Explaining the NBL Salary Cap System

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Written for nbl.com.au by Liam Santamaria

 

A little over three years ago the NBL announced broad reforms to its player contract and salary rules.

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It was March 30, 2016 – a really big day in the history of the league.

The changes, developed in collaboration with the Australian Basketball Players’ Association (ABPA), revolved around three key revisions: the introduction of a ‘soft’ salary cap, lifting the number of imports that teams could sign and revising the marquee player rule.

The former ‘hard’ cap of $1 million was gone and the much-maligned ‘player points’ system abolished.

In their place a system was implemented that enables clubs, if they can afford it, to spend whatever they want but with any amount above the cap being subjected to a Salary Equalisation Subsidy, or ‘luxury tax’.

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It’s a system that sees the funds generated by that tax distributed to teams which may otherwise find it difficult to meet the cap.

No matter which way you view it, the changes announced that day represented a landmark moment for the NBL. The league was flourishing and it was clear that a new salary system was required in order to continue that growth, while also maintaining the competitiveness of the teams.

Recently, a new Collective Bargaining Agreement (CBA) was struck between the league and the players’ association which involved some further changes to the salary system.

Minimum player salaries were increased, as was investment in player welfare and development, while minimum salaries for development players were introduced for the first time.

Now, three years on from the introduction of the new system, the NBL has continued to go from strength to strength.

Of course, that growth has not come without its challenges and the ability of ‘smaller’ clubs to compete with the ‘bigger’ teams is right at the top of that list.

So how exactly does the NBL’s salary system work? What are the checks and balances?

Truth be told, it’s all pretty complicated but I’ll do my best to break it down.

Before we start, one quick note…

What I’m not going to do here is list each team’s salary spend from last season or estimate their spending for the year ahead. I’m also not going to offer much in the way of a critique of the system. I’m just going to lay out how the thing works, as I understand it, and you can make your own judgements from there.

 

The Soft Salary Cap

Okay, so as mentioned above, the NBL has a ‘soft’ salary cap and a system that revolves around a Salary Equalisation Subsidy or ‘luxury tax’.

Clubs who can afford it can essentially spend whatever they want on player salaries but any amount above the cap becomes subjected to the luxury tax, imposed at marginal, incremental rates. We’ll come back to exactly how this works in a minute.

First though, let’s establish how the salary cap is determined.

The cap is calculated for each season by combining the accumulated spend from the previous season and averaging this number by the number of clubs.

So, as an example, if the clubs spend an average of $1.5 million on player salaries in a given season that would become the new salary cap for the following year.

For the 2019-20 season the salary cap has been set at $1.43 million.

One of the interesting outcomes from the recent collective bargaining process is that a limit has been put on the growth of the cap. From 2019-20 onwards, the cap cannot grow by more than 7% per season.

This has been done for a number of reasons but, as I understand it, the main one is to ensure that one off anomalies cannot ‘break’ the system. For example, if a club decided to spend $2 million on a really high-profile import. If that happened the cap would increase by so much that probably only that one club would be paying luxury tax while everyone else would be claiming from the equalisation subsidy.

Of course, the league would want to encourage clubs to recruit high-profile athletes. After all, signings like that would benefit all of the clubs and the league financially and it’s unlikely any one signing would have too great an impact on competitiveness that you’d want to discourage it. Thus, the 7% cap on salary growth.

 

The Salary Floor

The Salary Floor is the amount that every club must pay to play in the NBL. It is set at 90% of the Salary Cap (or 2% more than the previous season’s floor, whichever is higher).

So with the 2019-20 cap being $1.43 million, the minimum amount every team must spend on players this season is $1.287 million.

 

The Luxury Tax

The Salary Equalisation Subsidy, or ‘luxury tax’, seems to be the part of the system people are most interested in.

First things first: it’s worth pointing out that distributions from the Equalisation Subsidy account are actually governed by a group of independent trustees from outside the NBL who review annual applications from clubs (or the ABPA) for ‘special assistance’.

The top priority of the tax is to help smaller clubs pay to the Salary Floor which, as I explained before, is the amount that every club must pay to play in the NBL.

The second priority is to assist clubs to pay to the Cap.

There are other things that clubs can apply for luxury tax funding for however those are the main two.

Now, here’s the question most often asked about the luxury tax: are those ‘equalisation’ funds actually being distributed to the teams who need them?

The simple answer is: yes. In fact, without those funds there are one or two teams who, at the moment, would struggle to continue competing in the league.

A club like Cairns, for example, is community owned and as such does not have an ownership structure that allows any individual to make a decision to dip into his/her pockets and ensure the club spends to a certain level – unlike every other club in the NBL at present.

