The Components of a NFL Contract and the Salary Cap Tweet
One of the things that people often ask me about is how exactly does the salary cap work. I admit sometimes I take it for granted with my charts and explanations that people know how it works when in reality most don’t. I still learn something new when I interact with people as it pertains to the salary cap and I’ve immersed myself in it for the last 6 years or so and done my best to learn as much as I can. So I’ll try and explain some of the money that makes up a contract and yearly cap hit and what exactly happens when a player is cut or traded. This is probably going to be long, but hopefully wont be too confusing, though I make no promises.
Paragraph 5 Salary
The P5 salary is what I refer to as a players base salary. This is the money actually earned for playing during the NFL season. The CBA mandates minimum levels of P5 pay but not maximum levels. Minimum pay is based on your experience in the NFL. Experienced is based on earning a “credited season”, which is defined as more or less being on the active 53 man roster for at least 3 games in a given season. In 2013 the minimum pay for a rookie is $405,000 and for a veteran who has been at least 10 credited seasons its $940,000. The salary itself is earned in 17 weekly installments and does not require participation in a game to be earned. The cutoff deadline for earning a week’s pay is actually Tuesday at 4PM EST, which is why Tuesday during the season is a big day for players to be cut. It avoids an extra weeks financial commitment to a player. In general P5 salary would be similar to what you earn at your job in that if you work you get paid a pre-negotiated amount of money.
When players get injured and the player is put on IR their salaries can reduce to make up for the fact that they are not playing. This is called a split salary. It is very common for players drafted in the last 4 rounds of the draft during their first two or three seasons in the NFL and for veteran players who have an injury history. For stars like Darrelle Revis it is not a factor. So during the season if you look at the IR charts I keep on my website and you see a base salary of $288,000 for a rookie in 2013 its because I am assuming that they have a split in their contract to reduce the financial burden, both cash and cap, to a franchise. A player does not earn a credit towards a season if they are on IR.
Veteran players can also sign what are called “Qualifying Contracts” in which they are paid in cash at the minimum level but their cap charge is only that of a player with two years of experience. This type of contract was created to allow veterans who make more money than younger players to have a chance to remain in the NFL by keeping the cap dollars at the same level. The contract must be no longer than 1 season, contain the minimum salary, a guarantee not to exceed the minimum salary of a player with 2 years experience, and additional bonus money not to exceed $65,000, a number that rises by $15,000 every 3 years with the next raise coming in 2015, in order to qualify. If the player received more than $65,000 from another team that season in offseason bonus money you can not sign than player to a qualifying contract.
These are lump sum bonuses paid out for fulfilling specific criteria such as being on the roster or reporting on time to training camp. Roster bonuses come in a number of different forms. Offseason roster bonuses are probably the most prevalent and give the players the most job security. These are the bonuses you hear about on ESPN when they state “Player X has a bonus due on the 2nd day of the 2013 League Year”. What this means is that if a player remains on the roster beyond 4PM of the 2nd day of the League Year (which means the 2nd day of free agency) he earns a lump sum payment that the team can not get back if they cut the player at any other point in the season. Why is this good for a player? Because it forces the teams hand to quickly make a decision on the players future. A players best chance of finding another job and getting the most money is if he is available during all of free agency. If a team carries a player through August and then cuts him, the players chances at getting big money or a new home drastically reduces. Teams at that point are “capped out” and don’t like to fill out a roster with new guys who have yet to know the system.
A perfect example of this was a few years ago when the Arizona Cardinals cut Matt Leinart in early September. The best he could do was obtain a contract for the minimum salary, $630,000, with the Texans and a chance to earn a few more dollars if he ever played. He never saw any action that year and earned $630,000. The following year Houston gave Leinart a two year deal worth $5.5 million dollars and $2 million guaranteed. He never did anything in 2010 to warrant a raise in 2011. It was simply the timing of the whole issue. If he had an offseason roster bonus in his contract with Arizona he would have earned the bigger contract in 2010.
