What your view of sports and life would be if you had too many concussions
Now that we are past the Super Bowl, we get into the time when free-agency and the upcoming draft means NFL fans everywhere start creating “wish lists” for their respective teams. The trouble is that many of these fans simply do not understand that many moves they would like their teams to make are not possible because of the Salary Cap. To make a long story short, the Salary Cap is a limit on the money teams can spend per season on players.
Unfortunately, the Salary Cap is not simply a number. It is actually a quite complex system, and it is really only truly understood by accountants and/or attorneys. That’s why we here at Dubsism formulated an explanation of how the Salary Cap actually works. To do this, we’ve broken it down to small, easy-to-understand steps involving an example contract, then showing all the permutations which can be applied.
1) “Salary Cap” vs. “Team Salary”
In order to understand the Salary Cap, you need to be familiar with three basic terms which will be referred to throughout this article. Part of what makes the Salary Cap so confusing is these three terms sound interchangeable, but they very much are not.
Team Salary includes the Rookie Minimum Active Salary as of the day of the draft for all drafted rookies. That means there’s an automatic number for rookies which is used for Team Salary purposes. That number does not change until the player is signed to a contract with another number to be used toward Team Salary, or the team’s rights to the player are relinquished through waivers, or until the Tuesday following the tenth week of the regular season if the player remains unsigned.
On top of that, there is also a rookie Salary Cap, which is a subset of the overall Salary Cap. Each team has its own unique rookie Salary Cap, which based on the number of draft picks they have and where in each round the picks occurred. This is done to give teams flexibility in dealing with drafting players and managing the Salary Cap. This si also done because the NFL very much does not want team not drafting players because of Salary Cap concerns. The league has spent a lot of time and effort turning the NFL Draft into a three-day event, and the last thing they want is teams passing on picks on live television.
2) How the Salary Cap is Determined
The Salary Cap is determined through a complicated calculation system, which is negotiated with the Players Union during the collective bargaining process. In other words, the factors used to determine the Salary Cap are part of the Collective Bargaining Agreement (CBA) between the league and the Players Union, which means those factors can change with each new contract.
Currently, the Salary Cap is based on income the teams earn during the NFL’s fiscal year. As previously mentioned, that money is placed in a pool which is divided equally amongst all 32 teams. At first, the money placed into that pool was limited to what was known as Defined Gross Revenues (DGR). Originally, DGR was defined as the money earned from the national television contract, ticket sales, and NFL merchandise sales. However, over time the DGR pool was expanded to include total revenue, which meant the addition of some major revenue streams like stadium naming rights and advertising.
3) How Much Can Each Team Spend
The Salary Cap for each team in 2014 was $133 million. That number will be different in 2015. Estimates vary depending on who is asked, but the safest assumption is the Salary Cap for 2015 will be approximately $140 million. This is critical to some teams who have some serious cap problems. The following list shows each NFL team based on how much money they have to spend under a Salary Cap set at $140 million. In terms of straight salary, here’s how all 32 teams fare in terms of Salary Cap compliance (green = under the Salary Cap, red = over the Salary Cap).
However, once all other non-salary payments to players are considered, and once all expired and voided contracts are subtracted, the rankings and the numbers change as is illustrated in the following chart.
In other words, the Jaguars have a ton of money to spend, where the New Orleans Saints need to shed nearly $28 million in payroll before the start of the NFL’s next fiscal year.
4) The Repercussions of Going Over the Salary Cap
Contractually, teams must always be in compliance and cannot go over the Salary Cap. The simple reason for this is all contracts are reviewed by the NFL before any deal can be made official. Amongst several criteria the league evaluates in contracts is whether or not it would violate the Salary Cap. If the deal is not cap-compliant, the NFL will reject it.
But to be more specific, all teams must be in compliance with the Salary Cap on the first day of the league’s fiscal year. That is usually on or about March 1st.* If at the start of a new fiscal year a team is not in compliance with the Salary Cap, they cannot sign any players until they are in compliance.
That isn’t to say there have not been times when a team has managed to sneak a cap-breaking deal past the NFL. But those violators ultimately get caught and the respective teams were penalized. The sanctions levied include fines and/or forfeiture of draft picks. In recent history, teams have lost draft picks and/or fined, or had their Salary Cap reduced.
