Calculating Maximum Salaries

The bidding war for LeBron James, Dwyane Wade and Chris Bosh will be coming soon to an N.B.A. front office near you.

Following years of anticipation and salary cap maneuvering, one of the most anticipated dates in N.B.A. free agency history – July 1, 2010 – is approaching.

Lots of teams will have cap room to throw at him. Miami Heat fans, and fans around the country, have logical arguments as to why one, two or even three of them will choose to lead their teams. Here’s a look at how much it will take to get them.

Unlike in other professional sports, N.B.A. salaries are capped.

Maximum N.B.A. salaries fluctuate in line with fluctuations in the salary cap.

The salary cap is set by calculations based on projected amounts for revenue and benefits for the upcoming season. Barring any adjustments that are necessitated, they typically use the set amount for national broadcast rights (which is determined in advance), plus the revenues for the previous season (other than national broadcast rights), increased by 4.5%.

The salary cap calculation takes 51% of the league’s projected revenue, subtracts projected benefits, and divides by the difference by the number of teams in the league. Adjustments are then made if the previous season’s revenues were below initial projections.

For maximum salaries purposes, a slightly different cap calculation is used, one that is based on 48.04% of the league’s projected revenues (rather than 51%). The calculations are otherwise the same.

There are types of maximum salaries. Each is based on a player’s tenure.

  • A player with 0-6 years of experience can make up to 25% of the salary cap
  • A player with 7-9 years of experience can make up to 30% of the salary cap
  • A player with 10+ years of experience can make up to 35% of the salary cap

A year of experience is earned for every prior season in which a player was on the active or inactive roster of an N.B.A. team for at least one day during the regular season.

These maximum salary rules only apply to the first year of a player’s contract. All remaining years are governed by the rule regarding contract lengths and annual raises.

The league builds in a backstop, however, to protect the maximum salary levels for players in decreasing (or minimally increasing) salary cap environments. A player’s maximum salary in the first year of any new contract can never be less than 105% of the salary he earned in the last season of his previous contract.

The salary cap is expected to decline for the 2010-11 N.B.A. season from the $57.7 million level at which it is today. Therefore, the backstop will apply to James, Wade and Bosh.

Each player earned $15,779,912 last season. Thus, each player will be entitled to 105% of that amount, or $16,568,908 in the first year of any new contract signed this summer.

While the starting salary is the same no matter where each of these player sign, the N.B.A.’s Collective Bargaining Agreement gives the home team a financial advantage when it comes to re-signing its own players.

Each of the three player’s home teams can offer him one more year (six instead of five) and bigger annual raises (10.5% of the salary in the first season of his new contract instead of 8%). This translates to an offer of $125.5 million over six years, versus the $96.1 million over five years that other teams can offer.

That difference, $29.4 million, is very real. But it is also something of an illusion.

The first five years of a home team’s maximum contract offer would total $100.2 million, which isn’t too far away from $96.1 million. In most circumstances, unless a maximum contract player suffers a catastrophic injury, he will make a large salary in the sixth year no matter where he signs -– so locking in that sixth season now simply provides additional peace of mind.

So, for a player like James, that sixth season shouldn’t matter too much. Conversely, for a player like Wade, whose playing style and injury history place him at risk for breaking down, locking in that sixth year guarantee could be quite important. 

Here’s a look at the how maximum contract offers for James, Wade and Bosh would break down:

1 Response

  1. TKO says:

    The difference in raises (10.5% for incumbent teams vs 8% for other teams) back in 2010 is much smaller than in the 2011 CBA (7.5% vs 4.5%) or today (8% vs 5%). Although the difference in raises in 2011 or today is still small, the fact that the difference is even smaller in 2010 gave free agents even less incentive to stay with their incumbent teams.

    Seems like these “incentives” for free agents to stay with their incumbent teams (i.e. higher raises, longer contract durations, supermax contracts, etc.) don’t help too much. The top free agents (who are truly worth the incentives) leave anyways (or would’ve stayed even without these incentives) while the free agents for whom these incentives actually mattered end up becoming albatrosses, bad contracts down the road.

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