Compensation has become a dirty word in the National Basketball Association and has caused that already troubled league to be in a state of confusion and turmoil before one of the most important seasons in its history has begun.

The NBA has been trying to pump new life into its game, attract new fans and hold onto the old fans who started slipping away the last couple of seasons.

The league even hired a public relations firm to boost its image. But developments this past week have left the NBA with egg on its face, and demonstrated perhaps just how disorganized it has become.

Management has no one to blame but itself.

The chaos started Wednesday when Federal Judge Robert L. Carter voided an NBA compensation award given the Seattle .super Sonics last year after Marvin Webster signed with the New York Knicks as a free agent.

NBA Commissioner Larry O'Brien had ordered the Knicks to compensate Seattle with forward Lonnie Shelton, a 1979 first round draft choice and $450,000.

Judge Carter, of the Southern District of New York, said he found the award violated the agreement between the league and the NBA players Association. He said it more than compensated Seattle for the loss of Webster and that it penalized the Knicks, "which the agreement stipulates is not the purpose of compensation."

That ruling should now have a major affect on O'Brien's Wednesday ruling in the Bill Walton compensation case, if there is future litigation. O'Brien had awarded the Portland Trail Blazers Kermit Washington, Kevin Kunnert and a No. 1 draft pick in 1980 as compensation for Walton signing as a free agent with the San Diego Clippers. O'Brien also ordered the Clippers to give up either a 1982 No. 1 pick and $350,000 or guard Randy Smith.

Friday night, the Clippers traded Smith to Cleveland for a draft choice and then gave Portland the 1982 pick and the money to complete the Walton transaction.

Washington and Kunnert have said they may defy the order and not report to Portland; that could lead to more court cases.

Although it is still unclear, Judge Carter's ruling evidently means that Seattle will have to give Shelton back to the Knicks, along with Vinnie Johnson, the player the Sonics took with the Knicks' draft pick.

The NBA has appealed Judge Carter's ruling and in the meantime, O'Brien has said that any alternate compensation award that may be required "will not involve Shelton or Johnson going to the Knicks."

The matter was taken to the courts by the NBA Players Association.

There is little argument in the basketball world that, based on the performances of Shelton and Webster last season, the compensation was excessive. But when the compensation ruling was made, it seemed legitimate. Webster had just led Seattle to a second-place finish in the NBA and Shelton was a foul-plagued forward on a bad team.

The sad thing for the league in this whole matter is that it could have been easily avoided, with the case never getting to court.

If the Sonics and the Knicks could have worked out compensation on their own, O'Brien never would have entered into it and the players association would apparently not have had a case.

The way the compensation rule works under terms of the agreement is as follows:

If a player plays out his option and becomes a free agent, he can sign with any team in the league. The team losing the player then receives compensation from the player's new team. That compensation can be in the form of players, money or draft choices, or any combination of the three.

The two teams try to work out the compensation on their own, in effect working out a trade for the free agent.

If no agreement can be reached, the commissioner then decides compensation.

Under terms of the agreement between the NBA and the players association, the compensation rule is in effect for two more seasons. Beginning with the conclusion of the 1980-81 season, a free agent's old team gets a chance to match any offer from any other team, but if it doesn't and then loses the player, it gets no compensation.

So in essence, a free agent today is not really free because of the compensation rule. Bullet Kevin Grevey found that out.

Grevey played out his option last season and shopped around all summer, but had no offers and ended up signing with the Bullets again.

"There's no such thing as a free agent market," Grevey said. "Unless the guy is a franchise like Walton, a team just isn't going to sign him.Compensation scares them away."

The compensation system, as it is, can work, however, if it is not abused.

A case in point is the Bullets. They signed Bob Dandridge as a free agent in the 1977-78 season and paid his old team, the Milwaukee Bucks, $250,000 as compensation. Milwaukee wanted to get rid of Dandridge and the Bullets wanted him. He eventually led Washington to an NBA title in 1978.

This past summer, the Bullets signed another free agent, Kevin Porter. They paid a steep price for him -- two No. 1 draft choices -- but they worked out the deal with Porter's old team, the Detroit Pistons, before signing Porter.

The Houston Rockets did the same thing with Bullet free agent Tom Henderson.

The smart teams know better than to let the commissioner decide the compensation; now, apparently, everyone knows better.