The other wrinkle that can come into play here is when a player is released, traded, or retires and the Signing Bonus Accelerator** kicks in and puts a team over the Salary Cap. In that case, the team has seven days to do whatever they’ve got to do conform with the Salary Cap, because they can’t sign any players until they do.
It is also important to note that the league only looks at deals and the cap compliance for the current fiscal year. This is how deals get “back-loaded” in order to get large contracts past the league office.***
* There is an exception to this – See Section #11. **The Signing Bonus Accelerator is explained in Section #12. ***Back-loaded deals are explained in Section #7.
5) The Salary Cap is Not Just A Maximum; It’s Also a Minimum
Under the current CBA, teams must spend 95% of the Salary Cap. If the overall average for Team Salaries across the NFL falls below 95% of the Salary Cap, the NFL has to pay the difference to the players. More specifically, beginning in 2006 each team had to pay a guaranteed Minimum Team Salary. Any shortfall in the Minimum Team Salary at the end of a league year has to be paid by the team(s) having such a shortfall, and it must be paid directly to the players who were on their roster at any time during the season.
6) “Restricted Free Agents” vs. “Unrestricted Free Agents”
For Restricted Free Agents (RFA), all qualifying offers made by a team are immediately included in the Team Salary. This amount remains in the Team Salary until the player is signed, the qualifying offer is withdrawn, or a “June 1st*” tender is made. If the player is unsigned and the Team makes a “June 1st” or (June 15th**) offer, this offer will be included in team salary until the player is signed, the team gives up their rights to the player, or until the Tuesday after the tenth week of the regular season if the player is unsigned.
For Unrestricted Free Agents (UFA), if a “June 1st” offer is made, the amount offered will be included in Team Salary as of July 15th. For transition and franchise players, an offer will be included in team salary when it is made. These offers for UFA, transition players, and franchise players will remain included in team salary until the player is signed, the offer is withdrawn, the team gives up their rights to the player, or until the Tuesday following the tenth week of the regular season if the player is unsigned. All offer sheets will be included in Team Salary when the offer is made until the player is signed to a contract with any NFL Team or the offer sheet is withdrawn.
*Deadline for the prior club to send “June 1st Tender” to its unsigned Restricted Free Agents who received a qualifying offer in order for such player to be subject to the CBA’s “June 15th Tender” provision.
**Deadline for club to withdraw qualifying offers to Restricted Free Agents and still retain exclusive negotiating rights by substituting a “June 15th Tender” with a one-year contract valued at 110% of the player’s prior-year Salary with all other terms of that prior-year contract carried forward.
7) Contracts Do Not Necessarily Retain the Same Value From Year to Year
This is the flaw in this system, and where it can get rally confusing. It didn’t take long for teams to figure out how to get around the Salary Cap. One of the most common ways to do this is a practice known as “back-loading.” Simply stated, this means pushing money to the end of the contract. In other words, that $20 million dollar contract could be setup so it pays $2 million in the first year, $3 million in the second year, $5 million in the third year, and $10 million in the final year. It’s sort of like the reverse of a loan which has a “balloon payment.”
Over time, rules have been put in place to hamper this sort of deal. This includes limiting the number of years in which a signing bonus can be prorated and capping the base salary increase from uncapped years (which generally happen at the end of collective bargaining agreements because the rules for determining the Salary Cap are expiring) to capped years. For example, the “30% Rule” governs veteran contracts that are entered into in a capped year and extend into the final year of the CBA. The rule states that these contracts cannot have an annual increase of more than 30% of the salary, excluding amounts treated as a signing bonus provided for in the final capped year.
This is where it gets tricky again. Obviously, this helps teams in the beginning of contracts, and it gives teams the option to release a player before they have to pay the big-money years of the deal. That’s why you see so many guys get cut in March so team can avoid such pay-outs. The alternative is to renegotiate the remaining contract into more “cap-friendly” terms. The key to remember here is that contracts in the NFL are NOT guaranteed.
The problem for teams in these deals is they can end up paying a lot of money to players who are retired because they’ve deferred the money so far into the future. This is exactly why teams the Cowboys and the Patriots are pushing for big jumps in the Salary Cap because they have major future obligations to Tony Romo and Tom Brady respectively. How that happens is explained in greater detail in Section #10.
