If they really wanted to improve the level of play, they should start with contracts.
I say limit contracts to 2-3 years. This prevents some idiotic GM from signing ICan't PlayBall to a 6 year, $60 million dollar contract.
With less years, you wouldn't get all these teams with sh!tty players and unmovable contracts that no one wants to take. If a player starts sucking, he's only got 1 or 2 years left, and you can deal him or cut him in an easier fashion.
This also hinder teams from going over the salary cap and staying there for ~3-4 years. Bad contracts will run out and you won't have to wait as long to clear cap space.
Finally, the level of play would improve. If you couldn't hack it, you're out, and someone who can actually play ball is signed. Not only that, but players will play harder and train harder, knowing that every couple years they could get a new contract. Granted, players would be shuffling teams more often, but this isn't a bad thing. We definitely would not see another KG spending 12 years in Dumpsville before moving to better scenery on the back end of great career.
This will never happen though, because of the damn players union. No way they'll sign any CBA or whatever the hell they do agreeing to a limitation in contract years.
*sigh*