Other forms of the roster bonus come a bit later in free agency. This gives the player ample time to find a new home while also giving the team time to either trade the contract or renegotiate the salary. More team friendly roster bonuses deal with being on the roster during the season. Like salary these are paid out in weekly installments, but come with all kinds of conditions. The most stringent condition is the active gameday 46 man roster. If you don’t dress on gameday you do not get paid. Teams cant do that with the P5 salary which is why this form of roster bonus is popular. Others are rolled into simply being on the 53 man roster per game while the best forms for the player are those that are paid even if the player is on the injured reserve or PUP list. Some of the crazier ones I have heard are bonuses that are earned if the player is on the roster sometime in February of the following year! New England and San Francisco are teams that widely use in-season roster bonuses.
From a cap standpoint there is also a benefit to the in-season roster bonus. In the NFL these are considered incentive based payments. What that means is that when the league year begins what counts towards the salary cap depends on what you did the year before. So if you are set to earn $31,250 for every game on the active 46 but only made the active 46 the prior year for 5 games your cap charge in March will only be $156,250 rather than $500,000. Now if the player ends up playing 16 games they will adjust your cap number accordingly, but that comes at seasons end not during free agency when teams need the cap room. This was one of the reasons why the Jets used that type of structure with LaRon Landry. It allowed them to avoid $875,000 in cap charges for 2012 and defer them to a later date. P5s and normal offseason roster bonuses will always have the full amount count towards the salary cap. Teams like the Jets can use these in-season roster bonuses as ways to skirt the salary cap for one season if they wanted to with players like Santonio Holmes by restructuring his deal to include large roster bonuses for being on the active 53 next year.
These are bonuses paid out for completion of a team’s offseason workout program. These programs now run for, I believe, 9 weeks, starting in late March and running through May. Teams can not require mandatory participation for offseason workouts so they often pay large bonuses to entice players to participate. The way these work are as long as you complete a certain percentage of the program you earn the full compensation. Some like Landry don’t bother and forego their bonuses. In addition all players will earn $175 a day for each day they participate in 2013. That per day number changes every other year, with the next increase slated for 2015. The NFL charges each team at the start of the 2013 league year a cap fee of $504,000 for minimum workouts on top of the contracted bonuses, so any reported cap space number between now and the start of free agency needs to be reduced by $504,000. At the end of the workout period teams have their salary cap credited for money that was not earned. On the Jets cap page I lump these in with “other bonuses” primarily because the Jets don’t use the next category of bonus I’ll discuss, but the other cap pages have a workout column separate.
These are incentivized bonuses that are only earned for meeting some type of criteria. They can be simple things like weight, which are often given to linemen to avoid them getting too heavy, or very difficult to achieve bonuses like being elected to the All Pro Team. Like those in-season roster bonuses most of these other bonuses are based on performance from the year before. So if you have a $100,000 bonus for making the Pro Bowl in 2013 and you made the Pro Bowl in 2012, the team takes a $100,000 cap charge in 2013 because the bonus is now considered “likely to be earned”(LTBE). If the player does not actually meet the performance at the end of the year the team is credited with the money back on the cap which will then be carried over to the next league year. So whenever you see this money listed on a players cap its actually money not yet earned and money that may never be earned.
The CBA spells out all the criteria necessary for the categories in which individual bonuses may be paid. Again it’s a mechanism teams can use to circumvent the cap if the player was injured the year before. For example you could pay Mike Vick a $1 million dollar bonus for 2400 passing yards or Holmes a large bonus for 25 receptions. While in my mind those are pretty likely numbers, the NFL considers them “not likely to be earned” (NLTBE) in 2013. In general this section of bonuses can get very complex especially when teams begin to tie in bonuses based on individual criteria (say playing time) and team success (offensive ranking in a category) or playoff wins.
