NBA Finance Part II: Player Contracts

Don’t forget to check out Part I about the Salary Cap.

Next up is player contracts. We all know that NBA players get paid ridiculous amounts of money to be the best at the game of basketball. But how are these huge contracts between players and teams determined? There are plenty of rules governing these contracts. Once again, let’s start with the basics:

Maximum Contracts: The maximum amount of money a player can sign for depends on the number of years he has played in the league. If a player has been there for six years or less, the max he can make a year is either $9 million or 25% of the salary cap ($13,603,750 for the 2010-11 season), whichever is greater. Seven to nine years of experience can get you $11 million or 30% ($16,324,500), and ten plus years can bring in $14 million or 35% ($19,045,250).

Exception #1: The first year of a contract is the only one that cannot be over the maximum amount. For subsequent years in the contract, the player may be given up to a 10.5% raise each year if certain conditions are met.

Exception #2: A free agent’s maximum salary in the first year of a new contract cannot be less than 105% of the last year of his previous contract, even if that number is higher than the normal max salary.

Because of these two exceptions, Kobe Bryant, the NBA’s highest paid player, will make $30,453,000 in the 2013-14 season, even though that is much more than the maximum salary rule allows.

Rookie Salaries: First round draft picks have a salary scale based on what number at which they were drafted. In 2010, this number was $4,286,900 for the first pick and descends all the way to $850,800 for the last pick in round one. The first year of a rookie contract must be between 80% and 120% of this figure.

Options: Contracts will sometimes have an option for either the team or the player. This option allows the party the right to extend the contract for an additional year for no less than the last year’s salary.

Sign-and-Trades: The sign-and-trade is a common tool used by teams and players to work around salary restrictions. Let’s say Player X plays for Team #1 and only has a year left on his contract. He wants to go to Team #2, who wants him, but Team #2 doesn’t have the salary cap availability for a contract big enough for him. At the same time, Team #1 wants to get something for X, instead of letting him walk away for nothing a year later. The teams can execute a sign-and-trade, signing X for a certain salary that works for them and then trading him to Team #2 for other players/picks/etc. All three parties win in this situation. Team #1 gets trade assets for a player they would have lost in a year anyways. Player X gets a new contract and gets to go to the team he wants to be on. And Team #2 gets Player X with a new contract based on Team #1′s salary situation, even though the contract wouldn’t have been possible under their own salary restrictions. There are many complicated rules about trading and salaries, but those are the basics of a sign-and-trade.

Of course, there are tons of additional restrictions and rules about player contracts, but those are the most basic elements. Any questions?

Part I: The Salary Cap
Part III: Salary Exceptions
Coming soon: Part IV: The Collective Bargaining Agreement

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