Every average NBA fan has heard of the term ‘salary cap’ so many times that he or she is absolutely curious about what that exactly means. So, if you are wondering the same, this is the article for you.

The NBA salary cap is the limit to the total amount of money that NBA teams are allowed to pay their players. Like many professional sports leagues, the NBA has a salary cap to control costs and benefits parity, defined by the league’s collective bargaining agreement (CBA).

This limit is subject to a complex system of rules and exceptions and is calculated as a percentage of the league’s revenue from the previous season. Under the CBA ratified in July 2017, the cap continued to vary in future seasons based on league revenues. The salary cap is set at $112.4 million for the 2021-22 season and will reach $151.8 in the 2027-28 season.

The Tax Level for the 2021-22 season is $136.6 million while the minimum team salary, which is set at 90% of the Salary Cap, is $101.2 million.

If these explanations, sound a little unclear, the salary cap is basically a rule in order to make sure teams have an equal playing field and no club can purchase all elite players in their rosters. Basically, it helps to create a more competitive atmosphere inside the league.

The majority of American leagues (NFL, NHL, MLS) have hard caps while the NBA has a soft salary cap. Hard salary caps forbid teams from going above the salary cap. Soft salary caps allow teams to go above the salary cap but will subject such teams to reduced privileges in free agency. Teams that go above the luxury tax cap are subject to the luxury tax (a tax on every dollar spent over the luxury tax cap).

A luxury tax in professional sports is a surcharge put on the aggregate payroll of a team to the extent to which it exceeds a predetermined guideline level set by the league. The ostensible purpose of this “tax” is to prevent teams in major markets with high incomes from signing almost all of the more talented players and hence destroying the competitive balance necessary for a sport to maintain fan interest.

Each year, the salary cap is derived from basketball-related income or BRI. This includes revenue from tickets, broadcast rights, merchandise and concession sales, team sponsorship and promotions, championship parades, and several dozen other things. Under the current Collective Bargaining Agreement (CBA), the players get between 49 and 51 percent of the BRI.

Thanks to a huge spike in broadcast rights (as well as league interest in general), the cap skyrocketed from $70 million in 2015-16 to $112.4 million in 2021-22.

If you are wondering what would have happened if there was no salary cap in the NBA, you can take a look at European football. With no salary cap there, the teams that are owned by the richest individuals or companies and are willing to spend a lot, are in a position to get all of the good players. Such examples in today’s football are Paris-Saint-Germain, Manchester City, or Real Madrid. The first famous case when such an example happened is when Russian billionaire Roman Abramovich bought Chelsea in 2003 and literally brought in every player that he wanted.

The rise of “super teams” in recent years might suggest that the salary cap system in the NBA is broken, but we’ve also seen 29 of 30 franchises reach the playoffs in the 2010s. There’s simply no chance that would be the case if the Los Angeles Lakers and New York Knicks were allowed to spend triple what the Minnesota Timberwolves or Oklahoma City Thunder can afford based on differences in revenue streams in those markets.

Technically if there was no salary cap in the NBA, most players would receive less money than in the current scenario. Teams try to get as much as possible from the salary cap, giving their best players the largest contracts. In such a situation, where the salary cap is absent, players would be forced to agree to limited salaries.

On the other hand, if you are wondering if there is a salary floor just like there is a cap, the answer is – yes. The floor is set to 90 percent of the salary cap or $101.2 million for the 2021-22 season.

So, if a team’s salary is below that mark at the time of the final game of the regular season, it is required to distribute additional money to the players on the roster until it has actually spent the 90 percent. However, the team is not allowed to use this as a workaround to paying a player more than the league maximum for his stature.

If you thought that you got all the details about the salary regulations, there are of course many exceptions. The most familiar one is the one called – Bird right.

Larry Bird exception or veteran free agent exception, allows teams to exceed the salary cap to re-sign their own players.

The idea dates back to Larry Bird’s playing days with the Boston Celtics. The salary cap was agreed to for the 1983 season, but Bird had just signed a seven-year contract that September to remain with the Celtics. Rather than force them to blow up the team to get under the cap, the Larry Bird exception was created to allow Boston to exceed the cap.35 years later, dozens of players are signed using Bird Rights on an annual basis.

The guidelines of the Bird rights are:

– If a player has been with the same team without being waived or changing teams as a free agent, he is eligible for a five-year max contract (based on a number of years of service, as previously discussed) regardless of whether adding that amount would put the team over the cap.

– If a player has been with the same team for two years before hitting free agency, he is eligible to re-sign with the team using “Early Bird Rights.” He can sign for up to 175 percent of his previous year’s salary or the current average salary, whichever is greater. The deal must be for at least two years, but no more than four.

– There’s also a non-Bird exception, in which a player can sign a deal with the same team where he finished the previous season for up to four years with a starting salary up to 120 percent of his previous year’s salary.