I saved this for last because it is the money that seems to cause the most confusion when people look at the cap. For the most part prorated money is what is referred to as a signing bonus in the press. It is essentially a lump sum bonus that is considered paid out when a contract is signed or an option invoked, though in reality the payout occurs over a period of time. Now there are a number of less used prorated bonuses such as completion bonuses, fully guaranteed roster bonuses, bonuses when signed during a season, etc…but for this discussion we just are interested in those basic signing or option bonuses.
For those of us who have ever taken an accounting course think of this money as a depreciation schedule on an asset. If you have no accounting knowledge maybe think of it like buying a car in that your personal expense comes over the 5 years you are paying off the car loan. The league looks at each player as an asset with a maximum working life of 5 years for every prorated bonus paid. Prorated money is split over the course of the contract or 5 years, whichever is less, in equal installments. So if you have a player with a 6 year contract that begins in 2013 and you pay him a signing bonus of $20 million he will carry an expense of $4 million in each year from 2013-2017 from the bonus. There will be no expense in 2018 because that is beyond 5 years. If it’s a 3 year deal with a $9 million bonus the expense is $3 million per year because now the limit is 3 seasons rather than 5.
When you hear of an option bonus normally it means a bonus paid out in the second year of the contract, though sometimes it can be as late as the third or fourth year. That starts the clock over on the working life. So in the case of the 6 year deal an option bonus paid in 2014 will extend all the way out to 2018. So if its a $5 million bonus that’s an extra $1 million per year. The prorated bonus portion of the players salary now includes the $4 million from the first bonus and $1 million from the second bonus, giving him a full charge of $5 million per year from 2014-2017 and $1 million in 2018.
In general what we are talking about here is the ability to “buy now but pay later” from a salary cap perspective. What happens is the team and player agree on a contract value. Lets assume the sides decide he has to earn $21 million in the first 3 years of a 5 year deal worth $33 million total. Now the team could simply pay him $7 million a year in P5 salary, which would leave the team with cap charges of $7 million per year, but what if team is really strapped for cap space. Their other option is to pay him $15 million in a signing bonus, prorated at $3 million per year, and then pay the rest of the $21 million as base salary. Pretend its $1 million in 2013, $2 million in 2014, and $3 million in 2015. Our new cap charges are $4 million, $5 million, and $6 million a huge savings on our team salary cap. This is why you hear of teams, and the Jets will likely be one of them in 2013, converting base salary into a guaranteed bonus. All is well in the world when we do this until we come across what we call “dead money”.
This is the “pay later” portion of the equation. Dead money is your unused prorated money. Going back to the car example- unfortunately you find out that your car is a lemon just three years into owning it. The transmission died. The car leaks every fluid under the sun. Every other week it breaks down on your way to work. You have no option but to junk it. Does the bank just forgive the remaining two years of your auto loan? Nope. If you still owe $7,000 on the car you have to pay the bank $7,000 when you give that car up. That’s exactly what happens in the NFL. In essence you owe the salary cap money like you would the bank.
In the example where we had a 6 year contract with a signing and an option bonus that money you owe the cap is huge if you need to “junk” the player. If you want to cut the player in 2015 it’s a charge of $5 million per year from 2015 thru 2017 and an additional $1 million in 2018. In the NFL you get that money all charged at once so it’s a lump sum payment of $16 million in cap dollars for a player not even on the team. In 2016 its $11 million, 2017 its $6 million and in 2018 it would be $1 million.
