Hoops Rumors Glossary: Poison Pill Provision

The poison pill provision isn’t technically a term that is defined in the NBA’s Collective Bargaining Agreement. However, the concept of a “poison pill” has colloquially come to refer to a pair of NBA concepts.

The first of those concepts relates to the Gilbert Arenas Provision, which we’ve explained in a separate glossary entry. When a team uses the Arenas provision to sign an Early Bird restricted free agent to an offer sheet, that team can include a massive third-year raise that is often referred to as a “poison pill.”

Tyler Johnson‘s current deal with the Heat is one contract that fits this bill — the Nets included a third-year raise in their 2016 offer sheet, which Miami matched, so Johnson’s cap hit jumped from $5.88MM in the second year of his contract to $19.45MM in the third year.

However, the concept we’re focusing on today doesn’t involve Johnson, the Arenas provision, or RFA offer sheets. Instead, this second meaning of the “poison pill” relates to players who recently signed rookie scale extensions, something five players did in 2018.

The “poison pill provision” arises if a team extends a player’s rookie scale contract, then trades him before the extension officially takes effect. It’s a rare situation, but it features its own set of rules, since extensions following rookie contracts often create a large gap between a player’s current and future salaries.

For salary-matching purposes, if a player is traded between the time his rookie contract is extended and the following July 1 (when that extension takes effect), the player’s incoming value for the receiving team is the average of his current-year salary and the annual salary in each year of his extension. His current team, on the other hand, simply treats his current-year salary as the outgoing figure for matching purposes.

Let’s use Larry Nance Jr. as an example. Nance signed a four-year, $44.8MM rookie scale extension with the Cavaliers this year, which locks him up through the 2022/23 season. However, he’s only only the books for $2,272,391 in 2018/19.

If the Cavs were to abruptly change course on Nance and decided to trade him this season, the poison pill provision would complicate their efforts. From Cleveland’s perspective, Nance’s current-year cap hit ($2,272,391) would represent his outgoing salary for matching purposes. However, any team acquiring Nance would have to view his incoming value as $9,414,478 — that’s the annual average of the five years and $47,072,391 he has left when accounting for both his new and old contracts.

As we explain in our glossary entry on the traded player exception, NBA rules dictate that over-the-cap teams must send and receive approximately the same amount of salary in any trade. So applying the poison pill provision to a player like Nance and creating a $7MM+ discrepancy between how two trade partners account for him would make salary-matching far more difficult than usual.

Trades involving a player who recently signed a rookie scale extension are already rare. After all, those players are generally young, and a player who signed an extension is promising enough to have warranted a long-term investment. Those aren’t the type of players that teams typically trade. The poison poll provision further disincentivizes a deal involving one of those recently-extended players by complicating salary-matching rules, making those trades even rarer.

In other words, it’s probably a safe bet that we won’t see any of this year’s rookie scale extension recipients – Nance, Devin Booker (Suns), Karl-Anthony Towns (Timberwolves), Justise Winslow (Heat), and Myles Turner (Pacers) – traded before June 30.

Note: This is a Hoops Rumors Glossary entry. Our glossary posts will explain specific rules relating to trades, free agency, or other aspects of the NBA’s Collective Bargaining Agreement. Larry Coon’s Salary Cap FAQ was used in the creation of this post.

An earlier versions of this post was published in 2012 by Luke Adams.

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