If madshot's assumption you mean Franchise or Transition Tag is correct...
My league is a hard salary cap contract league. Initial contracts are 3 years at the salary the player was obtained in auction or waivers (or a set amount based on position and round if by rookie draft). Between years 2 and 3, players can be extended for one extra year (4 total) for the greater of a 20% or $5 raise or or for 2 years (5 total) for a 40% or $10 raise. The raise goes into effect immediately, so the raise counts in year 3 of the original contract plus the extra years added.
Once a player's contract is completely up, a team can use 1 Franchise Tag or 2 Transition Tags to retain players. The Franchise tag requires the player be given a qualifying offer of a new year 3 contract at the greater of (average of top 5 players at his position, 20% raise). Transition Tag is similar but it's average of top 10 and a 10% raise. After the players are tagged, other teams may bid on them in an auction that only includes the tagged players in the league. Bidding starts at the qualifying offer. Other teams can bid them higher if they wish. The team who tagged the player does not participate in the bidding. When the bidding is done, if anyone bid the player up, the tagging team has the option to keep the player at a salary equal to that winning bid, or to let him go to the team who bid on him and take draft picks as compensation. Two 1st round rookie picks for a Franchise tagged player, and a single 2nd round pick for a Transition Tagged player.
One other thing, just like the NFL, the tags remain on the player if he is signed to a contract for the length of his contract (not counting any later extensions). Unlike the NFL, we don't let teams remove the tags before signing them to the contract. This means if you use your Franchise Tag, it is stuck on that player for 3 years and cannot be used again unless you cut the player or trade him. If you do so, you cannot reacquire that player during the 3 years unless your Tag is free to place back on him.
We're starting year 5 next, so we've been through several of the contract extensions and I like how it is working (though you need to balance the prices vs the prices your players have, as we did). Last off-season was the first chance to do franchise and transition tags and I thought it worked out really well. Some people tagged players and kept them at the higher prices even after being bid up, others tagged players they knew would draw some interest and took the picks as compensation.