8) Signing Bonuses
Why would any player sign such a deal knowing he may never get the money at the back of the deal? Two words: Signing Bonus. Teams get a player to sign a back-loaded deal by offering a singing bonus up-front to counteract the deferred money. Signing bonuses are paid up front and are guaranteed. The icing on that little cupcake is that teams can also designate portions of the contract to be guaranteed. In other words, on the $20 million contract, a team could give the player a $5 million signing bonus and guarantee that if they cut him any time before the end of year three, they are still obligated to pay him the Year 3 money.
Then the question become don’t signing bonuses completely obviate the Salary Cap? Not really, because the Signing Bonus is considered part of the player’s salary, and as such, it counts when determining team and player salary. The difference is that signing bonuses are pro-rated over the life of the contract. Take our example of the four-year $20 million contract with a $5 million sign bonus. The value of the signing bonus is split equally amongst the years on the contract, so on our four-year deal, $1.25 million would count toward the Salary Cap in each year.
Now, if the team were to release that player at any point before the end of the contract, all money not paid as of yet in the signing bonus counts toward the Salary Cap immediately. So, using our example again, let’s say the team opts to release the player after the second year of the contract. Let’s walk through how that would work in terms of the Salary Cap. Remember, the contract is 4 years, $20 million, $5 million signing bonus, Year 3 is guaranteed, and there’s back-loading in Year 4.
This means that over the life of the contract the team committed to $25 million in total obligations between salary and signing bonus, but only paid out $12.5 million in actual salary since Year 3 was guaranteed. The total only comes to $17.5 million in actual money once the signing bonus is factored in, and it’s only a total Salary Cap hit of $15 million. Now a savings of $2.5 million on a $25 million obligation (not counting the signing bonus) may not sound like much, but that money will pay for five players making league minimum. In a league with a 53-man roster and a $133 million Salary Cap, that’s significant.
More importantly, a savings of $10 million against the Salary Cap (because that’s where you must count the signing bonus) is huge. It’s no accident that after all those machinations, the savings still ends up being exactly the value of Year 4.
9) How Renegotiation Works
Really, it only takes the agreement of the player and the team to do it. The players are willing to enter renegotiation because they really have the upper hand; they know the team wants to keep them. Teams want to do because they need to “peanut-butter” money around to get under that imposed limit.
The advantage in this process in 100% in favor of the players; they are just going to get more guaranteed money in a non-guaranteed world. Conversely, the teams own 100% of the danger in this process. This is like paying one credit card bill using another credit card. with another. That why the aforementioned teams like the Cowboys and Patriots who are headed for Salary Cap Hell are in that situation; they heaped more abuse on this process than Oliver Twist and those animals Sarah MacLachlan is always crying about combined.
Having said that, there are some constraints involved.
While the first renegotiation of a veteran contract can take place at any time, veteran players may not renegotiate to raise his salary for twelve months after the most recent renegotiation. Additionally, no player or team can agree to renegotiate a term of a previously signed contract for a prior year. To that end, no contract can be negotiated for a current season after the last regular season game.
For rookies, contracts cannot be renegotiated for one year after the signing date or the following August 1, whichever is later.
Regardless of status, no player can agree to a contract, contract extension, or any renegotiation that expires before the last day of a season. This also means renegotiated contracts are revalued for Salary Cap purposes at the time they are signed.
10) Salary vs. Bonus Under Renegotiation
All Salary in a renegotiated contract is handled under the Salary Cap as if it were a new contract and counts toward Team Salary. However, if a player renegotiates his contract and gets a new signing bonus, the new signing bonus is prorated over the remaining years of the original contract and over the length of the extension. The terms of the original signing bonus does not change.
Once again, let’s apply this to our example contract. Our player who originally got the four-year, $20 million contract with the $5 million signing bonus is between Year 2 and Year 3 of that deal. The team wants to sign him to a 3-year extension, which would take the end of the deal from Year 4 to Year 7. The terms of the the extension are $5 million per year, plus a $2 million signing bonus.
