Ordinarily, the aggregate salaries of an NBA team must remain under the salary cap provided for in the NBA's Collective Bargaining Agreement ("CBA".) However, the CBA provides for several exceptions, which are defined in Article VII, Section 6, where player salaries may total more than the salary cap.
One of the exceptions to the salary cap are the so-called "Larry Bird rights." In the CBA, this is officially known as the Veteran Free Agent Exception.
The Veteran Free Agent Exception allows players to re-sign with their team at an amount that cannot exceed a defined percentage of the salary cap or a defined percentage of the player's earnings in their last season, whichever is greater. The particular percentages are determined by the years of service time the player has been in the NBA.
For purposes of this exception, the CBA groups players by service time of less than seven seasons, between seven and ten seasons, and more than ten seasons. In determining the maximum contract amount under this exception, the percentage of the player's earnings in the last season is constant at 105% regardless of service time. However, the percentage that the contract may be of the salary cap increases with each service group from 25%, to 30%, and 35%. Carmelo is in the last service group, having played for eleven seasons.
However, the Veteran Free Agent Exception does not apply to all players entering free agency. In order to qualify, a player must have played the last three seasons with one team, have changed teams only by means of trade, or have signed with a prior team during the first of the three preceding seasons. Carmelo has played more than three seasons with the Knicks, and is therefore eligible for this exception.
Effectively, the Veteran Free Agent Exception operates as an incentive for players to resign with a team by offering them a salary that cannot be matched by other teams due to salary cap constraints. In turn, this allows the fan base to develop a greater bond with the player, which can then be leveraged by the team and player in marketing endeavors.
By utilizing the Veteran Free Agent Exception, it has been reported that the Knicks offered Carmelo a contract for $129 million for five years, or the maximum contract allowed. In contrast, other teams have only been able to offer him $96 million for four years. The difference between the two contracts is the Knicks are able to offer an additional year and an additional $33 million.
Hopefully, Carmelo, re-signs with the Knicks. As a result of the Veteran Free Agent Exception, he certainly has an additional thirty three million reasons to do so.