How it Works: Player Bonuses

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Photo Source: Sportige.com

Players can negotiate different bonuses into their contracts and while they often get reported, the variety and mechanics of player bonuses are not often explained. This post will explain the different types of player bonuses, how they affect a player’s cap hit, and the basics of how they work.

It’s easiest to start with a couple of bonus rules that are applied to all bonuses. All players are eligible for all types of bonuses, even players who are rookies on a rookie scale contract, so long as the bonuses do not cause the player’s salary to be above his max (or 120% of the rookie scale for first round picks) or count toward his minimum (except as provided in footnote [2] below). Bonuses are typically given when a player signs a new contract, though they can also be given to players who are signing a rookie or veteran extension.

Signing (and Trade) Bonuses

The basic understanding of a signing bonus is that a player receives a bonus by simply agreeing to sign a contract with a team. However, for purposes of determining a player’s contract amount, a signing bonus is considered any one of the following three bonus types: (i) a bonus earned upon the player signing a contract  (a “Signing Bonus”), (ii) a bonus earned when a player is traded (a “Trade Bonus”), and (iii) payments in excess of the Excluded International Player Payment Amount (an “International Player Bonus”).[1] [2]

The cap hit for all signing bonuses is pro rated over the guaranteed years of a contract.[3][4] For example, if a player signs a fully guaranteed 4-year contract worth $2.5M per year with a $1M Signing Bonus, such player’s cap hit would be $2.75M in each of the four seasons. A Trade Bonus would work the same way but would only apply to the current salary cap year when the player is traded and the remaining years left on the contract after the trade year.[5] So if the above-referenced player had a $1M Trade Bonus instead of a Signing Bonus and was traded at the beginning of year 3, his cap hit for the four years would be as follows:

Year Cap Hit
1 $2,500,000
2 $2,500,000
3 $3,000,000
4 $3,000,000

For unrestricted free agents or restricted free agents signing a new contract with their current team, the maximum amount a Signing Bonus can provide for is 15% of the compensation called for by the contract, excluding other bonus amounts.[6] For restricted free agents who are signing an offer sheet from another team, the maximum amount a team can offer as a Signing Bonus is 10% of the compensation called for by the offer sheet, not including other bonus amounts. Trade Bonuses and International Player Bonuses follow the same rules – 10% of the player’s contract for a restricted free agent signing an offer sheet and 15% of the player’s contract for anyone else.

Offseason Participation Bonuses

Player contracts can also provide for bonuses that will be paid out if the player participates in an offseason skill and/or condition program or the one of the NBA summer leagues. The maximum amount of such bonus is 20% of the player’s base compensation for the upcoming NBA season. If the bonus is dependent on participation in an offseason program, such program cannot exceed 2 weeks in length.

Of course, a lot can happen in an NBA offseason that is out of a player’s control or conflicts with the participation requirements. Players can negotiate around this and give themselves carve-outs wherein a team will waive the participation requirements upon the occurrence of certain events. Any contract with offseason participation bonuses may provide a carve-out where the bonus will still be paid if (i) the team waives the participation requirement, (ii) the player trains or plays games with his national team during the offseason, or (iii) the player is injured or has any other medical condition that prevents the player’s participation in a summer league or skill and conditioning program.

Performance Bonuses

Performance Bonuses are bonuses tied to a player’s performance or achievement of a numbers based goal. These bonuses can be based on either individual or team achievements. The benchmarks, however, have to be based on hard numbers or generally recognized league honors to be valid.[7] For example, a player could have a performance bonus based on “shooting 40% from three” but they could not have a performance bonus for “being the best 3-point shooter in the NBA.”

Performance Bonuses are split into two categories: Likely Bonuses and Unlikely Bonuses. Likely Bonuses are bonuses based on a benchmark that was achieved by the player in the previous season.  For example, if a player is coming off a season where he scored 22 ppg, and his new contract has a performance bonus if the player scores 20 ppg, this bonus would be a Likely Bonus. Unlikely Bonuses, on the other hand, are based on benchmarks that were not achieved in the player’s most recent season.