This means the original $5 million signing bonus is allocated at $1.25 million per year over the last two years of the original deal just as it would be if there were no renegotiation. However, the new $2 million signing bonus is allocated at $400,000 per year over the remaining two years of the original contract (Years 3 and 4) as well as the extended three years (Years 5, 6, and 7). That makes the year-by year breakdown look like this:
The trick here is the point behind extending back-loaded deals is to move that money even further back. In terms of our example contract, that means moving that $10 million in salary from Year 4 to Year 7. More often than not, that’s going to mean a deal involving a big signing bonus off-set by ridiculously low salaries in Years 4 and 5, followed by a bump in Year 6, culminating in a “balloon payment” number in Year 7.
Let’s suppose a deal was constructed to do just that. The original $10 million in salary from Year 4 has been moved to Year 7, but to get the player to sign that deal, the team agreed to a three-year extension worth $15 million with a $5 million signing bonus. It would likely look like this:
Given what we’ve learned so far, it’s pretty obvious that the odds of Year 7 being paid out as is are pretty low. Once this deal hits the end of Year 6, the most likely outcomes are A) player gets released, the team saves the actual money but takes the Salary Cap hit, or B) renegotiates the deal again to push the money even further back.
Option B is exactly why the teams coming up on serious Salary Cap issues (the examples being the aforementioned Cowboys and Patriots) are in that situation.
11) March 1st vs. June 1st
If the compliance date is March 1st, why are so many players not released until after June 1st? The easy answer is that in the most recent CBA, teams can stretch their Salary Cap liability over the next 2 seasons if they release a player after June 1st. The best way to illustrate this is to go back to our example contract. Remember, the contract is 4 years, $20 million, $5 million signing bonus, Year 3 is guaranteed, and there’s back-loading in Year 4. Don’t forget, there was a renegotiation involved which the team agreed to a three-year extension worth $15 million with a $5 million signing bonus. If you look back at the structure of this deal as illustrated in Section #10, the team could release the player after Year 6, and break that $16 million cap liability into $8 million over the following two years.
12) Voidable Years
Many contracts in the NFL now include clauses for “voidable years.” This usually applies to contracts which contain incentives which allow a player to file for Free Agency sooner if certain goals are achieved. This gets a bit complicated as to how the years voided by Free Agency are handled. The two terms to remember here are 1) Salary Cap Accelerator (SCA) and 2) “Likely To Be Earned” incentive (LTBE)
For starters, the overwhelming majority of contracts containing voidable years are handled with a prorated signing bonus, so the likelihood of voiding years can be addressed when determining the term of years for such a prorated signing bonus. That means if the player achieves the goals which void the remainder of the contract, the Salary Cap Accelerator kicks in. Simply stated, the SCA means the year (or years) of the contract which are voided, any amount of the signing bonus that was allocated to those years are added immediately to Team Salary.
Let’s apply this to our example contract. Suppose when that contract was renegotiated after Year 2, it included voidable years after Year 4. Let’s also suppose the player met the criteria to void the remainder of the contract in Year 5. The salary for Years 6 and 7 are nullified and do not count towards Team Salary, but all remaining signing bonus money instantly goes to Team Salary for the upcoming year. In this case, that means the team incurs an $800,000 liability against the Salary Cap in Year 6.
If the SCA causes a team to go over the Salary Cap, the amount the team goes over in that year will be deducted from the team’s Salary Cap in the next year. Again, as far as our example contract is concerned, if the $800,000 liability puts the team over the Salary Cap in Year 6, then the team’s Salary Cap for Year 7 is reduced by the amount the team is over in Year 6.
13) Likely To Be Earned (LTBE) Incentives
The LTBE is intended for the other incentives which can be included in player contracts which do not involve the Free Agency option. Usually, this means cash incentives for achieving certain goals. Again, let’s go back to our example contract. Suppose the player under our example contract is a running back, and along with the “voidable years” clause in his deal, there was also a $200,000 cash incentive if he rushed for more than 1,000 yards in any season. Let’s also assume for the years before he got to the “voidable” clause he averaged over 1,000 rushing yards. Because he hit the criteria needed to invoke the “voidable” clause, and because he had a track history of reaching the criteria for the cash incentive, that cash is considered “likely to be earned.”
Here’s how it works. First off, it is important to remember that “voidable years” always contain an option to invoke them; that option belonging to either the player or the team. If the option to void the contract is not invoked, then the terms of the contract are abided by as they were set up. It’s only when the contract is voided that SCA and/or LTBE come into play.