That’s why signing bonus money gives the player far more financial security than just the lump sum payment. It offers an extra layer of protection from being cut due to the cap costs being so high to the team. Better to pay the player a few million to stick around and eat up $8 million in cap space than not be here and cost me $16 million. That’s why when we talk about restructuring contracts for the sake of salary cap room in this year we always have to have an eye on the future. Its why for players like David Harris and Nick Mangold who have had two down years in a row you don’t want to push too far in the future. You also need to see what it means for future cap. In Mangold’s case he has a gigantic salary cap number already in 2015. Push too much money from 2013 into the future and you are stuck with no more room to renegotiate in 2015 unless you just want to remain tied to someone that may be trending down. Just getting under the cap is easy, managing the future is not and GMs and cap managers spend tons of time going over those possibilities when they have to use prorated money for salary cap purposes
The only other issue in regards to dead money from the prorated bonus is the timing of the release or trade of the player. It if occurs after June 1 the league will only allow you to take a dead cap hit of the prorated money from that particular season, meaning $5 million in the example above. The balance is then charged to the following year, in the example $11 million in 2016. You can also designate a player a June 1 cut prior to June 1. In this case you will maintain the full cap charge for the player, even though he has been released, until June 1 at which point just the prorated money for the year remains with the balance being charged to the following league year. This is done to allow you to avoid guarantees or roster and workout bonus money that you might be obligated to pay if the player actually remains on the roster until June 1. But in terms of helping with free agency it really does not give you any benefit due to the benefit coming long after players are signed.
In the NFL you can primarily be cut for three reasons: skill, injury, and salary cap. A skill cut states that you are no longer as good as your peers competing for the same position. Injury means that you are not in the necessary condition to play football. Salary cap terminations mean that a team needs cap room to sign a player or retain players who, in the view of the club, are better than you. In the NFL almost anything can be guaranteed (P5 salary, roster bonuses, workout bonuses, etc…), but it’s the level of guarantee that is important.
Fully guaranteed money is the real deal. That means your money is protected from skill, injury, and cap terminations. For you to not earn that money you have to do something egregious to be cut and not paid. The most complete form is that with “no offset” meaning not only do you get paid from the team that cut you but any additional money you earn from another team that year is yours to keep. Most contain offset language meaning if the player has a $7 million dollar guarantee and signs with a new team for $2 million you are only on the hook for $5 million in cap and cash dollars.
Often times reported guarantees are not fully guaranteed. Normally they just contain protection for 1 of the 3 termination reasons. So if you are protected from injury but don’t get hurt that injury guarantee was worth nothing. You have a skill guarantee but the teams cap is awful you are out of luck. You will never see a roster or workout bonus guaranteed for all 3 terminations upon signing, due to rules in the CBA treating them as a prorated bonus. In my mind the skill guarantee is the best of the three to have because it’s the most subjective but that’s just my opinion on it.
Guarantees can also be earned over the life of a contract. Usually its based on being on the roster beyond a certain date- normally either right after the Super Bowl in February or the 2nd day of the new League Year in March. I believe Tom Bradys deal fully guarantees itself every year where he is on the roster at the start of the League Year. Roster and workout bonuses can also become fully guaranteed and not treated as a prorated bonus using similar mechanisms where the full guarantee is contingent on an event. Veteran players who have never received what is called “Termination Pay” automatically have their base salaries guaranteed at the start of a season if they make the active roster for week 1. If they do not make it for week one about ¼ of their salary is guaranteed. One you receive “Termination Pay” this automatic guarantee is no longer available to the player.
The benefit to guaranteed salary for the team is that is lessens the dead money from bonuses in the later years of a contract making it cost effective to cut a player in the 3rd year and beyond of most contracts. It is also a useful tool in negotiations to work out more favorable terms with a player since you are guaranteeing money rather than just protecting it with dead money. Also, unlike signing bonuses, there is no dead money that remains on your team if you trade a player. In a trade in the NFL all signing bonus money accelerates onto the cap of the team trading the player, just like as if the player was cut. The guaranteed salary simply transfers to the new team.
On my site when you see “dead money” listed it includes all prorated money for a player plus money that I know is guaranteed for skill that season. It is the number based on the player being a pre-June 1 cut. If you want to know the amount if cut after June 1 for most players you simply find the players dead money charge for the following season and subtract it from the amount in the current season from the tables. Or you can just email me and Ill follow up with you on it.
Well hopefully you made it to the bottom of this and if you did hopefully it at least explains a little bit of what is in an NFL player contract, how they are valued, and how it effects the possibilities of cutting the player and general workings of the salary cap. Feel free to ask any questions below or via email and Ill try to answer those questions either in a future article or in a followup discussion post as best I can.