HoopsHype explains: How do maximum contracts work?

HoopsHype explains: How do maximum contracts work?

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HoopsHype explains: How do maximum contracts work?

You’ll often read reports of various players signing “max extensions”, receiving “maximum contracts”, but the those labels don’t tell the entire story. Based on the number of years a player has been in the league, whether or not they are signing with their own team or another in free agency and a host of other potential variables, the differences between different types of maximum salaries can be vast – potentially on the order of $70 million over the length of the contract. And max contracts signed in different seasons will end up with their own unique numbers.

Max salaries fall into three major categories. In the simplest scenario, players with 0-6 years of experience are eligible for 25 percent of the salary cap, 7-9 years at 30 percent and 10 years (or over) of years in the league brings that number up to 35 percent. Players who sign under “Bird rights” are eligible for 8 percent annual raises and ones without them for 5 percent (up from 7.5 and 4.5 percent in the previous cap). Bird rights can get quite nuanced, but in most cases this is the choice between signing with your own team or another. Bird rights are also the difference between being available for a five- or four-year deal.

For example, when Mike Conley signed his $153 million deal with the Grizzlies in the summer of 2016 he had played nine seasons in the NBA, all with Memphis, and his $26.5 million starting salary was 30 percent of the cap for the 2016-17 season with 7.5 percent raises annually over five years. In reality, since Conley’s salary was calculated under the old Collective Bargaining Agreement, Conley received slightly under 30 percent due to the NBA using a lower “basketball related income” split to determine max contracts. Under the new CBA, which was approved in December by both the Players Association and NBA and will start for the 2017-18 season, maximum contract percentages will actually be what they have been reported as previously.

The years to determine the maximum salaries have been built on a pretty simple logic. Almost every max player in the NBA is drafted in the first round, and will have played four seasons under a team-friendly rookie contract before hitting restricted free agency. During that summer, the player signs a four- or five-year contract (often with a player option at the end to hit unrestricted free agency right in the middle of their prime) after which they will be eligible for the 30 percent maximum. The 35 percent figure after 10 years doesn’t really make any sense, since most players produce at their best level at the age of 27 or 28, and doesn’t line up with the simplest path in terms of contract lengths, but it’s something that players like Chris Paul (this summer) and LeBron James (in 2018) will enjoy the benefits of.

An interesting market dynamic max contracts create is that players of various impact will be compensated the same. Roughly 30 percent of the cap doesn’t correctly express the value of players like Kevin Durant, Stephen Curry, LeBron James, Russell Westbrook, Kawhi Leonard – players who are the top-tier superstars of the NBA. Teams tend to have no choice but to extend contracts that will be painful at the end, and it makes a world of difference if that player is Paul Millsap or James Harden.

Derrick Rose, Kevin Durant and Chris Paul Rules

To skip over the number-of-years requirement, the NBA has two types of “Designated Player Extensions” – one for players coming off rookie deals and one for veterans (the “Designated Veteran Extension” being added in the latest CBA). Each team can have up to four of designated players, two for players receiving rookie extensions and two for veterans. Both can be negotiated a year before the player’s current deal ends.

For players coming off their rookie contract, the DPE is often called the “Derrick Rose rule”, since Rose was the only player who met the criteria when the rule was introduced back in 2011. To be eligible a player must have either made two All-NBA teams, been selected as Defensive Player of the Year or won MVP. Meeting one of these goals bumps the potential maximum salary of a player from 25 to 30 percent of the salary cap.

The “Kevin Durant rule” for veterans has the same criteria, but bumps the potential salary of a player from 30 to 35 percent for players with 7-9 years of experience. The “Designated Player Veteran Extension” was created after Durant left the Thunder to encourage players to stay with their respective teams (in particular, protecting the smaller markets). Funnily enough, this didn’t stop the Kings from trading DeMarcus Cousins away. Currently, the Indiana Pacers are desperate for Paul George to make an All-NBA team this season, since the extra $70 million qualifying for the DPVE would probably keep George in Indiana long-term, instead of having to trade him or potentially George walking in unrestricted free agency in 2018.

Another fun detail in the new CBA is the move from the “Over-36 rule” to the “Over-38 rule”. Previously, players couldn’t sign five-year contracts (a rule designed to protect bad management and dumb ownership) that extended past their age 36 season. Chris Paul is the president of the Players’ Union, and helped negotiate to move that cut-off age to 38.

Paul is an unrestricted free agent this summer and just turned 32 years old.

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