If either party (depending on who has the option) elects to void the existing contract, they must do so by the start of the next League Year. At that point, all incentives which are considered LTBE count toward Team Salary for the upcoming year. Incentive which are always considered LTBE include:
Conversely, if a player did not reach the performance incentive in the previous year, the incentive is deemed “not likely to be earned” (NLTBE) and is not included in Team Salary.
Obviously, this raises the question as to who decides which incentives are LTBE or NLTBE. The NFL has impartial arbitrators who hear disputes between the owners and the players concerning what should be considered LTBE, especially for rookies or veterans who did not play in the prior year. To determine whether a clause is LTBE or NLTBE for Team Salary purposes, the arbitrators look at the prior season, not the current one. This is done so that looking to last year’s performance level is only for Salary Cap purposes so as not to affect the player’s possible bonuses for the current year.
All incentives deemed as LTBE are included in Team Salary. If those incentives push a team over the Salary Cap, then the Salary Cap Accelerator (SCA) kicks in. However there is an exception. In a contract with “voidable years” option belonging to the player, and if the incentive which provides the “voidable option” also contains an LTBE incentive, the SCA does not apply.
14) Cash Incentives vs. Signing Bonuses
First of all, it can be confusing because cash incentives are considered signing bonuses, but they are not handled the same way when it comes to determining the Salary Cap. That’s because signing bonuses can contain multiple components. The components which are treated as signing bonuses are:
On the other hand, almost all non-guaranteed components are not treated as a signing bonus. They are included in the Team Salary for the year in which they were earned. These bonuses cannot be prorated. This applies to all non-guaranteed amounts of any salary advance, off-season workout bonus, off-season roster bonus, or off-season reporting bonus. For purposes of this discussion, “guaranteed” is defined as payments which are made regardless of skill, incentive, injury, or termination of the contract.
However, there is a special set of rules for contracts signed, renegotiated, or extended in the final capped year of the Collective Bargaining Agreement (CBA). Since the Salary Cap is a function of terms spelled out in the CBA, considerations need to be made for bonuses paid in the final season governed by the Salary Cap due to the expiration of the CBA. In this case, the following components are considered as signing bonuses, regardless of guarantee status.
This begs another question. What stops a player from signing a contract with a huge guaranteed signing bonus, then retiring and keeping the money? Nothing short of the owners not falling for such a deal. For them, it’s the classic case of Caveat Emptor.
Ever since Barry Sanders laid this exact sort of job on the Detroit Lions, the owners have been faced with a balancing involving investing a greater amount of money up front for players in the form of guaranteed signing bonuses in order to circumvent the Salary Cap countered by contractual language which stipulates players must return a portion of the signing bonus to the team if the player fails or refuses to practice or play with the team. In such a case, the player is obligated to repay some or all of such a signing bonus depending on the language agreed to in the contract, or the team is not obligated to pay any parts of the signing bonus which were pro-rated and/or already allocated toward Team Salary. In any event, in such a case the team’s Salary Cap will be raised in the following year by the amount previously included in Team Salary.
15) Players Who Are Traded or Retire
Thankfully, we’ve already covered a lot of this. First, we’ve already discussed the Salary Cap Accelerator (SCA) under which if a player is released on or before June 1st, the remaining unpaid portion of any signing bonuses “accelerates,” meaning all such owed bonuses are included in the current year’s Team Salary, meaning the team will take an immediate Salary Cap hit for the remaining unpaid signing bonus.
Another situation in which the SCA would kick in is when a player is traded or waived and picked up by another team. In either case, the new team is not liable for any of the original signing bonus; the team who waived or traded the player is on the hook for the accelerated signing bonus in the same aforementioned manner.
As far as retirement is concerned, in the vast majority of cases, if a player retires, any unpaid signing bonus money which has not yet been included in Team Salary “accelerates” and therefore becomes part of the current year’s Team Salary.
That should give you a working knowledge of how the NFL Salary Cap actually works. Like I said, this formula changes based on the Collective Bargaining Agreement. That means based on the current deal, and factoring in the frosty relationship between the Players Union and the league thanks to Roger Goodell you can bet several factors I’ve outlined here will change come 2020.