NBA Free Agency: What is the salary cap and the salary floor?

The NBA’s free agency period is getting set to begin and general managers are worrying about one thing: How do I fit under the salary cap?

This time of year, everyone becomes accountants in the NBA. Who is going where? For how much? What does this mean for future cap space? How are teams cutting money?

There was even a trade executed Wednesday ahead of free agency that had some cap implications. The Detroit Pistons traded Jodie Meeks to the Orlando Magic for a conditional second round pick in a move to shed $6 million of salary and give the Pistons enough cap room to go after a max contract player.

It is these kinds of moves that have casual fans scratching their heads and figure out what the strategy is exactly. Cap space is an asset.

Why? Why have the salary cap? Why is it important? And what keeps teams from not spending at all and basking in the glory of shared revenue?

The NBA’s collective bargaining agreement has a number of different rules and regulations for player transactions designed to help each team have a chance at winning the championship and try to level the playing field in some way. The very basic though is this thing called the salary cap.

The NBA puts a limit on how much teams are allowed to spend without using various exceptions built into the collective bargaining agreement.

The way the salary cap is determined is by splitting the amount of basketball-related income between the players and the owners. Without diving into too many details, this amount is determined by the league’s TV deal, ticket and merchandise sales and other items. The players and the owners virtually split this amount 50/50 based on another complex formula.

With the league’s salary cap set, the teams then know the amounts they have to work with to spend and add new players to their roster and retain players on their roster (minus the Larry Bird Exception, which allows teams to go over the cap to retain free agents).

Teams are allowed exceptions like that to go over the cap. But they are few and they come with their own limitations. The ability to add new players is severely limited for the teams that spend the most. They cannot simply add a big-name free agent to create a super team, they have to fit them under the cap or under one of these exceptions.

Essentially, though, the salary cap exists to limit how much teams can spend.

The Cleveland Cavaliers spent $107 million in salaries this past year. So even with the cap increasing to an estimated $94 million this year, the Cavaliers will not be able to add many players to the roster except their own free agents (using the Larry Bird exception) or through the taxpayer mid-level exception.

And, to make things trickier for the Cavaliers, teams that spend too much have to pay a luxury tax. A tax that was made more onerous in the last round of collective bargaining — going from a dollar-for-dollar tax to a $1.25-to-dollar tax and getting more expensive the more a team is over the luxury tax line.

All this is done to put pressure on teams to control their own spending and make it more costly to spend more. On the opposite end, the Philadelphia 76ers spent $63 million and could have more than $30 million in cap room to spend at a minimum.

That room allows them to spend if they want. But they will have to spend. Just like there is a ceiling capping how much teams spend, there is also a floor. The penalties though are not as onerous.

To ensure the players get their share of the basketball-related income, teams are required to spend 90 percent of the salary cap each year. Failing to do so means the team would have to spread the amount needed to reach the 90 percent salary floor to the players on the team.

It is not a very costly penalty, but it is also somewhat embarrassing to the team as they negotiate with agents. No one wants to seem cheap.

The salary cap and the salary floor are the very basics of NBA free agency. General managers around the league are constantly maneuvering and positioning themselves around this number.

With the salary cap jumping up by more than $20 million, that number has come into more focus as teams begin preparing to negotiate with and sign free agents this summer.

For more NBA free agency coverage, check out our hub page.