Likely Bonuses are be applied to the player’s salary and count against team salary. If and when the player does not achieve the stated benchmark, the amount of the Likely Bonus falls off of the player’s cap hit. Unlikely Bonuses are not applied to a player’s salary unless or until the player (or his team) achieves the relevant benchmark. Because Unlikely Bonuses are not immediately included in team salary but may be earned, they must fit into a team’s cap space at the time of signing. In order to accurately calculate such team’s cap space, all unlikely bonuses that could be paid out during the upcoming season must be considered. For example, if a team wants to sign a player to a $10M per year contract with a $1M Unlikely Bonus in year 1, the team needs to have $11M in cap space during that year. If that team has $13M in cap space and $3M in Unlikely Bonuses dedicated to current players in that year, they cannot sign a free agent for $10M plus $1M in Unlikely Bonuses.

All Performance Bonuses can be a maximum of 15% of a player’s salary in a season. Over the course of a contract, Performance Bonus raises work the same as other raises applicable to the relevant player. For example, for Bird and Early Bird Free Agents, Performance Bonuses can be increased by 7.5% per year.[8] For Non-Bird Free Agents and other team’s free agents, Performance Bonuses can be increased 4.5% per year.

Physical or Academic Achievement Bonuses

Player contracts can also have bonuses for achieving physical or academic benchmarks. These could be bonuses for reaching a certain weight or for earning a college degree. Boris Diaw, for example, famously had a weight-based bonus in his Spurs contract that would net him an extra $500,000 if he maintained a certain weight by different deadlines throughout the 2014-15 season.

The CBA is unclear on how these bonuses are applied or how large they can be. They are defined in the same CBA clause as the offseason participation bonuses, but the restrictions on those bonuses are not applied to Physical or Academic Achievement Bonuses. No part of the CBA mentions anything further on the rules and restrictions applied to Physical or Academic Achievement Bonuses. It is probably safe to assume, however, that they have most of the same characteristics of other bonuses or are at least not more favorable or more restrictive than any other bonus type.

Player Bonuses – Quick Summary

Bonus Type Maximum Amount Salary Cap Application
Signing Bonus (General) 15% of entire contract Pro rated over # of guaranteed years
Signing Bonus (Offer Sheet) 10% of entire offer sheet Pro rated over # of guaranteed years
Trade Bonus (General) 15% of entire contract Applied if traded,
Pro rated over # of guaranteed years
International Player Bonus (General) 15% of entire contract Pro rated over # of guaranteed years
Offseason Participation Bonus 20% of season salary Applied to upcoming season’s salary if earned
Performance Bonus (Likely and Unlikely) 15% of season salary Likely Bonus included in salary;
Unlikely Bonus applied if achieved
Physical or Academic Achievement Bonus Uknown Uknown

_________________________________________________________________

[1] The Excluded International Player Payment Amount is the amount an NBA team can pay to an international team or organization to buyout a player’s international contract so he can sign with whoever holds his draft rights. These payment amounts are not included in team salary if they stay below the amount set forth in the CBA. Any money exceeding this amount is treated as a bonus to the international player and will count against the salary cap.

[2] The International Player Bonus is the only bonus that can be considered salary for the purposes of determining whether a player is paid the required minimum salary.

[3] If the contract is fully non-guaranteed (for a Signing bonus) or has no guaranteed years remaining (for a Trade bonus), the entire bonus will be applied to the team’s salary cap for the first year (for a Signing bonus) or the year the player is traded (for a Trade bonus).

[4] If the contract has an Early Termination Option (ETO), the bonus is applied to all guaranteed years of the contract except for the ETO year.

[5] Trade Bonuses are only applied the first time a player is traded. If a player has a $1M trade bonuses and is traded in Y2 and Y4 of his contract, he will only receive the $1M bonus for the Y2 trade.

[6] Of course this means that even if an NBA team doesn’t care about international payments counting against their salary cap, the amount they can pay to buyout their Eurostash players is restricted to the Excluded International Player Payment Amount plus 15% of the player’s contract.

[7] This includes MVP, Finals MVP, DPOY, 6MOY, Most Improved Player, All-NBA honors, NBA All-Defense honors, and being selected to the All-Star team.

[8] All raises are a percentage increase over the first year’s salary or bonus and are not compounded.

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