As Taipans President Troy Stone noted recently, when teams are bidding against each other for a particular player in free agency, “larger privately owned clubs are able to absorb (costs) more readily than a community owned club when there is someone there who can cut a cheque to get a player across the line.”

The Taipans, like one or two other clubs, also operate within a smaller commercial market when compared to the markets of some of the ‘bigger’ clubs, like Melbourne and Sydney. Thus, in their current circumstances, their ability to spend to the cap is dependent on assistance from the subsidy.

Okay, so let’s now look at how payment of the luxury tax actually works.

Firstly, whether or not a club exceeded the cap in a specific season – and if so, by how much – is calculated once that season is completed.

Secondly, the amount a club must contribute to the subsidy is determined according to a marginal rate, based on the percentage by which they’ve exceeded the cap.

So… if a club spends over the cap by 1-15% they pay 25 cents of luxury tax for every dollar they exceed the cap. If the percentage spend is 16-30% over, they pay 50 cents on each extra dollar. That rises to $1 for every $1 over if they exceed the cap by 31-50% and finally, the tax is $1.50 for every $1 spent over the cap if the percentage spend is over 50% above.

This is very similar to how the NBA’s luxury tax system works, just with different numbers.

If a team does need to make subsidy payments, the league issues them an invoice at the end of the season and the club is required to make the payment within 14 days.

From there, the Independent Trustees of the Subsidy Account consider the relevant applications for ‘special assistance’. That process is completed prior to the end of April each year and payments are made to the successful applicants accordingly.

It’s probably worthwhile to note here that there are criteria that clubs must meet – other than simply not paying to the floor – in order to be eligible to apply to the trustees for a distribution.

For example, clubs need to demonstrate that they’re making every effort to in fact pay to the floor under their own steam, without needing to rely on the subsidy. They also have to satisfy the trustees that they have a model in place that means they won’t be reliant on the subsidy on a repeat basis.

It’s also worth noting that the current salary and contracting rules mandate that each year the league is to communicate these ‘special assistance’ payments to the clubs and the ABPA, stating what payments have been made to whom.

That all make sense? Good, ‘cos my head is starting to hurt.

 

How is a team’s spend calculated?

There are a bunch of rules that clubs must follow that allow each team to be treated consistently when the NBL calculates their overall spend.

The first is the size of the roster. Each team must have at least eleven players plus at least one development player (DP). The maximum number of DPs a team can have is four.

Each of those eleven fully-contracted players is given a player value by an independent Contract Review Committee.  It is that value – said by the league to be “an independent measure of each player’s market value” – which is counted towards the cap, not necessarily the dollar amount, or the value of other benefits, which the team contracted to pay to the player.

So, why not just use what the player is actually being paid as the ‘value’? Well, as I understand it, that’s how it usually plays out.

Additionally, if a player is being paid more than the amount the Contract Review Committee determines is his ‘Player Value’, it’s the higher number that counts against the cap.

You want to overpay for a highly sought-after player? Cool, that overpayment will count towards your salary cap spend.

What you can’t do though, is receive an unfair advantage by, for example, having someone like Bogut come in and play for minimum salary.

There are all kinds of reasons why a player may be willing to play for less that their market value but the purpose of the luxury tax scheme is to, amongst other things, ensure the competitiveness of the competition.

Okay, so each player has their monetary ‘value’. This value is then divided by 28 (the number of regular season games an NBL team plays) to decide on what is called a pro rata payment. For every game a player plays, this amount is added to the club’s Salary Cap for that season.

In the circumstance that one of the team’s eleven fully-contracted players gets injured and is replaced by a DP, a pro rata value equal to minimum salary is applied for the games played by the DP and the value of the injured player is not applied.

Where a team chooses to bring in someone from outside their DP list (like Adelaide did last year with Shaun Bruce) that player is then subjected to valuation and a pro rata value applied for the games he replaces an injured player.

An example of how all this might play out for a hypothetical team is below:

Marquee Players

There are a number of mechanisms in place allowing clubs to manage their salary cap spend whilst still getting quality players on fair and reasonable wages.

The first of these is, of course, the marquee player status – the rule which allows teams to pay a high-level local mostly outside the cap.

A marquee player must be an Australian or New Zealander and a club can have a maximum of four of these players. That being said, teams are only allowed a total of four marquee and non-restricted (import) players combined.

Now, contrary to popular belief, marquee players are not completely paid outside the cap. What actually happens is the NBL caps the value of these players so that, no matter what they are getting paid, only a set amount is included in the salary cap.

The amount included in the cap for a club’s first Marquee player is $171,654.

