Article VIII of the Collective Bargaining Agreement contains the rules pertaining to the rookie scale.

The System:

The salary for first round picks comes from the Rookie Salary Scale, which is specified in Exhibit B of the CBA. RealGM also has the complete set of Rookie Salary Scales available here. Players must be paid between 80% and 120% of the Rookie Scale amount.

For first round picks, each contract must be for two guaranteed seasons with team options for a third and fourth season. The third season team option can be exercised from the last day of the player’s first season through that October 31. The same timeline applies a year later for the fourth year team option. If a team declines one of their team options on a player, they will become an unrestricted free agent at the end of the intervening season and the team cannot sign them for a larger salary than they would have received if the team had not declined the option. (This eliminates a potential loophole where a franchise declines an option to pay a former first round pick more money earlier.)

It is worth noting that the scale that applies to a player is the one where they sign their rookie contract, not the one from the year they are drafted. For example, the Minnesota Timberwolves drafted Ricky Rubio in 2009 but he signed with the team in 2011. As such, he was paid according to the Rookie Salary Scale for the 2011-12 season.

One other aspect of the rookie scale worth mentioning: first round picks subject to the rookie scale are an exception to the salary cap. That is what allows teams who are over the cap to sign their draft picks. 

How it Works:

Once a player is drafted in the first round, the 100% amount of the Rookie Scale for that season is put on the team’s books. Over the cap teams can use the Rookie exception to sign their draftees at anywhere in that 80%-120% range mentioned above. If a player agrees to a contract with that team, his salary for that season replaces the cap hold. This explains why teams with cap space often wait to sign their first round picks until later in the offseason- waiting gives them a little extra wiggle room. 

If a player spends three seasons out of the NBA after they are drafted, they can sign a contract with the team holding their rights outside of the rookie scale as long as runs for at least three seasons and the first season salary is more than 120% of the appropriate Rookie Scale amount for that selection and season. The player and team could still agree to a Rookie Scale contract and the team holding the player’s rights still has exclusive negotiating rights- the player does not gain any form of free agency just by waiting out a franchise.

In the current CBA, there are three ways to get the cap hold for a first round pick off the books, two of which allow a team to retain the player’s rights:

1. The player signs a contract with a non-NBA team. In this circumstance, the cap hold comes off the books on the date he signs that contract or the first day of the NBA regular season, whichever is later.

2. The player and team both agree in writing not to sign a contract through the remainder of that league year. This option was added in the 2011 CBA.

3. The team renounces the player. In this context, renouncing a player takes their cap hold off the books and makes the player an unrestricted free agent.

The Purpose of the Rookie Scale:

The Rookie Scale limits the salaries for first round picks in response to some outlandish contracts, predominantly in the 1990s. The poster child for this was Glenn Robinson, who sought a $100 million contract after going first overall in the 1994 Draft but ended up receiving a 10 year, $68 million deal with the Milwaukee Bucks. The rookie scale came in the next season (1995).

That change had greater waves around the league, some positive and some negative. It made young players substantially more valuable and draft picks hotter commodities but also limiting the contracts to four years maximum (plus restricted free agency) has changed the relationship between young stars and their first teams.