — the smallest amount you can pay your full roster. If a team is below the floor, the difference is distributed among the rest of the roster.

Initially, the NBA implemented the soft cap because they wanted to encourage teams to keep their own players and make reasonable, necessary improvements through multiple exceptions. Although the exceptions and formulas have existing holes which teams often take advantage of, teams have a true opportunity to level the playing field by properly allocating resources in the right places and making smart and innovative salary cap decisions.

Let’s get into the details.

WHY THE CAP GOES UP AND DOWN

You might remember that in 2016 a large number of players signed massive deals because the “cap went up.” We don’t mean LeBron James, Kawhi Leonard and other superstars, but players who didn’t really deserve the money got paid. For example, from 2012-2013 to 2016-2017, the max salary went from $13.4 million to $22 million. This meant that a player like Kent Bazemore was able to sign an $18 million per year deal, simply because more money was available for teams to spend. Most people would agree that Bazemore is not an 18 million dollar guy.

So, where did this money come from? Well, thanks to a massive nine-year, $24 billion television deal signed by the NBA in 2014, the salary cap took off to unimaginable heights. Players got paid at an all-time high rate. There was simply no precedent for a cap increase of this magnitude and it’s uncertain where the cap will end up each year going forward.

TYPES OF CONTRACT EXCEPTIONS

Contract exceptions are a commonly referenced piece of the salary cap puzzle. These exist so that a team can sign players and go over the soft cap. Let’s take a look at some of the notable exceptions.

Bird Exception: The Bird exception, named after Celtics great Larry Bird, allows a team to go over the cap to keep their own free agent. Essentially, a player has to have played three straight seasons for one team without ever clearing waivers for that team to own his Bird rights. Teams with Bird rights can offer these players an extra contract year and a higher salary than every other team. In a perfect world, this would incentivize players to remain with teams that drafted them.

Early Bird: This is a different type of Bird exception. This exception gives teams the right to go over the cap to re-sign free agents on a limited contract, as long as the player has been on the team for two seasons without clearing waivers — also called early qualifying veterans. This lets the team re-sign their own free agents for a certain percentage of the previous year’s salary or the NBA’s average salary, whichever number is greater. This exception is only possible on deals between two and four years in length.

Non-Bird: Free agents that don’t qualify for Bird or early Bird deals then get lumped into this exception. Teams can re-sign these players to deals worth a different percentage of their previous year’s salary or a percentage of the league’s minimum salary, whichever number is greater. These deals can last up to four years in length.

Mid-Level: You’ve surely heard about teams using the mid-level exception once per year to go over the cap. Teams are allowed a certain amount of mid-level money depending on whether they are over or under the luxury tax. The NBA has a luxury tax system that is applied if the team payroll exceeds a separate threshold higher than the salary cap. These teams then pay a penalty for each dollar their team salary exceeds the tax level.

Trade Exceptions: Typically, a team can’t make a deal that would leave them $100,000 above the salary cap, regardless of whether the trade reduces or increase its overall payroll, and requires exceptions in order to do so; the trade exception helps them get this done. The exception allows a team to trade for any player as long as their collective incoming salary does not exceed a set amount, which is based on whether the team pays the luxury tax after the trade and the collective outgoing salary. Taxpaying teams can absorb up to 125% of the outgoing salary + $100,000, and for non-taxpayers the amount changes based on outgoing salary and incoming salary allowed — a sliding scale.

If a team trades away players with higher salaries than of the players they acquire, the traded player exception allows them to acquire players with salaries not exceeding the difference + $100,000, for up to one year after the trade in which they acquired this credit.

Rookie Exception: Teams can sign their first-round picks to rookie-scale deals and they are allowed to go over the cap to do so.

Minimum Exception: Teams can sign players for the NBA’s minimum salary even if they are over the cap, for up to two years in length. In the case of two-year contracts, the second-season salary is the minimum salary for that season. The contract may not contain a signing bonus. This exception also allows minimum-salary players to be acquired via trade. There is no limit to the number of players that can be signed or acquired using this exception.

TYPES OF CONTRACTS

It’s important to remember that not all contracts are created equal. This is especially important to consider when it comes to deadline deals. Teams seek favorable types of contracts in deadline day deals, in large part for future planning and roster management. Here are a few types of contracts to be aware of.

Player Option: The player can decide whether they want to stay with their team for another year or become an unrestricted free agent.

Team Option: The team has the power to keep the player or let them opt out of the deal.

Early Termination: The player has the right to end their contract early, but cannot exercise this right prior to the end of the fourth year of a current deal.

Max Contract: This is the maximum amount of money a team can pay a player over the course of his contract. This number is dictated by the cap.

Supermax: For a veteran to qualify for the supermax deal, he must be entering his eight or ninth season in the NBA and have either of the following qualifications:

  • Made the All-NBA team (at any level) in either the season immediately before signing the extension, or two of the three previous seasons; or
  • Named NBA Defensive Player of the Year in either the season immediately before signing the extension or two of the three previous seasons; or
  • Named NBA MVP at least once in the previous three seasons.

Additionally, the team offering the supermax must have originally drafted the player or obtained the player while he was on his rookie deal. If all of these fall into place, the team can offer contracts with a starting salary between 30 and 35% of the salary cap. The deal can only be for five years max.

Sign and Trade: This allows the player to re-sign with their current team, then initiate a trade immediately within the next 48 hours. This does not apply to restricted free agents who have signed offer sheets with other teams already.

TYPES OF FREE AGENTS

Free agency is a different beast than the trade deadline, but full-scale organizational planning must take everything into account. Here’s a look at the different types of free agents.

Unrestricted Free Agents: These are players whose contracts have fully expired and are free to sign with any team. These players have full control over where they sign.

Restricted Free Agents: These are players who have the right to test the free agent market, and other teams are allowed to make them contract offers. Once these players get an offer sheet from a different team, their original team has the right to match any offer and keep the player. They can go over the soft cap to do this.

Overall, while the trade deadline is just one specific date on the league calendar, general managers and ownership groups need to take into account all of these different salary cap exceptions, types of contracts, and upcoming types of free agents so that they can create a short- and long-term plan for the organization. It takes an incredible front office to have a true handle on all of the options upcoming with the deadline in sight.

Now you know why some free agent deals you see on Twitter might simply be impossible and why others might fit right into your team’s plans come February 6th.

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