However, that value increases for each additional Marquee guy on your roster. A second Marquee player will cost you $228,873 in the cap, a third is valued at $286,091 while a fourth costs $343,309.

Of course, to this point teams have not tended to go for a third or fourth Marquee guy as that would mean they’d have either one or zero imports.

Two? Well yeah, that happens.

The Sydney Kings, for example, had only two imports for much of last season and while they did, they had two of their non-restricted players – Andrew Bogut and Brad Newley – classified as Marquees. When the Kings released Deng Acouth and signed a third import in Ray Turner, Newley was re-classified and his full pro rata value started counting towards the cap.

Interestingly, the Perth Wildcats only had one player – Nick Kay – classified as marquee for all of last season, despite having just the two imports. It simply worked out better for them financially to play it like that, considering the value of their other deals.

A few examples of players who were classified as Marquee players during at least part of NBL19 are Daniel Johnson (Adelaide), Nathan Jawai (Cairns), Todd Blanchfield (Illawarra), Chris Goulding (Melbourne), Bogut (Sydney) and Kay (Perth).

So, what do we think about this rule? Well, what I will say is that without it a whole bunch of our best local players almost certainly wouldn’t be in the league.

The rule is in place to encourage clubs to target local players, such as Bogut or Mitch Creek, and pay them what is required to get them to come home to the NBL and play.

This rule has already helped bring other players home from Europe and may make it possible to see guys like Joe Ingles and Patty Mills return to the league one day.

Of course, the marquee player rule not only helps to bring players home, it also serves to keep players in the league as well. Without it, you could almost guarantee that a guy like Nathan Sobey would’ve signed in Europe this off-season and not with Brisbane. The same applies to Kay’s decision to stay in the NBL this time last year. Yes he moved clubs but he stayed in the league.

Goulding, Johnson, Blanchfield… without the Marquee player status those guys would almost certainly be maximising their earning potential in Europe right now instead of playing in the NBL.

 

Imports

There are a couple of key rules that relate to players who are classified as ‘restricted’.

Firstly, as mentioned earlier, teams can sign up to three restricted players, or ‘imports’, to their roster.

Most imports negotiate with clubs in US Dollars. To give clubs some relief and encourage them to recruit the best players they can afford, the league has set a conversion rate for the purpose of the Salary Cap at 92 cents.

This doesn’t make any difference to what the player actually gets paid, but it does allow a much smaller number to be applied to the Salary Cap and as such means teams enjoy some relief from having to pay luxury tax on the full amount.

There is also the Next Stars program – an initiative aimed at attracting some of the best talent from across the globe to come to the NBL to develop their game and prove themselves instead of doing so in the US college system.

These players are in addition to the eleven selected by the club and are, in the ordinary course, paid for by the NBL so their wage is exempt from the Salary Cap.

When the NBL signs a Next Stars player, all of the clubs are given an opportunity to present a case to the player as to why he should join that club. The league, club and player then work together on the best fit for him.

Next Stars are considered to be non-restricted players, no matter where they are from and the programme is intended to be agnostic with regards to a player’s nationality.

Lastly, there is what is called a Special Restricted Player. These are players from a select number of Asian countries that the NBL has selected as possible areas to market the NBL and bring more supporters in from outside of the Australian or New Zealand market.

Those countries have changed slightly over time but are currently China, Philippines, Taiwan, India, South Korea, Singapore and Japan.

If a club signs a player from one of these countries, they are exempt from the Salary Cap and are generally treated in the same was as a local player.

 

The Five Player Salary Maximum Rule

One rule the system has to ensure there is an element of talent spread across the league is the Five Player Salary Maximum rule.

This rule is designed to stop a club from simply signing all the best players – having a bench full of talent who would be starters on other rosters – and essentially buying a championship.

The rule states that the five lowest-paid players on each roster cannot have a combined player value of more than 40% of the Salary Floor.

In other words, every team needs to have some cheaper players on their roster to balance out the higher-priced talent.

With this season’s floor set at $1.287 million, the combined value of each team’s bottom five players cannot exceed $514,800.

 

That’s it! That’s how it works.

Of course, there are a number of other components that help to bind the whole system together but those are the main features.

The NBL salary system is essentially a soft cap, a luxury tax and a bunch of other rules that all blend together in a heap of complex ways to help develop the league.

It’s a multifaceted mixture of encouraging top athletes to play, inviting passionate, ambitious owners to invest and continually growing a sustainable, competitive competition.

That’s a challenging balance to strike and, as we’ve seen with the reforms in the recent CBA, it’s a process that involves constant tinkering.

Now, if you’ll excuse me, I need to lie down.

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