With a new CBA and a new TV deal on the horizon, the NBA could be in line for another big spike increase in the salary cap, similar to the spike back in 2016. We will see whether the league implements any cap smoothing or not, but regardless we should expect the salary cap to be appreciably more than current levels. Common sense tells us that a bigger salary cap leads to larger salaries for the players. I believe that now is the best time for discussions around player contracts to not be expressed in dollars, but in terms of the salary as a percentage of the league-wide salary cap. Let's go into more detail below.
Because the league keeps growing its revenue on a year-by-year basis, the salary cap keeps increasing annually as well. This puts the league in a rising cap environment, where the amount teams can spend on their rosters increases every year. I liken this to an inflationary environment, another topic that is quite popular in the world today. One definition for inflation is "a general increase in prices and fall in the purchasing value of money." Let's break this down into two pieces.
First, A general increase in prices. In the NBA's case, prices is replaced by the salary cap line, the limit to the amount a team can spend outside of exceptions, and player contracts. If you look at the table below, you can see that the cap has more than doubled over the last ten years.
The large spike in the cap between 2015-2016 and 2016-2017 was due to the new television deal the league negotiated, something that the league is in line for again after the 2024-2025 season. The next TV deal could see another explosion in the salary cap, thus continuing the trend of ever-increasing player salaries.
Next, fall in the purchasing value of money. In the NBA, this essentially means that a $15 million player in 2022 is a lot different than a $15 million player in 2014. In 2014, its basically the equivalent of a rookie-scale max amount, roughly 25% of the salary cap. Today, its essentially what an average starting center makes, roughly 12% of the salary cap. Another example of this can be seen in the dollar amount of a max contract in the NBA over the years. Below is a table showing the value of a would-be Super-Max contract (35% of the salary cap) over the last ten years.
As you can see, the price of a Super Max has continuously increased and will continue to do so. A team would have to clear 5 more million dollars in cap space to sign a super max free agent in 2022 when compared to 2020. Yesterday's price is not today's price.
Expressing Salaries as a Percentage of the Salary Cap
In a league where the maximum amount a player can make is limited to a percentage of the salary cap, it only makes sense that we expand this practice to the discussion around all contracts. I shake my head when people react to reported deals with shock at the reported dollar amounts and comparing them to contracts signed by players in prior years.
For example, let's take a look at the recent rookie extension signed by RJ Barrett. He recently signed a 4 year, $107 million base extension with the New York Knicks that begins in 2023-2024. This just happens to be roughly the same amount of years and dollars that Jaylen Brown signed that began in 2020-2021. The difference here is that Barrett's deal will average out to be roughly 17.3% of the salary cap given current salary cap estimations, probably less if their is a big spike due to the coming tv deal, while Brown's is on average 22.8% of the cap over the life of the contract. This is just one example of comparing deals signed in different years needs to be contextualized using a percentage of the salary cap instead of, or along with, the dollar amounts.
I would expect that their may be a lot of deals over the coming years that may produce a lot of shock value at the reported numbers, but in reality, from a percentage of the salary cap perspective, these deals will be right in line with similar value we have seen historically. I look forward to the day when we do not even discuss dollar amounts at all and analyze only on a percentage basis.
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Nick Thoreson is a young professional working in finance who is passionate about the NBA and especially all things salary cap related.