The National Basketball Association (NBA) employs an alarmingly complex set of financial regulations governing how much each team can pay each player.  With the most important free agency period ever  starting today, a guide to the relevant rules follows.

Maximum Salary

As part of the Collective Bargaining Agreement (the labor agreement between the players and owners) teams may not pay a player a yearly salary above 30% of the salary cap and contracts may not exceed five years. What this means, is that for the superstar players on the market this summer (Lebron James, Dwayne Wade, Chris Bosh, etc.) no team may pay them more than about $16.5 million per year. Since no team can pay these cream-of-the-crop players any more than that, the teams they end up with will depend on factors outside of salary (geography, future teammates, friendships, etc.).

 Also, since several of these players are guaranteed to be offered the maximum, only teams with over $16.5 million in salary cap space will be able to sign them.

The Salary Cap

By rule, each NBA team is only allowed to spend a certain amount total on their players, set as a percentage of all revenue earned by all teams. This was put into place in the mid-80s to level the playing field and keep large market teams from dominating the small market teams. The cap for the coming season is $57.7 million, meaning the amount paid to all players cannot exceed that number.
However, the NBA has a soft cap, meaning that there exist numerous exceptions and loopholes teams can use to cause their payroll to exceed the salary cap (unlike the hard caps in the NFL and NHL, which strictly enforce their cap level).

Exceptions

• Larry Bird Exception – Teams are allowed to resign any player that has played with them for at least three straight years, regardless of whether that new contract will send the team over the salary cap.  Larry Bird was the first player to get a contract under these terms.
• Mid-Level Exception – Teams are allowed to sign one player to a contract equal to the average NBA salary, regardless of the impact on the salary cap.
• Traded Player Exception – Now things get complicated.  Say Team A trades a player making the max salary ($16.5 million) to Team B for a player making $6.5 million a year.  Team A now has a $10 million trade exception.  This means that Team A can now add up to $10 million in salary (through trades only) in the following year, regardless of the impact on the salary cap.

Sign and Trade

The sign and trade agreement presents a strange scenario in which a team signs one of its former players only to immediately trade him to another team.  Why do these happen?  Really, they benefit all parties involved.  The player’s former team would know at this point that they won’t re-sign the player, and if they let him just go to another team, they will get nothing in compensation while a trade will net them players, draft picks, and/or cash.  The player will be able to sign a bigger deal with his former team than with any other team (teams can re-sign a player of theirs that’s becoming a free agent for six years instead of the normal five).  Whereas the other team is able to get the player they want.  It is because of this move that the Dallas Mavericks have entered into the running for LeBron James.  They don’t have the cap space currently to sign him, but are willing to trade players to the Cleveland Cavaliers (James’ former team) to execute a sign and trade deal.  The Cavs would sign him to a max deal (for six years, which only they can offer) then immediately trade him to Dallas for players/draft picks/cash.

This is only scratching the surface of the NBA’s free agency laws (which honestly take a lawyer to sort out).  But this knowledge will keep you on the front line of what goes down over the coming weeks, as you hear of Larry Birds being sign-and-traded for trade exceptions, and other such nonsense.