Why is there a salary cap for each team in the NBA?

Many types of sports are basically utilizing a hard or simple salary cap. However, it is the league that decides on the amount or rate. It is for this reason that the teams cannot spend more than the set amount.

Interestingly, the salary cap of the National Basketball Association (NBA) is not hard. In this manner, it can be designed to be exploited or bent. This is why you can see an NBA team who could pay just easily even over four times the targeted salary cap in the entire player expenses next season.

A salary cap is a figure being set following the league’s revenue. This figure determines how much money teams are allowed to spend or use in getting players through either trades or free agency from other teams without using salary-cap exceptions.

“A team below the line may spend freely in the free agent or trade markets until it reaches that line. A team above the line can only add salary through either the traded player exception or one of the exceptions we are going to cover below,” said Sam Quinn, a known basketball analyst and writer at CBS Sports.

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“The projected 2022-23 salary cap is currently $122 million,” he noted.

Paul Agustin, of CBA Breakdown, also said the salary cap for NBA has “so many exceptions that very few teams are ever under the cap for a season.”

On the question of how much the cap is, it is first essential to know that the NBA is projecting benefits and Basketball Related Income (BRI)  each year in July.

On the other hand, the Collective Bargaining Agreement (CBA) defines a percentage of targeted BRI that goes into the cap computation. After this, some adjustments are being done to the cap based on the correctness of the projections from the previous season. Thus, the CBA talks about the maximum and minimum salaries based on years of league experience.

What is the meaning of Basketball Related Income?

NBA’s Basketball Related Income (BRI) covers any types of revenues received by the league, NBA Media Ventures, or NBA Properties. The income may include:

  1. Game day parking receipts
  2. Income from team sponsorships
  3. Proceeds from summer camps
  4. Income from premium seat licenses
  5. Proceeds got by NBA Properties for any licensed product from the NBA
  6. Revenue from mascot and dance team appearances
  7. 40 percent proceeds from arena signage
  8. 40 percent of proceeds from luxury suites
  9. 45 percent to 50 percent of proceeds from arena naming rights
  10. Proceeds from beverage sale rights
  11. Game gate receipts
  12. Revenue from broadcasting rights
  13. Sales from novelty, program, and concession

“Any item that is included in BRI under the CBA benefits players, as it will increase the salary cap. Increasing the salary cap has a cascading effect on the amount of compensation each player can make,” said Agustin.

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Understanding the meaning of minimum and maximum pay

The CBA sets both the minimum and maximum amount of money a team can pay its players for every season. The salary cap then became the ceiling that limits the total salaries a team can pay or offer its players during a salary cap year. However, this has some exceptions.

Since the salary cap has some exceptions, teams can go beyond it and only pay a tax, making this a soft cap.

The salary cap for the NBA league is different from the NFL which observes hard cap mechanism where no team can go beyond the cap for any reason.

On the part of the NBA league, the minimum team salary is something that requires teams to use at least 90 percent of the salary cap on their players during a salary cap year. The time set for the salary cap year is from July 1 through the next June 30.

Meantime, a maximum salary of a player is never below than 105 percent of his previous salary.

“So even if the cap level decreases drastically, a player who previously had a maximum player contract can still receive a 5 percent increase over his previous contract,” Agustin said.

“There are, however, annual salary increase restrictions in these maximum player contracts,” he added.

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How to compute the salary cap

To compute the salary cap, simply multiply the projected BRI by 44.74 percent, less target player benefits, such as welfare and health. Afterward, divide the result by 30, which is the number of NBA teams presently.

For the 2019-20 season alone, the salary cap was $109.14 million. In this manner, the minimum team salary for the 2019-20 season was $98.226 million.

For the 2018-19 season, the salary cap and the minimum team salary were at $101.869 million and $91.682 million, respectively.

“Because teams can structure a player’s compensation in a number of ways, the CBA includes extensive rules for determining when and what part of a player’s salary is included in a team’s team salary and therefore counts towards the salary cap for a particular salary cap year,” according to the CBA Breakdown report.

Furthermore, the CBA is already expecting that teams will both sign their first round draft picks and re-sign their free agents. This is the reason why it is also using “cap holds” as a reserve spot for these players in each team’s team salary.

Accordingly, the specific amount of a player’s cap hold is a multiple of the player’s salary. This amount also depends on some facts indicated below.

“Each free agent is included in his team’s team salary at the beginning of each salary cap year at his cap hold amount until he actually re-signs with his current team, signs with another team, or is renounced,” Agustin said.

“Each first round draft pick is included in his team’s team Salary at his cap hold amount right when he is selected until the player signs with that team or that team loses or trades its exclusive draft rights,” he added.